<PAGE> 1
As filed with the Securities and Exchange Commission on September 26, 1996
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. 17
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 18
MFS SERIES TRUST X
(FORMERLY, 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, MA 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 September 28, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of MFS Government
Mortgage Fund for its fiscal year ended July 31, 1995 on September 29, 1995 and
will file a Rule 24f-2 Notice on behalf of MFS Government Mortgage Fund for its
fiscal year ended July 31, 1996 on or before September 30, 1996. The Registrant
filed a Rule 24f-2 Notice on behalf of MFS/Foreign & Colonial International
Growth Fund, MFS/Foreign & Colonial International Growth and Income Fund and
MFS/Foreign & Colonial Emerging Markets Equity Fund with respect to their fiscal
year ended May 31, 1996 on July 23, 1996.
================================================================================
<PAGE> 2
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME FUND
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
<TABLE>
CROSS REFERENCE SHEET
---------------------
(Pursuant to Rule 404 showing location in the Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a),(b) Front Cover Page *
2 (a) Expense Summary *
(b),(c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares *
of the Fund - Performance
Information
(d) Condensed Financial Information *
4 (a) The Funds; Investment Objective *
and Policies; Investment
Techniques; Risk Factors
(b),(c) Investment Objective and Policies; *
Investment Techniques; Risk
Factors
5 (a) The Funds; Management of the *
Funds - Investment Adviser
(b) Front Cover Page; - Management *
of the Funds; Back Cover Page
(c) Management of the Funds - *
Portfolio Managers
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(d) * *
(e) Management of the Funds - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information;
Information Concerning Shares
of the Funds - Expenses
(g) Investment Techniques - Portfolio *
Trading
5A (a),(b),(c) ** **
6 (a) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Exchanges;
Information Concerning Shares
of the Funds - Redemptions and
Repurchases; Information
Concerning Shares of the Funds-
Description of Shares,
Voting Rights and Liabilities
(b),(c),(d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Funds - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Funds - Distributions;
Information Concerning Shares
of the Funds - Tax Status
(h) * *
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
7 (a) Front Cover Page; Management *
of the Funds - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Net Asset Value
(c) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Funds -
Purchases; Shareholder Services
(e) Expense Summary; Information *
Concerning Shares of the Funds -
Purchases; Information Concerning
Shares of the Funds - Distribution
Plans
(f) Information Concerning Shares *
of the Funds - Distribution Plans
8 (a) Information Concerning Shares *
of the Funds - Purchases;
Information Concerning Shares
of the Funds - Redemptions and
Repurchases; Shareholder Services
(b),(c),(d) Information Concerning Shares *
of the Funds - Redemptions and
Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a),(b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a),(b),(c) * Investment Policies
and Restrictions
(d) * *
14 (a),(b) * Management of the
Funds - Trustees
and Officers
(c) * Management of the
Funds - Trustees
and Officers;
Appendix A
15 (a) * *
(b),(c) * Management of the
Funds - Trustees
and Officers
16 (a),(b) Management of the Funds Management of the Funds
(c) * *
(d) * Management of the Funds -
Investment Adviser; FCM;
FCEM
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares Distribution Plans
of the Funds - Distribution
Plans
(g) * *
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(h) * Management of the Funds -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Funds -
Shareholder Servicing
Agent
17 (a),(b)(c),(d),(e) * Portfolio Transactions and
Brokerage Commissions
18 (a) Information Concerning Shares Description of Shares,
of the Funds - Description of Voting Rights and
Shares, Voting Rights and Liabilities
Liabilities
(b) * *
19 (a) Information Concerning Shares Shareholder Services
of the Funds - Purchases;
Shareholder Services
(b) Information Concerning Shares Management of the Funds -
of the Funds - Net Asset Value; Distributor; Determination
Information Concerning Shares of Net Asset Value and
of the Funds - Purchases Performance - Net Asset
Value
(c) * *
20 * Tax Status
21 (a),(b) * Management of the Funds -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
23 * Independent Auditors and
Financial Statements
<FN>
- ------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE> 8
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME FUND
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
Supplement to the October 1, 1996 Prospectus and Statement of
Additional Information
The following information should be read in conjunction with the Funds'
Prospectus and Statement of Additional Information ("SAI"), dated October 1,
1996, and contains a description of Class P shares.
Class P shares are available for purchase only by certain retirement plans
established for the benefit of employees of Massachusetts Financial Services
Company ("MFS"), the Funds' investment adviser, and employees of MFS' affiliates
("MFS Retirement Plans"). Class P shares may not be offered or sold outside of
The Commonwealth of Massachusetts, and this supplement does not constitute an
offer of Class P shares to any person who resides outside of The Commonwealth of
Massachusetts.
<TABLE>
EXPENSE SUMMARY
<CAPTION>
CLASS P
---------------------------------------------
INTERNATIONAL EMERGING
INTERNATIONAL GROWTH AND MARKETS
GROWTH FUND INCOME FUND EQUITY FUND
------------- ------------- -----------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed
on Purchases of Fund Shares (as a percentage
of offering price) ......................... None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable) ..... None None None
INTERNATIONAL EMERGING
INTERNATIONAL GROWTH AND MARKETS
GROWTH FUND INCOME FUND EQUITY FUND
------------- ------------- -----------
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fees .............................. 0.975% 0.975% 1.25%
Rule 12b-1 Fees .............................. None None None
Other Expenses (after expense
reimbursement)(1)(2) ....................... 0.765% 1.045% 0.75%
----- ----- ----
Total Operating Expenses (after expense
reimbursement) ............................. 1.74% 2.02% 2.00%(3)
<FN>
- --------------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the period ended May 31, 1996.
The shareholder servicing agent fee component of "Other Expenses" is a
predetermined percentage based upon the Fund's net assets attributable to
each class.
(2) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
</TABLE>
-1-
<PAGE> 9
(3) MFS has agreed to bear, subject to reimbursement by the Emerging Markets
Equity Fund, until December 31, 2005, expenses of Class P shares of the
Fund such that the aggregate expenses of the Emerging Markets Equity Fund
does not exceed 2.00% of the Fund's average daily net assets attributable
to Class P shares on an annualized basis. This arrangement may be
terminated or revised by MFS at any time. Absent this expense arrangement,
estimated "Other Expenses" and "Total Operating Expenses" for the Emerging
Markets Equity Fund's Class P shares would be 1.17% and 2.42%,
respectively.
Example of Expenses
-------------------
<TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
CLASS P
---------------------------------------------
INTERNATIONAL EMERGING
INTERNATIONAL GROWTH AND MARKETS
PERIOD GROWTH FUND INCOME FUND EQUITY FUND
------ ------------- ------------- -----------
<S> <C> <C> <C>
1 year................................... $18 $21 $20
3 years.................................. 55 63 63
<FN>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of each Fund
will bear directly or indirectly. A more complete description of each Fund's
management fee is set forth under the caption "Management of the Funds" in the
Prospectus.
The "Example" set forth above should not be considered a representation of past
or future expenses of the Funds; actual expenses may be greater or less than
those shown.
</TABLE>
THE FUNDS
Four classes of shares of each Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class P shares. Class P shares are
available for purchase only by the MFS Retirement Plans and are described in
this Supplement. Class A shares, Class B shares and Class C shares are described
in the Funds' Prospectus and are available for purchase by the general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares will
convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption of 1.00% during the first year and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class P
shares are offered at net asset value without an initial sales charge or CDSC
and are not subject to a distribution or service fee. Class C and Class P shares
do not convert to any other class of shares of the Funds.
-2-
<PAGE> 10
INFORMATION CONCERNING CLASS P SHARES OF THE FUNDS
As noted above, Class P shares are offered at net asset value without an
initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Funds for Class P
shares of any other Fund available for purchase by such Plans at their net asset
value (if available for sale), and may redeem Class P shares of the Funds at net
asset value. Distributions paid by the Funds with respect to Class P shares
generally will be greater than those paid with respect to Class A, Class B and
Class C shares because expenses attributable to Class A, Class B and Class C
shares generally will be higher.
MFS has agreed to bear, subject to reimbursement by the Emerging Markets
Equity Fund, until December 31, 2005, expenses of Class P shares of the Fund
such that the aggregate expenses of the Emerging Markets Equity Fund does not
exceed 2.00% of the Fund's average daily net assets attributable to Class P
shares on an annualized basis. This arrangement may be terminated or revised by
MFS at any time. Such payments by MFS are subject to reimbursement by the
Emerging Markets Equity Fund which will be accomplished by the payment by the
Fund of an expense reimbursement fee to MFS computed and paid monthly as a
percentage of its average daily net assets for its then current fiscal year,
with a limitation that immediately after such payment the aggregate operating
expenses of the Fund would not exceed the amounts set forth in the preceding
sentence. The expense reimbursement agreement terminates on the earlier of the
date on which payments made thereunder by the Emerging Markets Equity Fund equal
the prior payment of such reimbursable expenses by MFS or December 31, 2005.
The date of this Supplement is October 1, 1996
-3-
<PAGE> 11
LOGO
PROSPECTUS
DATED OCTOBER 1, 1996
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH
FUND (the "International Growth
Fund") -- The investment objective of the
International Growth Fund is capital
appreciation. The Fund seeks to achieve its
investment objective by investing, under
normal market conditions, at least 65% of
its total assets in equity securities of
companies whose principal activities are
outside the U.S. growing at rates expected
to be well above the growth rate of the
overall U.S. economy.
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH
AND INCOME FUND (the "International Growth
and Income Fund") -- The investment
objective of the International Growth and
Income Fund is capital appreciation and
current income. The Fund seeks to achieve
its investment objective by investing,
under normal market conditions, at least
65% of its total assets in equity and fixed
income securities of issuers whose
principal activities are outside the U.S.
MFS/FOREIGN & COLONIAL EMERGING MARKETS
EQUITY FUND (the "Emerging Markets Equity
Fund") -- The investment objective of the
Emerging Markets Equity Fund is capital
appreciation. The Fund seeks to achieve its
investment objective by investing, under
normal market conditions, at least 65% of
its total assets in equity securities of
issuers whose principal activities are
located in emerging market countries.
No assurance can be given that the
investment objective of the International
Growth Fund, the International Growth and
Income Fund or the Emerging Markets Equity
Fund (individually or collectively
hereinafter referred to as the "Fund" or
the "Funds") will be achieved. Each Fund is
a diversified series of MFS Series Trust X
(the "Trust"), an open-end management
investment company. The minimum initial
investment generally is $1,000 per account
(see "Purchases").
THE FUNDS ARE INTENDED FOR INVESTORS WHO
UNDERSTAND AND ARE WILLING TO ACCEPT THE
RISKS ENTAILED IN SEEKING CAPITAL
APPRECIATION AND IN INVESTING IN FOREIGN
SECURITIES.
The Funds' 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. Each Fund also has retained as its
sub-advisers Foreign & Colonial Management
Ltd. and Foreign & Colonial Emerging
Markets Limited (collectively, the
"Sub-Adviser"), both of which are located
at Exchange House, Primrose Street, London
EC2A 2NY, United Kingdom.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENT AGENCY, AND
ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF,
OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE
SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN
YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the
information concerning each Fund and the
Trust that a prospective investor ought to
know before investing. The Trust, on behalf
of the Funds, has filed with the Securities
and Exchange Commission (the "SEC") a
Statement of Additional Information, dated
October 1, 1996, as amended or supplemented
from time to time (the "SAI"), which
contains more detailed information about
the Trust and each Fund and is incorporated
into this Prospectus by reference. See page
27 for a further description of the
information set forth in the SAI. A copy of
the SAI may be obtained without charge by
contacting the Shareholder Servicing Agent
(see back cover for address and phone
number). The SEC maintains an Internet
World Wide Web site that contains the SAI,
materials that are incorporated by
reference into the Prospectus and the SAI,
and other information regarding the Fund.
This Prospectus is available on the
Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND
RETAIN IT FOR FUTURE REFERENCE.
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.
<PAGE> 12
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary........................................................................ 1
2. The Funds.............................................................................. 2
3. Condensed Financial Information........................................................ 2
4. Investment Objective and Policies...................................................... 3
International Growth Fund............................................................ 3
International Growth and Income Fund................................................. 4
Emerging Markets Equity Fund......................................................... 4
5. Investment Techniques.................................................................. 5
6. Risk Factors........................................................................... 10
7. Management of the Funds................................................................ 13
8. Information Concerning Shares of the Funds............................................. 16
Purchases............................................................................ 16
Exchanges............................................................................ 19
Redemptions and Repurchases.......................................................... 20
Distribution Plans................................................................... 22
Distributions........................................................................ 23
Tax Status........................................................................... 24
Net Asset Value...................................................................... 24
Description of Shares, Voting Rights and Liabilities................................. 24
Performance Information.............................................................. 25
Expenses............................................................................. 25
9. Shareholder Services................................................................... 26
Appendix A -- Waivers of Sales Charges................................................... 27
Appendix B -- Description of Bond Ratings................................................ 30
</TABLE>
<PAGE> 13
- --------------------------------------------------------------------------------
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)......... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable)............................................. See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------
INTERNATIONAL GROWTH INTERNATIONAL GROWTH EMERGING MARKETS
FUND AND INCOME FUND EQUITY FUND
-------------------- -------------------- -----------------
<S> <C> <C> <C>
Management Fees........................................ 0.975% 0.975% 1.25%
Rule 12b-1 Fees(2)..................................... 0.50% 0.50% 0.50%
Other Expenses (after expense reimbursement)(4)........ 0.765% 1.045% 0.75%(5)
------ ------ -----
Total Operating Expenses (after expense
reimbursement)...................................... 2.24% 2.52% 2.50%(5)
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES
-----------------------------------------------------------------
INTERNATIONAL GROWTH INTERNATIONAL GROWTH EMERGING MARKETS
FUND AND INCOME FUND EQUITY FUND
-------------------- -------------------- -----------------
<S> <C> <C> <C>
Management Fees........................................ 0.975% 0.975% 1.25%
Rule 12b-1 Fees(6)..................................... 1.00% 1.00% 1.00%
Other Expenses (after expense reimbursement)(4)........ 0.875% 1.135% 0.82%(5)
------ ------ -----
Total Operating Expenses (after expense
reimbursement)...................................... 2.85% 3.11% 3.07%(5)
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
-----------------------------------------------------------------
INTERNATIONAL GROWTH INTERNATIONAL GROWTH EMERGING MARKETS
FUND AND INCOME FUND EQUITY FUND
-------------------- -------------------- -----------------
<S> <C> <C> <C>
Management Fees........................................ 0.975% 0.975% 1.25%
Rule 12b-1 Fees(6)..................................... 1.00% 1.00% 1.00%
Other Expenses (after expense reimbursement)(3)(4)..... 0.765% 1.045% 0.75%(5)
------ ------ -----
Total Operating Expenses (after expense
reimbursement)...................................... 2.74% 3.02% 3.00%(5)
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) Each 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)
0.50% per annum of the average daily net assets attributable to each Fund's
Class A shares (see "Distribution Plans" below). Distribution expenses paid
under these Plans, together with the initial sales charge, may cause
long-term shareholders to pay more than the maximum sales charge that would
have been permissible if imposed entirely as an initial sales charge.
(3) "Other Expenses" for Class C shares of each Fund are based on Class A
expenses for the relevant Fund during the last fiscal period except for the
shareholder servicing agent fees component of "Other Expenses" which has
been estimated for Class C shares.
(4) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(5) MFS has voluntarily agreed to bear, subject to reimbursement by the Emerging
Markets Equity Fund, until December 31, 2005, expenses of each class of
shares of the Fund such that the aggregate expenses of the Emerging Markets
Equity Fund's Class A shares, Class B shares and Class C shares do not
exceed 2.50%, 3.07% and 3.00%, respectively, of the Fund's average daily net
assets on an annualized basis. This arrangement may be terminated or revised
by MFS at any time (see "Information Concerning Shares of the
Funds -- Expenses" below). Absent this expense arrangement, "Other Expenses"
and "Total Operating Expenses" for the Emerging Markets Equity Fund's Class
A shares would have been 1.16% and 2.91%, respectively, "Operating Expenses"
and "Total Operating Expenses" for the Emerging Markets Equity Fund's Class
B shares would have been 1.23% and 3.48%, respectively, and estimated "Other
Expenses" and "Total Operating Expenses" for the Emerging Markets Equity
Fund's Class C shares would be 1.16% and 3.41%, respectively.
(6) Each Fund has adopted a Distribution Plan for its Class B and Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which provides that it
will pay distribution/service fees aggregating up to (but not necessarily
all of) 1.00% per annum of the average daily net assets attributable to each
Fund's Class B shares under the Class B Distribution Plan and Class C shares
under the Class C Distribution Plan (see "Distribution Plans" below).
Distribution expenses paid under these Plans, together with any CDSC payable
upon redemption of Class B and Class C shares, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
1
<PAGE> 14
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND
---------------------------------------
PERIOD CLASS A CLASS B CLASS C
- --------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year........ $ 69 $ 69 $29 $38 $28
3 years....... 114 118 88 $85 $85
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH AND INCOME FUND
---------------------------------------
PERIOD CLASS A CLASS B CLASS C
- --------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year........ $ 72 $ 71 $31 $41 $31
3 years....... 122 126 96 $93 $93
</TABLE>
<TABLE>
<CAPTION>
EMERGING MARKETS EQUITY FUND
---------------------------------------
PERIOD CLASS A CLASS B CLASS C
- --------------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year........ $ 71 $ 71 $31 $40 $30
3 years....... 121 125 95 $91 $91
</TABLE>
- ---------------
(1) Assumes no redemption.
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of each 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 share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "Management of the Funds"; 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 ANY FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
- --------------------------------------------------------------------------------
2. THE FUNDS
Each Fund is a diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1985. The Trust presently consists of four
series, each of which represents a portfolio with separate investment objectives
and policies. This Prospectus relates to the International Growth Fund, the
International Growth and Income Fund and the Emerging Markets Equity Fund.
Shares of the other series of the Trust, MFS Government Mortgage Fund, are
offered and sold pursuant to a separate prospectus and statement of additional
information. Shares of each Fund are sold continuously to the public and each
Fund then uses the proceeds to buy securities for its portfolio. Three classes
of shares of each Fund currently are offered to the general public. Class A
shares are offered at net asset value plus an initial sales charge up to a
maximum of 4.75% of the offering price (or a CDSC of 1.00% upon redemption
during the first year in the case of certain purchases of $1 million or more and
certain purchases by retirement plans) and are subject to an annual distribution
fee and service fee up to a maximum of 0.50% per annum. Class B shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption (declining from 4.00% during the first year to 0% after six
years) and an annual distribution fee and service fee up to a maximum of 1.00%
per annum; Class B shares will convert to Class A shares approximately eight
years after purchase. Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year and an annual distribution fee and service fee up to a maximum of
1.00% per annum. Class C shares do not convert to any other class of shares of a
Fund.
The Trust's Board of Trustees provides broad supervision over the affairs
of the Funds. The Adviser is responsible for the management of each Fund's
assets (including supervision of the Sub-Adviser) and the officers of the Trust
are responsible for the operations of each Fund. The Adviser manages each
portfolio from day to day in accordance with each Fund's investment objective
and policies. A majority of the Trustees are not affiliated with the Adviser or
the Sub-Adviser. The Trust also offers to buy back (redeem) shares of each Fund
from shareholders at any time at net asset value, less any applicable CDSC.
- --------------------------------------------------------------------------------
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Funds and
should be read in conjunction with the financial statements included in the
Funds' Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of each Fund's independent auditors, given
upon their authority as experts in accounting and auditing. Each Fund's
independent auditors are Ernst & Young LLP.
2
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
EMERGING INTERNATIONAL INTERNATIONAL GROWTH
MARKETS EQUITY GROWTH AND INCOME
- -----------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED MAY 31, 1996* CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value -- beginning of period $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00 $ 15.00
------- ------- ------- ------- ------- -------
Income from investment operations# --
Net investment income (loss) $ 0.04 $ (0.02) $ 0.11 $ 0.05 $ 0.03 $ (0.03)
Net realized and unrealized gain on investments
and foreign currency transactions 1.50 1.50 0.90 0.90 1.69 1.69
------- ------- ------- ------- ------- -------
Total from investment operations $ 1.54 $ 1.48 $ 1.01 $ 0.95 $ 1.72 $ 1.66
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income $ (0.02) $ -- $ (0.03) $ (0.01) $ (0.01) $ --
In excess of net investment income -- (0.01) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions declared to shareholders $ (0.02) $ (0.01) $ (0.03) $ (0.01) $ (0.01) $ --
------- ------- ------- ------- ------- -------
Net asset value -- end of period $ 16.52 $ 16.47 $ 15.98 $ 15.94 $ 16.71 $ 16.66
------- ------- ------- ------- ------- -------
Total return++ 10.24%++ 9.85%++ 6.71%++ 6.37%++ 11.43%++ 11.07%++
Ratios (to average daily net assets)/Supplemental
datasec.:
Expenses## 2.50%+ 3.07%+ 2.52%+ 3.11%+ 2.24%+ 2.85%+
Net investment income (loss) 0.35%+ (0.19)%+ 1.04%+ 0.49%+ 0.24%+ (0.31)%+
Portfolio turnover 22% 22% 29% 29% 11% 11%
Average commission rate $ 0.0136 $ 0.0136 $ 0.0291 $ 0.0291 $ 0.0107 $ 0.0107
Net assets at end of period (000 omitted) $ 19,861 $ 20,021 $ 11,950 $ 13,641 $ 41,483 $ 43,264
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the commencement of investment operations, October 24, 1995 to May 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
sec. The Adviser voluntarily agreed to maintain the expenses of the Emerging Markets Equity Fund at not more than
2.50% and 3.07% of average daily net assets for Class A and Class B shares, respectively. To the extent
actual expenses were over/under these limitations, the net investment income (loss) per share and the ratios
would have been:
Net investment income (loss) $ 0.02 $ (0.08) -- -- -- --
Ratios (to average net assets):
Expenses 2.91%+ 3.48%+ -- -- -- --
Net investment income (loss) 0.10%+ (0.44)%+ -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
4. INVESTMENT OBJECTIVE AND POLICIES
Each Fund has a different investment objective which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Funds can be expected to affect the market and financial
risk to which each Fund is subject and the performance of each Fund. The
investment objective and policies of each Fund may, unless otherwise
specifically stated, be changed by the Trustees of the Trust without a vote of
the shareholders. A change in a Fund's objective may result in the Fund having
an investment objective different from the objective which the shareholder
considered appropriate at the time of investment in the Fund. Any investment
involves risk and there is no assurance that the investment objective of any
Fund will be achieved.
INTERNATIONAL GROWTH FUND -- The International Growth Fund's investment
objective is to seek capital appreciation. The Fund seeks to achieve its
objective by investing, under normal market conditions, at least 65% of its
total assets in equity securities of companies whose principal activities are
outside the U.S. growing at rates expected to be well above the growth rate of
the overall U.S. economy. The foreign growth securities in which the Fund may
invest include securities of more established companies which represent
opportunities for long-term growth. See "Investment Techniques -- Foreign Growth
Securities" below. The selection of securities is made solely on the basis of
potential for capital appreciation. Dividend and interest
3
<PAGE> 16
income from portfolio securities, if any, is incidental to the Fund's investment
objective of capital appreciation.
The Fund may invest up to 25% of its net assets in securities of issuers
whose principal activities are located in emerging market countries. See
"Investment Techniques -- Emerging Market Securities" below.
While the Fund intends to invest primarily in equity securities, the Fund
may also invest up to 35% of its net assets (and generally expects to invest not
more than 20% of its net assets) in fixed income securities of government,
government-related, supranational and corporate issuers whose principal
activities are outside the U.S., including up to 10% of its net assets in fixed
income securities rated Ba or lower by Moody's Investors Service, Inc.
("Moody's") or BB or lower by Standard & Poor's Ratings Services ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps") and comparable unrated securities. See "Risk Factors -- Lower Rated
Fixed Income Securities" below. The Adviser and Sub-Adviser consider a variety
of factors in selecting fixed income securities to achieve capital appreciation,
including the creditworthiness of issuers, interest rates and currency exchange
rates.
INTERNATIONAL GROWTH AND INCOME FUND -- The International Growth and Income
Fund's investment objective is to seek capital appreciation and current income.
The Fund seeks to achieve its objective by investing primarily in equity and
fixed income securities of issuers whose principal activities are outside the
U.S.
The Fund will invest, under normal market conditions, at least 65% of its
total assets (and generally expects to invest a substantial portion of its total
assets) in a combination of the following:
(a) equity securities of foreign "blue chip" companies and foreign growth
companies. See "Investment Techniques -- Foreign Growth Securities"
below. The Fund considers a security to be "blue chip" if the total
equity market capitalization of the issuer is at least U.S. $1
billion; and
(b) fixed income securities of government, government-related,
supranational and corporate issuers whose principal activities are
outside the U.S. The Fund may invest up to 50% (and generally expects
to invest from 15% to 35%) of its net assets in fixed income
securities, including up to 25% of its net assets in fixed income
securities rated below Ba or lower by Moody's or BB or lower by S&P
or Fitch and comparable unrated securities. See "Risk Factors --
Lower Rated Fixed Income Securities" below.
The Fund may invest up to 10% of its net assets in securities of issuers
whose principal activities are located in emerging market countries. See
"Investment Techniques -- Emerging Market Securities" below.
EMERGING MARKETS EQUITY FUND -- The Emerging Markets Equity Fund's
investment objective is to seek capital appreciation. The Fund seeks to achieve
its objective by investing, under normal market conditions, at least 65% of its
total assets in equity securities of issuers whose principal activities are
located in emerging market countries. The Adviser and the Sub-Adviser expect to
take a global approach to portfolio management by weighting the Fund's
investments towards countries in Latin America, Asia, Africa, the Middle East
and the developing countries of Europe, primarily in Eastern Europe. See
"Investment Techniques -- Emerging Market Securities" below. The selection of
securities is made solely on the basis of potential for capital appreciation.
Dividend and interest income from portfolio securities, if any, is incidental to
the Fund's investment objective of capital appreciation.
While the Fund intends to invest primarily in equity securities, the Fund
may also invest less than 35% of its net assets in fixed income securities of
government, government-related, supranational and corporate issuers whose
principal activities are outside the U.S., rated Ba or lower by Moody's or BB or
lower by S&P, Fitch or Duff & Phelps and comparable unrated securities. See
"Risk Factors -- Lower Rated Fixed Income Securities" below. The Adviser and the
Sub-Adviser consider a variety of factors in selecting fixed income securities
to achieve capital appreciation, including the creditworthiness of issuers,
interest rates and currency exchange rates.
------------------
The Funds do not intend to emphasize any particular country or region in
making their investments, but under normal market conditions, each Fund will be
invested in at least three countries (outside the U.S.) and will not invest more
than 50% of its net assets in issuers whose principal activities are located in
a single country. See "Risk Factors -- Investments in One or a Limited Number of
Countries" below. Currently, none of the Funds expect to invest more than 25% of
their net assets in issuers whose principal activities are located in a single
country, except that the International Growth Fund and the International Growth
and Income Fund generally expect to invest between 15% to 45% of their assets in
issuers whose principal activities are in Japan. Each Fund will seek to reduce
risk by investing its assets in a number of markets and issuers, performing
credit analyses of potential investments and monitoring current developments and
trends in both the international economy and financial markets.
The Adviser and the Sub-Adviser determine where an issuer's principal
activities are located by considering such factors as its country of
organization, the principal trading market for its securities and the source of
its revenues and assets. The issuer's principal activities gen-
4
<PAGE> 17
erally are deemed to be located in a particular country if: (a) the security is
issued or guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws of,
and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country.
Each Fund may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; securities
such as bonds, warrants or rights that are convertible into stocks; and
depositary receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
For temporary defensive reasons, such as during times of international
political or economic uncertainty or turmoil, most or all of each Fund's
investments may be in cash (U.S. dollars, foreign currencies or multinational
currency units) and/or securities that are denominated in U.S. dollars or whose
issuers are domiciled in the U.S. Each Fund is not restricted as to the portions
of its assets which may be invested in securities denominated in a particular
currency and up to 100% of each Fund's net assets may be invested in securities
denominated in foreign currencies and multinational currency units.
- --------------------------------------------------------------------------------
5. INVESTMENT TECHNIQUES
Consistent with each Fund's investment objective and policies, each Fund
may engage in the following investment techniques, many of which are described
more fully in the SAI. See "Investment Policies and Restrictions" in the SAI.
FOREIGN GROWTH SECURITIES: Each Fund may invest in securities of foreign
growth companies, including established foreign companies, whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Risk Factors" below. It is anticipated that these
companies will primarily be in nations with more developed securities markets,
such as Japan, Australia, Canada, New Zealand and most Western European
countries, including Great Britain.
EMERGING MARKET SECURITIES: Consistent with each Fund's respective
objective and policies, each Fund may invest in securities of issuers whose
principal activities are located in emerging market countries. Emerging market
countries include any country determined by the Adviser and the Sub-Adviser to
have an emerging market economy, taking into account a number of factors,
including whether the country has a low- to middle-income economy according to
the International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser and the Sub-Adviser determine
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for its securities and the source of its revenues and
assets. The issuer's principal activities generally are deemed to be located in
a particular country if: (a) the security is issued or guaranteed by the
government of that country or any of its agencies, authorities or
instrumentalities; (b) the issuer is organized under the laws of, and maintains
a principal office in, that country; (c) the issuer has its principal securities
trading market in that country; (d) the issuer derives 50% or more of its total
revenues from goods sold or services performed in that country; or (e) the
issuer has 50% or more of its assets in that country. See "Risk Factors --
Emerging Markets" below.
FIXED INCOME SECURITIES: Fixed income securities in which each Fund may
invest include all types of long-or short-term debt obligations, such as bonds,
notes, bills, debentures, loans, loan assignments and commercial paper. Each
Fund may invest in emerging market fixed income securities, which, in addition
to the securities identified above, may take the form of interests issued by
entities organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by emerging market country issuers. Fixed
income securities in which each Fund may invest include securities in the lower
rating categories of recognized rating agencies and comparable unrated
securities. See "Risk Factors" below. The International Growth Fund will not
invest more than 10% of its net assets, the International Growth and Income Fund
will not invest more than 25% of its net assets and the Emerging Markets Equity
Fund will not invest 35% or more of its net assets, in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P or Fitch and comparable
unrated securities. See "Risk Factors -- Lower Rated Fixed Income Securities"
below. However, because most foreign fixed income securities are not rated, a
Fund will invest in foreign fixed income securities primarily based on the
Adviser's or the Sub-Adviser's credit analysis without relying on published
ratings.
INVESTMENT IN OTHER INVESTMENT COMPANIES: Each Fund may invest in other
investment companies to the extent permitted by the 1940 Act and applicable
state securities laws (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase thinly traded securities of emerging market companies, or
5
<PAGE> 18
(iii) when the Adviser or the Sub-Adviser believes such investments may be more
advantageous to the Fund than a direct market purchase of securities. If a Fund
invests in such investment companies, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser) but also will indirectly bear similar
expenses of the underlying investment companies.
PRIVATIZATIONS: The governments in some countries, including emerging
market countries, have been engaged in programs of selling part or all of their
stakes in government owned or controlled enterprises ("privatizations"). Each
Fund may invest in privatizations. In certain countries, the ability of foreign
entities to participate in privatizations may be limited by local law and the
terms on which the foreign entities may be permitted to participate may be less
advantageous than those afforded local investors.
DEPOSITARY RECEIPTS: Each Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depositary
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of a Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of a
Fund in ADRs, GDRs and other types of depositary receipts are deemed to be
investments in the underlying securities.
BRADY BONDS: Each Fund may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with
debt restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
bonds may be viewed as speculative.
STRUCTURED SECURITIES: Each Fund may invest a portion of its assets in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of sovereign debt obligations. This type of
restructuring involves the deposit with, or purchase by, an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which each Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. Each Fund is permitted to invest in a class of
Structured Securities that is either subordinated or unsubordinated to the right
of payment of another class. Subordinated Structured Securities typically have
higher yields and present greater risks than unsubordinated Structured
Securities. Structured Securities are typically sold in private placement
transactions, and there currently is no active trading market for Structured
Securities.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements in
order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, each Fund has adopted certain procedures intended to
minimize risk. Foreign repurchase agreements may be less well secured than U.S.
repurchase agreements, and may be denominated in foreign currencies. They may
also involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in U.S.
markets.
6
<PAGE> 19
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which each Fund may invest also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind ("PIK
bonds"). Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. Each 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 under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
INDEXED SECURITIES: Each Fund may invest in indexed securities whose value
is linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself.
LOANS AND OTHER DIRECT INDEBTEDNESS: Each Fund may invest a portion of its
assets in loans. By purchasing a loan, a Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate,
government or other borrower. Many such loans are secured, and most impose
restrictive covenants which must be met by the borrower. These loans are made
generally to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buy-outs and other corporate activities. Such loans may be in default
at the time of purchase. Each Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods and services. These claims may also be purchased at a time
when the company is in default. Certain of the loans acquired by a Fund may
involve revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
and other direct investments may not be in the form of securities or may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, a Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. For a further discussion of loans and the risks related to
transactions therein, see the SAI.
RESTRICTED SECURITIES: Each Fund may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to a Fund's limitations on investing not
more than 15% of its net assets in illiquid investments. The Board of Trustees
has adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board,
however, will retain oversight and is ultimately responsible for the
determinations. The Board will carefully monitor each Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in a Fund's portfolio to the
extent that qualified institutional buyers become for a time uninterested in
purchasing Rule 144A securities held in the Fund's portfolio. Subject to each
Fund's 15% limitation on investments in illiquid investments, a Fund may also
invest in restricted securities that may not be sold under Rule 144A, which
presents certain risks. As a result, a Fund might not be able to sell these
securities when the Adviser or Sub-Adviser wishes to do so, or might have to
sell them at less than fair value. In addition, market quotations are less
readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
LENDING OF PORTFOLIO SECURITIES: Each Fund may seek to increase its income
by lending portfolio securities under present regulatory policies, including
those of the Board of Governors of the Federal Reserve System and the SEC. Such
loans will usually be made only to member
7
<PAGE> 20
banks of the Federal Reserve System and member firms (and subsidiaries thereof)
of the New York Stock Exchange, and would be required to be secured continuously
by collateral in cash, irrevocable letters of credit or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. As with other extensions of credit there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to entities deemed by the Adviser or the Sub-Adviser to be of good
standing, and when, in the judgment of the Adviser or the Sub-Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser or the Sub-Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the value of the relevant Fund's total assets.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: Securities may be purchased on
a "when-issued" or on a "forward delivery" basis, which means that the
obligations will be delivered to a 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 a Fund is not limited to the amount of securities for which it may have
commitments to purchase on such basis, it is expected that under normal
circumstances, a Fund will not commit more than 10% of its assets to such
purchases. A Fund does not pay for the securities until received or start
earning interest on them until the contractual settlement date. In order to
invest its assets immediately, while awaiting delivery of securities purchased
on such basis, a Fund will hold cash, short-term money market instruments, U.S.
Government securities or other liquid, high grade debt securities in a
segregated account to pay for the commitment. Although the Funds do not intend
to make such purchases for speculative purposes, purchases of securities on such
bases may involve more risk than other types of purchases. For additional
information concerning these securities, see the SAI.
OPTIONS ON SECURITIES: Each Fund may write (sell) covered put and call
options on securities ("Options") and purchase put and call Options on
securities that are traded on foreign and U.S. securities exchanges and over the
counter. A Fund will write such Options for the purpose of increasing its return
and/or protecting the value of its portfolio. Each Fund may also write
combinations of put and call Options on the same security, known as "straddles."
Such transactions can generate additional premium income but also present
increased risk. Each Fund may purchase put or call Options in anticipation of
declines in the value of portfolio securities or increases in the value of
securities to be acquired.
Each Fund may purchase and sell options that are traded on foreign and 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. Each 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. Each Fund may also write over-the-counter options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
Each 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 and non-hedging purposes. In contrast to other types
of options a yield curve option is based on the difference between the yields of
designated securities rather than the actual prices of the individual
securities. Yield curve options written by a Fund will be "covered" but could
involve additional risks, as discussed in the SAI.
OPTIONS ON STOCK INDICES: Each Fund may write (sell) covered call and put
Options and purchase call and put Options on foreign and domestic stock indices
("Options on Stock Indices"). A Fund may write such options for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When a Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In addition, if the value
of an underlying index moves adversely to the Fund's option position, the option
may be exercised, and the Fund will experience a loss which may only be
partially offset by the amount of the premium received.
Each Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. A Fund's
possible loss in either case will be limited to the
8
<PAGE> 21
premium paid for the option, plus related transaction costs.
FUTURES CONTRACTS: Each Fund may enter into contracts for the purchase or
sale for future delivery of contracts based on indices of securities as such
instruments become available for trading or fixed income securities or foreign
currencies ("Futures Contracts"). Such transactions will be entered into for
hedging purposes, in order to protect a Fund's current or intended investments
from the effects of changes in interest or exchange rates, or for non-hedging
purposes to the extent permitted by applicable law. For example, in the event
that an anticipated decrease in the value of portfolio securities occurs as a
result of a decline in the dollar value of foreign currencies in which portfolio
securities are denominated or a general increase in interest rates, the adverse
effects of such changes may be offset, in whole or in part, by gains on Futures
Contracts sold by a Fund. Conversely, the adverse effects of an increase in the
cost of portfolio securities to be acquired, occurring as a result of a rise in
the dollar value of securities denominated in foreign currencies or a decline in
interest rates, may be offset, in whole or in part, by gains on Futures
Contracts purchased by a Fund. Each Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although each Fund
believes that use of such contracts will benefit the Fund, if its investment
judgment about 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 and the Fund may realize a loss. Transactions entered into for
non-hedging purposes involve greater risk including the risk of losses which are
not offset by gains on other portfolio assets. Each Fund will not enter into any
Futures Contract if immediately thereafter the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of its total assets.
OPTIONS ON FUTURES CONTRACTS: Each Fund may purchase and write options on
futures contracts ("Options on Futures Contracts") in order to protect against
declines in the values of portfolio securities or against increases in the cost
of securities to be acquired. Purchases of Options on Futures Contracts may
present less risk in hedging a Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, 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. In addition, if
an option is exercised, a Fund may suffer a loss on the transaction. Options on
Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted under applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FOREIGN CURRENCIES: Each Fund may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. As in the case of other types of options, however, the writing of an
Option on Foreign Currency will constitute only a partial hedge, up to the
amount of the premium received, and a Fund may be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to a Fund's position, it may forfeit the entire amount of the premium
paid for the Option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by a Fund will be traded on foreign and
U.S. exchanges or over-the-counter.
FORWARD CONTRACTS: Each Fund may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date at a price set at the time of the contract ("Forward
Contracts"). Each Fund may enter into Forward Contracts for hedging purposes as
well as for the non-hedging purpose of increasing the Fund's current income. By
entering into transactions in Forward Contracts, however, a Fund may be required
to forego the benefits of advantageous changes in exchange rates and, in the
case of Forward Contracts entered into for non-hedging purposes, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative. Forward Contracts are traded over-the-counter,
and not on organized commodities or securities exchanges. As a result, such
contracts operate in a manner distinct from exchange-traded instruments, and
their use involves certain risks beyond those associated with transactions in
Futures Contracts or options traded on exchanges. A Fund may also enter into a
Forward Contract on one currency in order to hedge against risk of loss arising
from fluctuations in the value of a second currency (referred to as a "cross
hedge") if, in the judgment of the Adviser or the Sub-Adviser, a reasonable
degree of correlation can be expected between movements in the values of the two
currencies. Each Fund has established procedures consistent with statements of
the SEC and its staff regarding the use of Forward Contracts by registered
investment companies, which requires use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments,
9
<PAGE> 22
each Fund may enter into interest rate swaps, currency swaps and other types of
available swap agreements, such as caps, collars and floors. Swaps involve the
exchange by a Fund with another party of cash payments based upon different
interest rate indices, currencies and other prices or rates, such as the value
of mortgage prepayment rates. For example, in the typical interest rate swap, a
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.
Each Fund may also purchase and sell caps, floors and collars. In a typical
cap or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
a Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the SAI for more information on, and the risks
involved in, these activities.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. (the "NASD") and such other policies as
the Trustees may determine, the Adviser may consider sales of shares of the
Funds and of the other investment company clients of MFD, the Funds'
distributor, as a factor in the selection of broker-dealers to execute the
Funds' portfolio transactions.
From time to time, the Adviser and the Sub-Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of a 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 SAI.
While it is not generally each Fund's policy to invest or trade for
short-term profits, each Fund may dispose of a portfolio security whenever the
Adviser or the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate. It is
anticipated that each Fund's portfolio turnover rate will not exceed 300% during
the Fund's first fiscal year. Because each Fund may have a portfolio turnover
rate of over 100%, transaction costs incurred by each Fund and realized capital
gains and losses of each Fund may be greater than that of a fund with a lesser
portfolio turnover rate.
- --------------------------------------------------------------------------------
6. RISK FACTORS
FOREIGN SECURITIES: Transactions involving foreign equity or debt
securities or foreign currencies, and transactions entered into in foreign
countries, involve considerations and risks not typically associated with
investing in U.S. markets. These include changes in currency rates, exchange
control regulations, governmental administration or economic or monetary policy
(in the U.S. or abroad) or circumstances in dealings between nations. Costs may
be incurred in connection with conversions between various currencies. Each Fund
may invest up to 100% of its assets in foreign securities which are not traded
on a U.S. exchange. Special considerations may also include more limited
information about foreign issuers, higher brokerage and custody costs, different
or less stringent accounting standards and thinner trading markets. Foreign
securities markets may also be less liquid, more volatile and less subject to
government supervision than in the U.S. Investments in foreign countries could
be affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods.
10
<PAGE> 23
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities in
emerging markets may be less liquid and more volatile in price than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of a
Fund is uninvested and no return is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Funds bear the risk that the securities will not be delivered and that the
Funds' payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
repatriation of assets, and may have less protection of property rights than
more developed countries. The economies of countries with emerging markets may
be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Fund could be
adversely affected by a delay in obtaining a grant of, or a refusal to grant,
any required governmental approval for repatriation of capital, as well as by
the application to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be
restricted or controlled to varying degrees. These restrictions or controls may
at times preclude investment in certain foreign emerging market debt obligations
and increase the expenses of a Fund. See the SAI for a further discussion of
emerging markets securities as well as the associated risks.
ALLOCATION AMONG EMERGING MARKETS: Each Fund may allocate all or a portion
of its investments in emerging market securities among the emerging markets of
Latin America, Asia, Africa, the Middle East and the developing countries of
Europe, primarily in Eastern Europe. Each Fund will allocate its investments
among these emerging markets in accordance with the Adviser's and the
Sub-Adviser's determination as to the allocation most appropriate with respect
to the Fund's investment objective and policies. Each Fund may invest its assets
allocated to investment in emerging markets without limitation in any particular
region, and, in accordance with the Adviser's and the Sub-Adviser's investment
discretion, at times may invest all of its assets allocated to investment in
emerging markets in securities of emerging market issuers located in a single
region (e.g., Latin America). To the extent that a Fund's investments are
concentrated in one or a few emerging market regions, the Fund's investment
performance correspondingly will be more dependent upon the economic, political
and social conditions and changes in those regions. The ability of a Fund to
allocate its investments among emerging market regions without restriction may
have the effect of increasing the volatility of the Fund, as compared to a fund
which limits such allocations.
INVESTMENTS IN ONE OR A LIMITED NUMBER OF COUNTRIES: Each Fund will seek
to reduce risk by investing its assets in a number of markets and issuers.
However, each Fund may invest up to 50% of its net assets in issuers located in
a single country. To the extent that a Fund invests a significant portion of its
assets in a single or limited number of countries, the Fund's investment
performance correspondingly will be more dependent upon the economic, political
and social conditions and changes in that country or countries, and the risks
associated with investments in such country or countries will be particularly
significant. The ability of a Fund to focus its investments in one or a limited
number of countries may have the effect of increasing the volatility of that
Fund.
EMERGING GROWTH COMPANIES: Each Fund may invest in securities of emerging
growth companies, including established companies. Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. The securities of emerging growth companies may have limited
11
<PAGE> 24
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Funds will involve a higher degree of risk than would established
growth stocks.
FOREIGN CURRENCIES: Because each Fund may invest up to 100% of its asset in
securities denominated in currencies other than the U.S. dollar, and because
each Fund may hold foreign currencies, the value of a Fund's investments, and
the value of dividends and interest earned by a Fund, may be significantly
affected by changes in currency exchange rates. Some foreign currency values may
be volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Funds. Although the Adviser and Sub-Adviser may attempt to manage
currency exchange rate risks, there is no assurance that the Adviser and Sub-
Adviser will do so at an appropriate time or that the Adviser and Sub-Adviser
will be able to predict exchange rates accurately. For example, if the Adviser
and Sub-Adviser hedge a Fund's exposure to a foreign currency, and that
currency's value rises, the Fund will lose the opportunity to participate in the
currency's appreciation. Each Fund may hold foreign currency received in
connection with investments in foreign securities, and enter into Forward
Contracts, Futures Contracts and Options on Foreign Currencies when, in the
judgment of the Adviser or Sub-Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rates. While the holding of foreign currencies will permit a
Fund to take advantage of favorable movements in the applicable exchange rate,
it also exposes the Fund to risk of loss if such rates move in a direction
adverse to the Fund's position. Such losses could also adversely affect the
Fund's hedging strategies. See the SAI for further discussion of the holding of
foreign currencies as well as the associated risks.
FIXED INCOME SECURITIES: To the extent a Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. Each Fund is
subject to no restrictions on the maturities of the fixed income securities it
holds. A Fund's investments in fixed income securities with longer terms to
maturity are subject to greater volatility than the Fund's shorter-term
obligations.
LOWER RATED FIXED INCOME SECURITIES: Fixed income securities in which each
Fund may invest may be rated Baa by Moody's or BBB by S&P or Fitch (and
comparable unrated securities). For a description of these and other rating
categories, see Appendix B. These securities, while normally exhibiting adequate
protection parameters, have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than in the case of higher grade fixed
income securities.
Each Fund may also invest in fixed income securities rated Ba or lower by
Moody's or BB or lower by S&P or Fitch (and comparable unrated securities). No
minimum rating standard is required by any Fund. These securities are considered
speculative and, while generally providing greater yield than investments in
higher rated securities, will involve greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. These lower rated high yielding fixed income securities
generally tend to be affected by economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on a
Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, a Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's and the Sub-Adviser's judgment
may at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
While the Adviser and the Sub-Adviser may refer to ratings issued by
established credit rating agencies, it is not
12
<PAGE> 25
any Fund's policy to rely exclusively on ratings issued by these rating
agencies, but rather to supplement such ratings with the Adviser's and the
Sub-Adviser's own independent and ongoing review of credit quality. A Fund's
achievement of its investment objective may be more dependent on the Adviser's
and the Sub-Adviser's own credit analysis than in the case of an investment
company primarily investing in higher quality fixed income securities.
Since shares of each Fund represent an investment in securities with
fluctuating market prices, shareholders should understand that the value of
shares of the Fund will vary as the aggregate value of the portfolio securities
of the Fund increases or decreases. However, changes in the value of securities
subsequent to their acquisition will not affect cash or yield to maturity to a
Fund.
TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although
each Fund may enter into transactions in Options, Options on Stock Indices,
Forward Contracts, Futures Contracts, Options on Futures Contracts and Options
on Foreign Currencies for hedging purposes, such transactions nevertheless
involve 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 a Fund's hedging strategy
unsuccessful and could result in losses. Each Fund also may enter into
transactions in Options, Options on Stock Indices, Forward Contracts, Futures
Contracts and Options on Futures Contracts for other than hedging purposes, to
the extent permitted by applicable law, which involves greater risk. In
particular, such transactions may result in losses for a 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 a Fund may be required to maintain a position
until exercise or expiration, which could result in losses. The SAI contains a
description of the nature and trading mechanics of Options, Options on Stock
Indices, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies, and includes a discussion of the risks related to
transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Options and Futures Contracts traded by a Fund will include U.S. Government
securities as well as foreign securities.
------------------------------
The SAI includes a discussion of investment policies and a listing of
specific investment restrictions which govern each Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated. See "Investment Policies and
Restrictions" in the SAI.
Each Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
- --------------------------------------------------------------------------------
7. MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER -- The Adviser manages each Fund pursuant to separate
Investment Advisory Agreements, each dated September 1, 1995 (the "Advisory
Agreements"). The Adviser provides each 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 each Fund. For its services and facilities, the Adviser receives
an annual management fee computed and paid monthly, in an amount equal to the
following annual rates of the average daily net assets of each Fund:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE
DAILY NET ASSETS
FUND OF EACH FUND
- -------------------------- ------------------------
<S> <C>
International Growth
Fund.................... 0.975% of the first $500
million and 0.925%
thereafter
International Growth and
Income Fund............. 0.975% of the first $500
million and 0.925%
thereafter
Emerging Markets Equity
Fund.................... 1.25%
</TABLE>
For the period ended May 31, 1996, MFS received management fees under the
Advisory Agreements of $313,570, $103,167 and $182,020 (equivalent on an
annualized basis to 0.975%, 0.975% and 1.25%, respectively, of each Fund's
average daily net assets) for the International Growth Fund, International
Growth and Income Fund and Emerging Markets Equity Fund, respectively.
These management fees are greater than the fees paid by most funds, but are
comparable to fees paid by funds having similar investment objectives and
policies. MFS also serves as investment adviser to each of the other funds in
the MFS Family of Funds (the "MFS Funds"), currently 55 funds, and to MFS(R)
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 Union Standard Trust, MFS Institutional Trust, MFS
Variable Insurance Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity
Trust, Inc. and seven variable accounts, each of which is a registered
investment com-
13
<PAGE> 26
pany established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of
Canada (U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $47.1
billion on behalf of approximately 2.1 million investor accounts as of August
31, 1996. As of such date, the MFS organization managed approximately $23.4
billion of assets in equity securities, approximately $19.5 billion of assets
invested in fixed income funds and fixed income portfolios and approximately
$4.0 billion of assets in foreign securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin,
Jeffrey L. Shames, Arnold D. Scott 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. Mr. McNeil is the Chairman 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 of MFS, is also the Chairman and President
of the Trust. W. Thomas London, Stephen E. Cavan, James O. Yost and James R.
Bordewick, Jr., all of whom are officers of MFS, are officers of the Trust.
FCM -- Each Advisory Agreement permits the Adviser from time to time to
engage one or more sub-advisers to assist in the performance of its services.
Pursuant to each Advisory Agreement, the Adviser has engaged Foreign & Colonial
Management Ltd., a company incorporated under the laws of England and Wales
("FCM"), located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom, as sub-adviser to render advisory services to the Funds. FCM is a
wholly owned subsidiary of Hypo Foreign & Colonial Management (Holdings) Ltd.
("Hypo F&C"). Fifty percent of the outstanding voting securities of Hypo F&C is
owned by each of (i) Pountney Hill Holdings Ltd, which is wholly owned by five
closed-end, publicly listed investment trusts managed by FCM, including Foreign
& Colonial Investment Trust PLC, and (ii) Hypo (U.K.) Holdings Ltd., which is a
wholly owned subsidiary of HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank
AG), the oldest publicly listed, and fifth largest, commercial bank in Germany,
founded in 1835. FCM has a history of money management dating from 1868 and the
establishment of the world's oldest closed-end fund, Foreign & Colonial
Investment Trust PLC. As of June 30, 1996, FCM managed approximately U.S. $40.8
billion of assets, including approximately U.S. $30 billion of assets in equity
securities and approximately U.S. $10.7 billion of assets in fixed income
securities.
Under separate Sub-Advisory Agreements between the Adviser and FCM, each
dated September 1, 1995 (the "Sub-Advisory Agreements"), the Adviser may
delegate to FCM the authority to make investment decisions for each Fund. It is
presently intended that FCM will provide portfolio management services for all
of the assets of the International Growth Fund and the Emerging Markets Equity
Fund and for the equity portion of the assets of the International Growth and
Income Fund. For its services, the Adviser pays FCM a management fee, computed
and paid monthly, in an amount equal to 0.80% and 1.00% of the average daily net
assets of the International Growth Fund and the Emerging Markets Equity Fund,
respectively, on an annualized basis and 0.75% of the average daily net assets
managed by FCM of the International Growth and Income Fund on an annualized
basis. The Adviser and FCM have agreed to cooperate in distributing, advising
and managing investment products throughout the world. In this arrangement they
anticipate that certain expenses and revenues relating to their cooperative
activities, including investment advisory fees received from the Funds and
certain expenses incurred by MFS, FCM and their affiliates attributable to their
services to the Funds, will be shared.
FCEM -- Each Sub-Advisory Agreement permits FCM from time to time to engage
one or more sub-advisers to assist in the performance of its services. Pursuant
to each Sub-Advisory Agreement, FCM has engaged Foreign & Colonial Emerging
Markets Limited, a company incorporated under the laws of England and Wales
("FCEM"), located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom, as sub-adviser to render advisory services to the Funds. FCEM is a
subsidiary of FCM. FCEM serves as the investment adviser to public closed-end
and open-end funds and segregated accounts specializing in emerging markets. As
of June 30, 1996, FCEM managed approximately U.S. $4.6 billion of assets
invested in emerging markets.
Under separate Sub-Advisory Agreements between FCM and FCEM, each dated
September 1, 1995, FCM may delegate to FCEM the authority to make investment
decisions for each Fund. It is presently intended that FCEM will provide
portfolio management services for the portion of the assets of the Funds
invested in emerging markets securities. For its services, FCM pays FCEM a
management fee, computed and paid monthly, in an amount equal to 1.00% of the
average daily net assets managed by FCEM of each Fund on an annualized basis.
14
<PAGE> 27
For the period ended May 31, 1996, the Adviser paid the Sub-Adviser fees
under the Sub-Advisory Agreements of $255,468, $59,933 and $144,524 in
connection with its services for the International Growth Fund, International
Growth and Income Fund and Emerging Markets Equity Fund, respectively.
STRATEGIC ALLIANCE -- The sub-advisory services provided by the Sub-Adviser
to the Funds are part of a strategic alliance between MFS and FCM. As part of
this alliance, the portfolio managers and investment analysts of MFS and FCM
share their views on a variety of investment related issues, such as the
economy, securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS has access to the extensive
international equity investment expertise of FCM, and FCM has access to the
extensive U.S. equity investment expertise of MFS. MFS and Foreign & Colonial
each have investment personnel working in each other's offices in Boston and
London, respectively.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for portfolios of other clients of MFS or clients of
FCM. Some simultaneous transactions are inevitable when several clients receive
investment advice from MFS and FCM, particularly when the same security is
suitable for more than one client. While in some cases this arrangement could
have a detrimental effect on the price or availability of the security as far as
a Fund is concerned, in other cases it may produce increased investment
opportunities for the Fund.
PORTFOLIO MANAGERS -- The identity and background of the portfolio managers
for each Fund is set forth below. Each of the following portfolio managers has
acted in that capacity since the commencement of investment operations of each
Fund unless otherwise noted:
International Growth Fund -- Ian K. Wright, a director of FCM, Atul Patel,
Assistant Director and Global Funds Manager of FCM, and June Scott, a
Global Funds Manager of FCM, are the Fund's portfolio managers. Mr. Wright
has been employed as a portfolio manager by FCM since 1981 and has been one
of the Fund's portfolio managers since March, 1996. Mr. Patel has been
employed by FCM as a portfolio manager of the Fund since 1994 before which
he was employed by Bankers Trust Investment Management as Investment
Manager since 1992 and by Gartmore Investment Management as Global Fund
Manager since 1990. Mr. Patel has been one of the Fund's portfolio managers
since March, 1996. Ms. Scott has been employed by FCM since 1995, before
which she completed her MBA at the London Business School. Prior to
completing her MBA, Ms. Scott worked as a Quantitative Portfolio Analyst in
the Equity Research Group at J.P. Morgan Investment Management in London.
Ms. Scott has been one of the Fund's portfolio managers since March, 1996.
International Growth and Income Fund -- Chilton Thomson, Chief Investment
Officer of FCM, Atul Patel, Assistant Director and Global Funds Manager of
FCM, and Richard O. Hawkins, a Senior Vice President of the Adviser, are
the Fund's portfolio managers. Mr. Thomson has been employed by FCM as a
portfolio manager since 1994 and as one of the portfolio managers of the
Fund since 1995 before which he was employed by Bankers Trust Investment
Management as Chief International Investment Officer since 1992 and by
Gartmore Investment Management as International Director since 1989. Mr.
Patel has been one of the portfolio managers of the Fund since 1995. Mr.
Hawkins has been employed as a portfolio manager by the Adviser since 1988
and as one of the portfolio managers of the Fund since 1995.
Emerging Markets Equity Fund -- Dr. Arnab Kumar Banerji, Chief Investment
Officer of FCEM, has been the Fund's portfolio manager since October, 1995.
Dr. Banerji has been employed by FCEM as a portfolio manager since 1993
before which he served as Joint Head of Emerging Markets for Citibank
Global Asset Management since 1989.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for each Fund.
15
<PAGE> 28
- --------------------------------------------------------------------------------
8. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Shares of the Funds may be purchased at the public offering price through
any dealer and other financial institutions ("dealers") having a selling
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Funds.
Each Fund offers three classes of shares to the general public (Class A, B
and Class C shares) which bear sales charges and distribution fees in different
forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value
plus an initial sales charge, but in certain cases are offered at net asset
value without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares of each Fund are
offered at net asset value plus an initial sales charge as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF: DEALER ALLOWANCE
--------------------------- AS A PERCENTAGE
NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE OFFERING PRICE INVESTED PRICE
- ---------------------------------- ---------- ----------------
<S> <C> <C> <C>
Less than
$100,000.......... 4.75% 4.99% 4.00%
$100,000 but less
than $250,000..... 4.00 4.17 3.20
$250,000 but less
than $500,000..... 2.95 3.04 2.25
$500,000 but less
than $1,000,000... 2.20 2.25 1.70
$1,000,000 or
more.............. None** None** See Below**
</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
(see the SAI).
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of a Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares of each Fund are also offered at
net asset value without an initial sales charge but subject to a CDSC, equal to
1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization demonstrates to the satisfaction of MFD that
either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of the
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing
Agent (the "MFS Participant Recordkeeping System"); (b) the plan
establishes an account with the Shareholder Servicing Agent on or
after July 1, 1996; and (c) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds will be in an aggregate
amount of at least $500,000 within a reasonable period of time, as
determined by MFD in its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds. THE RETIREMENT PLAN
WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASE THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
16
<PAGE> 29
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------- ---------------------------------
<C> <S>
1.00%.......... On the first $2,000,000, plus
Over $2,000,000 to $3,000,000,
0.80%.......... plus
Over $3,000,000 to $50,000,000,
0.50%.......... plus
0.25%.......... Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers
with respect to a shareholder's new investment in Class A shares made on or
after April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemptions of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes
of the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
CLASS B SHARES: Class B shares of each Fund are offered at net asset value
without an initial sales charge but subject to a CDSC upon redemption as
follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
- --------------- --------------
<S> <C> <C>
First................................... 4%
Second.................................. 4%
Third................................... 3%
Fourth.................................. 3%
Fifth................................... 2%
Sixth................................... 1%
Seventh and following................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of
the purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under each Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Class B Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Funds at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
17
<PAGE> 30
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (i.e., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change to
the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's account
that were purchased through the reinvestment of dividends and distributions paid
in respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not convert to any other class of shares of
the Fund. The maximum investment in Class C shares that may be made is up to
$1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares
purchased through dealers and, as compensation therefor, MFD will retain the
1.00% per annum distribution and service fee paid under the Class C Distribution
Plan by the Fund to MFD for the first year after purchase (see "Distribution
Plans" below).
Class C shares are not currently available for purchase by any retirement
plan qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of
1986, as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of each class of
each Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. Each Fund reserves
the right to cease offering its shares at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET
TIMING. Purchases and exchanges should be made for investment purposes only.
Each Fund and MFD reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of
18
<PAGE> 31
related purchasers). Each Fund or MFD may reject or restrict any purchases by a
particular purchaser or group, for example, when such purchase is contrary to
the best interests of the Fund's other shareholders or otherwise would disrupt
the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make
exchanges among certain classes of shares of certain MFS Funds (as determined by
MFD) which follow a timing pattern, and with individuals or entities acting on
such shareholders' behalf (collectively, "market timers"), setting forth the
terms, procedures and restrictions with respect to such exchanges. In the
absence of such an agreement, it is the policy of each Fund and MFD to reject or
restrict purchases by market timers if (i) more than two exchange purchases are
effected in a timed account in the same calendar quarter or (ii) a purchase
would result in shares being held in timed accounts by market timers
representing more than (x) one percent of a Fund's net assets or (y) specified
dollar amounts in the case of certain MFS Funds which may include a Fund and
which may change from time to time. Each Fund and MFD reserve the right to
request market timers to redeem their shares at net asset value, less any
applicable CDSC, if either of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A and Class B shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B and/or Class C shares of certain specified MFS Funds sold by such
dealer during a specified sales period. In addition, from time to time, MFD, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of a Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in a Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------------
A shareholder whose shares are held in the name of, or controlled by, a
dealer might not receive many of the privileges and services from a Fund (such
as Right of Accumulation, Letter of Intent and certain recordkeeping services)
that the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in
an account with a 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 at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET
FUNDS): No initial sales charges or CDSC will be imposed in connection with an
exchange from shares of an MFS Fund to shares of any other MFS Fund, except with
respect to exchanges from an MFS money market fund to another MFS Fund which is
not an MFS money market fund (discussed below). With respect to an exchange
involving shares subject to a CDSC, the CDSC will be unaffected by the exchange
and the holding period for purposes of calculating the CDSC will carry over to
the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect
to the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
19
<PAGE> 32
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund
held by certain qualified retirement plans may be exchanged for units of
participation of the MFS Fixed Fund (a bank collective investment fund) (the
"Units"), and Units may be exchanged for Class A shares of any MFS Fund. With
respect to exchanges between Class A shares subject to a CDSC and Units, the
CDSC will carry over to the acquired shares or Units and will be deducted from
the redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund
and consider the differences in objectives, policies and restrictions before
making any exchange. Exchanges will be made only after instructions in writing
or by telephone (an "Exchange Request") are received for an established account
by the Shareholder Servicing Agent in proper form (i.e., if in writing -- signed
by the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record) and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to the MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. If an Exchange Request is received by
the Shareholder Servicing Agent on any business day prior to the close of
regular trading on the New York Stock Exchange (generally, 4:00 p.m., Eastern
time) (the "Exchange"), the exchange will occur on that day if all the
requirements set forth above have been complied with at that time and subject to
the Fund's right to reject purchase orders. No more than five exchanges may be
made in any one Exchange Request by telephone. Additional information concerning
this exchange privilege and prospectuses for any of the other MFS Funds may be
obtained from dealers or the Shareholder Servicing Agent. For federal and
(generally) state income tax purposes, an exchange is treated as a sale of the
shares exchanged and, therefore, an exchange could result in a gain or loss to
the shareholder making the exchange. Exchanges by telephone are automatically
available to most non-retirement plan accounts and certain retirement plan
accounts. For further information regarding exchanges by telephone, see
"Redemptions by Telephone." The exchange privilege (or any aspect of it) may be
changed or discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter into
an agreement with MFD, as set forth in such agreement. See
"Purchases -- General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account
on any date on which a Fund is open for business by redeeming shares at their
net asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally means
that the stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, a Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption
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is suspended or date of payment is postponed because the Exchange is closed or
trading on such Exchange is restricted or to the extent otherwise permitted by
the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his
account by telephoning the Shareholder Servicing Agent toll-free at (800)
225-2606. Shareholders wishing to avail themselves of this telephone redemption
privilege must so elect on their Account Application, designate thereon a bank
and account number to receive the proceeds of such redemption, and sign the
Account Application Form with the signature(s) guaranteed in the manner set
forth below under the caption "Signature Guarantee." The proceeds of such a
redemption, reduced by the amount of any applicable CDSC and the amount of any
income tax required to be withheld, are mailed by check to the designated
account, without charge, if the redemption proceeds do not exceed $1,000, and
are wired in federal funds to the designated account if the redemption proceeds
exceed $1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be responsible for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES
THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE
AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class
C shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B and Class C shares of any MFS Fund purchased on or after January
1, 1993 will be aggregated on a calendar month basis -- all transactions made
during a calendar month, regardless of when during the month they have occurred,
will age one year at the close of business on the last day of such month in the
following calendar year and each subsequent year. For Class B shares of any MFS
Fund purchased prior to January 1, 1993, transactions will be aggregated on a
calendar year basis -- all transactions made during a calendar year, regardless
of when during the year they have occurred, will age one year at the close of
business on December 31 of that year and each subsequent year. Prior to April 1,
1996, Class C shares of the MFS Funds were not subject to a CDSC upon
redemption. In no event will Class C shares of the MFS Funds purchased prior to
this date be subject to a CDSC. For the purpose of calculating the CDSC upon
redemption of shares acquired in an exchange on or after April 1, 1996, the
purchase of shares acquired in one or more exchanges is deemed to have occurred
at the time of the original purchase of the exchanged shares (if such original
purchase occurred prior to April 1, 1996, then no CDSC would be imposed upon
such a redemption).
At the time of a redemption, the amount by which the value of a
shareholder's account for a particular class of shares represented by Direct
Purchases exceeds the sum of the six calendar year aggregations (12 months in
the case of purchases of Class C shares and of purchases of $1 million or more
of Class A shares or purchases by certain retirement plans of Class A shares) of
Direct Purchases may be redeemed without charge ("Free Amount"). Moreover, no
CDSC is ever assessed on additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of a particular class, (i) any Free Amount
is not subject to the CDSC and (ii) the amount of the redemption equal to the
then-current value of Reinvested Shares is not subject to the CDSC, but (iii)
any amount of the redemption in excess of the aggregate of the then-current
value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC
will first be applied against the amount of Direct Purchases which will result
in any such charge being imposed at the lowest possible rate. The CDSC to be
imposed upon redemptions of shares will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases
of each class of each Fund's shares.
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<PAGE> 34
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, each
Fund requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of each Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of each Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder. Each Fund has reserved
the right to pay other redemptions either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's portfolio.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash. Any distribution in-kind of portfolio securities may include
foreign securities, including securities of issuers in emerging markets. Such
securities may be subject to risks not typically associated with the risks of
U.S. securities. See "Risk Factors -- Foreign Securities" and " -- Emerging
Markets."
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, each Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B
and Class C shares of each Fund pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Distribution Plans"), after having concluded that
there is a reasonable likelihood that the Distribution Plans would benefit the
Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or
are being waived. These circumstances, if any, are described below under the
heading "Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have
certain common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under each Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay
MFD a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the
Fund -- Distributor" in the SAI. The amount of the distribution fee paid by the
Fund with respect to each class differs under the Distribution Plans, as does
the use by MFD of such distribution fees. Such amounts and uses are described
below in the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less
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<PAGE> 35
than the expenses incurred by MFD under its distribution agreement with the
Funds, the Funds are not liable to MFD for any losses MFD may incur in
performing services under its distribution agreement with the Funds.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are
charged to, and therefore reduce, income allocated to shares of the Designated
Class. The Distribution Plans have substantially identical provisions with
respect to their operating policies and their initial approval, renewal,
amendment and termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have
certain features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares of each Fund are generally
offered pursuant to an initial sales charge, a substantial portion of which is
paid to or retained by the dealer making the sale (the remainder of which is
paid to MFD). See "Purchases -- Class A Shares" above. In addition to the
initial sales charge, the dealer also generally receives the ongoing 0.25% per
annum service fee, as discussed above.
The distribution fee paid to MFD under each Class A Distribution Plan is
equal, on an annual basis, to 0.25% of the Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution fee
to cover distribution-related expenses incurred by it under its distribution
agreement with a Fund (e.g., MFD pays commissions to dealers with respect to
purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). Distribution fee payments under the Class A
Distribution Plans may be used by MFD to pay securities dealers a distribution
fee in an amount equal on an annual basis to 0.25% per annum of each Fund's
average daily net assets attributable to Class A shares (other than Class A
shares that have converted from Class B shares) owned by investors for whom that
securities dealer is the holder or dealer of record. See "Purchases -- Class A
Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under a Class A Distribution Plan does not exceed 0.50%
per annum of the average daily net assets of a Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares of each Fund are offered at net
asset value without an initial sales charge but subject to a CDSC. See
"Purchases -- Class B Shares" above. MFD will advance to dealers the first year
service fee described above at a rate equal to 0.25% of the purchase price of
such shares and, as compensation therefore, MFD may retain the service fee paid
by the Fund with respect to such shares for the first year after purchase.
Dealers will become eligible to receive the ongoing 0.25% per annum service fee
with respect to such shares commencing in the thirteenth month following
purchase.
Under each Class B Distribution Plan, the Fund pays MFD a distribution fee
equal, on an annual basis, to 0.75% of the Fund's average daily net assets
attributable to Class B shares. As noted above, this distribution fee may be
used by MFD to cover its distribution-related expenses under its distribution
agreement with each Fund (including the 3.75% commission it pays to dealers upon
purchase of Class B shares, as described under "Purchases -- Class B Shares"
above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid
to MFD under the Class C Distribution Plan (which MFD in turn pays to dealers),
as discussed above, and a distribution fee paid to MFD (which MFD also in turn
pays to dealers) under the Class C Distribution Plan equal, on an annual basis,
to 0.75% of the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: Each Fund's
distribution/service fee for its current fiscal year is equal to 0.50%, 1.00%
and 1.00% per annum of the average daily net assets attributable to the Fund's
Class A shares, Class B shares and Class C shares, respectively.
DISTRIBUTIONS
Each Fund intends to pay substantially all of its net investment income as
dividends on an annual basis. In determining the net investment income available
for distributions, each 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 a 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. Each 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
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<PAGE> 36
cash or additional shares of the same class with respect to which a distribution
is made. See "Tax Status" and "Shareholder Services -- Distribution Options"
below. Distributions paid by each Fund with respect to Class A shares will
generally be greater than those paid with respect to Class B and Class C shares
because expenses attributable to Class B and Class C shares will generally be
higher.
TAX STATUS
Each Fund is treated as an entity separate from the other series of the
Trust for federal income tax purposes. In order to minimize the taxes each Fund
would otherwise be required to pay, each Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), and to make distributions to its shareholders
in accordance with the timing requirements imposed by the Code. It is expected
that none of the Funds will be required to pay entity level federal income or
excise taxes, although foreign-source income received by a Fund may be subject
to foreign withholding taxes.
Shareholders of each 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. A portion
of the dividends received from each Fund (but none of the Fund's capital gains
distributions) may qualify for the dividends-received deduction for
corporations. Shortly after the end of each calendar year, each Fund shareholder
will be sent a statement setting forth the federal income tax status of all
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction) and the amount, if any, of federal income tax withheld. In certain
circumstances, a Fund may also elect to "pass through" to shareholders foreign
income taxes paid by the Fund. Under those circumstances, the Fund will notify
shareholders of their pro rata portion of the foreign income taxes paid by the
Fund; shareholders may be eligible for foreign tax credits or deductions with
respect to those taxes, but will be required to treat the amount of the taxes as
an amount distributed to them and thus includible in their gross income for
federal income tax purposes.
A Fund's distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before a 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.
Each Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
Each Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on 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 been subject to 30% withholding. 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 a Fund.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each
day during which the Exchange is open for trading. This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Assets in each Fund's portfolio are valued on
the basis of their market values or otherwise at their fair values, as described
in the SAI. All investments and assets are expressed in U.S. dollars based upon
current currency exchange rates. The net asset value per share of each class of
shares is effective for orders received by the dealer prior to its calculation
and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has three classes of shares which it offers to the general
public, entitled Class A, Class B and Class C shares of Beneficial Interest
(without par value). Each Fund also has a class of shares which it offers
exclusively to certain retirement plans established for the benefit of employees
of the Adviser and its affiliates entitled Class P Shares. The Trust has
reserved the right to create and issue additional classes and series of shares,
in which case each class of shares of a series would participate equally in the
earnings, dividends and assets attributable to that class of that particular
series. Shareholders are entitled to one vote for each share held and shares of
each series are entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series vote
together in the election of Trustees and selection of accountants. Additionally,
each class of shares of a series will vote separately on any material increases
in the fees under its Distribution Plan or on any other matter that affects
solely that class of shares, but will otherwise vote together with all other
classes of shares of the series on all other matters. The Trust does not intend
to hold annual shareholder meetings. The Trust's Declaration of Trust provides
that a Trustee may be removed from office in certain instances. See "Description
of Shares, Voting Rights and Liabilities" in the SAI.
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Each share of a class of each Fund represents an equal proportionate
interest in the Fund with each other class share, subject to the liabilities of
the particular class. Shares have no pre-emptive or conversion rights (except as
set forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid
and non-assessable. Should a Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability would be limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
PERFORMANCE INFORMATION
From time to time, each Fund will provide total rate of return quotations
for each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. The International Growth and Income
Fund may also provide its yield and current distribution rate. 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 a Fund made at the maximum
public offering price of the shares of that class with all distributions
reinvested and which will give effect to the imposition of any applicable CDSC
assessed upon redemptions of the Fund's Class B and Class C shares. Such total
rate of return quotations may be accompanied by quotations which do not reflect
the reduction in value of the initial investment due to the sales charge or the
deduction of a CDSC, and which will thus be higher. Yield quotations will be
based on the annualized net investment income per share of a class of the
International Growth and Income 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. Yield calculations for Class B and Class C shares assume no CDSC is
paid. The current distribution rate for each class is generally based upon the
total amount of dividends per share paid by the International Growth and Income
Fund to shareholders of that class during the past 12 months and is computed by
dividing the amount of such dividends by the maximum public offering price of
that class at the end of such period. Current distribution rate calculations for
Class B and Class C shares assume no CDSC is paid. The current distribution rate
differs from the yield calculation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing, short-term capital gains, and return of invested
capital, and is calculated over a different period of time. All performance
quotations are based on historical performance and are not intended to indicate
future performance. Yield reflects only net portfolio income as stated and
current distribution rate reflects only the rate of distributions paid by the
International Growth and Income Fund over a stated period of time. Each 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
a Fund will calculate its total rate of return, yield and current distribution
rate see the SAI. In addition to information provided in shareholder reports,
each Fund may, in its discretion, from time to time make a list of all or a
portion of its holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS
and all expenses of each Fund (other than those assumed by MFS) including but
not limited to: governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to a Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of a Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Trust's Custodian, for all services to each Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of a Fund; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of a Fund and the preparation, printing
and mailing of prospectuses are borne by the Fund except that the Distribution
Agreement with MFD requires MFD to pay for prospectuses that are to be used for
sales purposes. Expenses of the Trust which are not attributable to a specific
series of the Trust are allocated among the series in a manner believed by
management of the Trust to be fair and equitable.
MFS has agreed to pay until December 31, 2005 the expenses of the Emerging
Markets Equity Fund such that the aggregate operating expenses of the Emerging
Markets Equity Fund's Class A, Class B and Class C shares do not exceed 2.50%,
3.07% and 3.00% per annum, respectively, of net assets; provided, however, that
this obligation may be terminated or revised at any time by MFS without the
consent of the Trust or the Emerging Markets Equity
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Fund by notice in writing from MFS to the Trust on behalf of the Fund. Such
payments by MFS are subject to reimbursement by the Emerging Markets Equity Fund
which will be accomplished by the payment by the Fund of an expense
reimbursement fee to MFS computed and paid monthly as a percentage of its
average daily net assets for its then current fiscal year, with a limitation
that immediately after such payment the aggregate operating expenses of the Fund
would not exceed the amounts set forth in the preceding sentence. The expense
reimbursement agreement terminates on the earlier of the date on which payments
made thereunder by the Emerging Markets Equity Fund equal the prior payment of
such reimbursable expenses by MFS or December 31, 2005.
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9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described
below or concerning other aspects of a 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 information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares; this option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full
and fractional shares of the same class of shares at the net asset value in
effect at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of a Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders,
each Fund makes available the following programs designed to enable shareholders
to add to their investment in an account with each 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 a Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of a Fund alone or in combination with shares of any of the classes of other MFS
Funds or MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of a Fund
may be sold at net asset value (and not subject to any CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value (and not subject to any CDSC) in
shares of the same class of another MFS Fund, if shares of such MFS Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments, as designated on the account application, and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be
at least $100,
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<PAGE> 39
except in certain limited circumstances. The aggregate withdrawals of Class B
and Class C shares in any year pursuant to a SWP will not be subject to a CDSC
and are generally limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in 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 of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to four different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
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 an investment program concurrently with a withdrawal
program would 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 share redemption (if applicable) in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of each Fund may be purchased by
all types of tax-deferred retirement plans, including IRAs, SEP-IRA plans,
401(k) plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------------
The Funds' SAI, dated October 1, 1996, as amended or supplemented from time
to time, contains more detailed information about each Fund, including
information related to (i) each Fund's investment policies and restrictions,
including the purchase and sale of Options, Options on Stock Indices, Futures
Contracts, Options on Futures Contracts, Forward Contracts and Options on
Foreign Currencies; (ii) the Trustees, officers, Investment Adviser and
Sub-Adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions; (vi)
the Distribution Plans; and (vii) various services and privileges provided by
each Fund for the benefit of its shareholders, including additional information
with respect to the exchange privilege.
- --------------------------------------------------------------------------------
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable
sales charges are waived (Section I), the initial sales charge and the CDSC for
Class A shares are waived (Section II), and the CDSC for Class B and Class C
shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of Class
A shares and on redemptions of Class B shares and Class C shares, as applicable,
are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
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<PAGE> 40
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of America ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the
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<PAGE> 41
CDSC imposed on certain redemption of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM
UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
IRA'S, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules;
- Death or disability of a SAR-SEP Plan participant.
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<PAGE> 42
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
DESCRIPTION OF BOND RATINGS
MOODY'S
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S & P
AAA: Debt rated AAA has the highest rating assigned by S & P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circum-
30
<PAGE> 43
stances are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA.' Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated
'F-1+'.
A: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
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<PAGE> 44
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be lowered, FitchAlert is relatively short-term, and should be resolved within
12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated 'D-1
+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics, which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operation factors and/or access to alternative sources of
funds, is outstanding and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as
to investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
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Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Sub-Adviser
Foreign & Colonial Management Ltd.
Exchange House
Primrose Street
London EC2A 2NY
United Kingdom
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO]MFS
THE FIRST NAME IN MUTUAL FUNDS
MFS[Registered Trademark]/Foreign & Colonial International
Growth Fund
MFS[Registered Trademark]/Foreign & Colonial International
Growth and Income Fund
MFS[Registered Trademark]/Foreign & Colonial Emerging
Markets Equity Fund
500 Boylston Street
Boston, MA 02116 MFC-1 4/96/151M
<PAGE> 46
LOGO
MFS(R)/FOREIGN & COLONIAL
INTERNATIONAL GROWTH FUND
MFS(R)/FOREIGN & COLONIAL
INTERNATIONAL GROWTH
AND INCOME FUND
MFS(R)/FOREIGN & COLONIAL
EMERGING MARKETS EQUITY FUND
(Members of the MFS Family of Funds(R))
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions.......................................................................... 2
2. Investment Policies and Restrictions................................................. 2
3. Management of the Funds.............................................................. 15
Trustees............................................................................. 15
Officers............................................................................. 16
Investment Adviser................................................................... 17
FCM.................................................................................. 17
FCEM................................................................................. 17
Custodian............................................................................ 18
Shareholder Servicing Agent.......................................................... 18
Distributor.......................................................................... 18
4. Portfolio Transactions and Brokerage Commissions..................................... 19
5. Shareholder Services................................................................. 21
Investment and Withdrawal Programs................................................... 21
Exchange Privilege................................................................... 23
Tax-Deferred Retirement Plans........................................................ 24
6. Tax Status........................................................................... 24
7. Distribution Plans................................................................... 25
8. Determination of Net Asset Value and Performance..................................... 27
9. Description of Shares, Voting Rights and Liabilities................................. 30
10. Independent Auditors and Financial Statements........................................ 31
Appendix A -- Trustee Compensation Table............................................. 32
</TABLE>
MFS(R)/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
MFS(R)/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME FUND
MFS(R)/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
Each a series of MFS Series Trust X
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Funds' Prospectus dated
October 1, 1996. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see 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.
STATEMENT OF
ADDITIONAL INFORMATION
October 1, 1996
<PAGE> 47
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Emerging Markets -- MFS/Foreign & Colonial
Equity Fund" Emerging Markets Equity
Fund, a diversified series
of the Trust.
"International Growth -- MFS/Foreign & Colonial
Fund" International Growth Fund,
a diversified series of the
Trust.
"International Growth -- MFS/Foreign & Colonial
and Income Fund" International Growth and
Income Fund, a diversified
series of the Trust.
"Funds" -- International Growth Fund,
International Growth and
Income Fund and Emerging
Markets Equity Fund.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a
Delaware corporation.
"Sub-Adviser" -- Foreign & Colonial Manage-
ment Ltd., a company
incorporated under the laws
of England and Wales
("FCM") and Foreign &
Colonial Emerging Markets
Limited, a company
incorporated under the laws
of England and Wales
("FCEM").
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the
Funds, dated October 1,
1996, as amended or
supplemented from time to
time.
"Trust" -- MFS Series Trust X, a
Massachusetts business
Trust. The Trust has
changed its name several
times during the past five
years. The Trust was
previously known as MFS
Government Mortgage Fund
(prior to June 2, 1995),
MFS Government Income Plus
Fund (prior to March 1,
1993), MFS Government
Income Plus Trust (prior to
August 3, 1992) and MFS
Government Securities Trust
(after December 7, 1990).
</TABLE>
2. INVESTMENT POLICIES AND
RESTRICTIONS
INVESTMENT POLICIES: The investment policies of each Fund are described in the
Prospectus and below. The following discussion of the Funds' investment policies
and restrictions supplements and should be read in conjunction with the
information set forth in the "Investment Objective and Policies" section of the
Prospectus.
FOREIGN SECURITIES: Each Fund may invest up to 100% of its assets in foreign
securities as discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
EMERGING MARKETS: Each of the Funds may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described in the
Prospectus under the caption "Risk Factors" and as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
a Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect a Fund's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these
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<PAGE> 48
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including a Fund) may be requested to participate in
the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance of
payments, including export performance, and its access to international credits
and investments. An emerging market whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for any
period during which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if a Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Board of Trustees.
DEFAULT; LEGAL RECOURSE -- A Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by a Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging market
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself. A
Fund's ability to enforce its rights against private issuers may be limited. The
ability to attach assets to enforce a judgment may be limited. Legal recourse is
therefore somewhat diminished. Bankruptcy, moratorium and other similar laws
applicable to private
3
<PAGE> 49
issuers of debt obligations may be substantially different from those of other
countries. The political context, expressed as an emerging market governmental
issuer's willingness to meet the terms of the debt obligation, for example, is
of considerable importance. In addition, no assurance can be given that the
holders of commercial bank debt may not contest payments to the holders of debt
obligations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. A Fund's net asset value may
also be affected by changes in the rates or methods of taxation applicable to
the Fund or to entities in which the Fund has invested. The Adviser and the Sub-
Adviser will consider the cost of any taxes in determining whether to acquire
any particular investments, but can provide no assurance that the taxes will not
be subject to change.
FOREIGN CURRENCIES -- Each Fund may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the value
of these currencies against the U.S. dollar may result in corresponding changes
in the U.S. dollar value of a Fund's assets denominated in those currencies.
Each Fund may attempt to minimize the impact of these changes to the U.S. dollar
value of the Fund's portfolio by engaging in certain hedging practices, such as
entering into Futures Contracts and Options on Foreign Securities as described
below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which a Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: A Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act"), and applicable
state securities laws. Such investment may also involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities, and the total return on such investment will be reduced by the
operating expenses and fees of such other investment companies, including
advisory fees.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange"), members of the Federal Reserve System, recognized
domestic or foreign securities dealers or institutions which the Adviser or the
Sub-Adviser has determined to be of comparable creditworthiness. The securities
that a Fund purchases and holds have values 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.
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, a 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. Each Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, a Fund
only enters into repurchase agreements after the Adviser or the Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or the Sub-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.
DEPOSITARY RECEIPTS: Each Fund may invest in American Depositary Receipts
("ADRs") which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the
4
<PAGE> 50
issuer of the deposited securities or to pass through voting rights to ADR
holders in respect of the deposited securities. Each Fund may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depositary receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. Each Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. Each Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly, information available to a
U.S. investor will be limited to the information the foreign issuer is required
to disclose in its own country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in a foreign currency. Each Fund may also
invest in Global Depositary Receipts ("GDRs") and other types of depositary
receipts. GDRs and other types of depositary receipts are typically issued by
foreign banks or trust companies and evidence ownership of underlying securities
issued by either a foreign or U.S. company.
LOANS AND OTHER DIRECT INDEBTEDNESS: Each Fund may purchase loans and other
direct claims against an issuer of emerging market debt instruments (a
"borrower"). In purchasing a loan, a Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate, governmental or
other borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer a Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
Certain of the loans acquired by a Fund may involve revolving credit facilities
or other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand. These commitments may have the effect of
requiring a Fund to increase its investment in a company at a time when the Fund
might not otherwise decide to do so (including at a time when the company's
financial condition makes it unlikely that such amounts will be repaid). To the
extent that a Fund is committed to advance additional funds, it will at all
times hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.
A Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. Direct indebtedness of developing countries involves
the risk that the governmental entities responsible for the repayment of the
note may be unable, or unwilling, to pay interest and repay principal where due.
In selecting the loans and other direct investments which a Fund will purchase,
the Adviser will rely upon its (and not that of the original lending
institution's) own credit analysis of the borrower. As a Fund may be required to
rely upon another lending institution to collect and pass on to the Fund amounts
payable with respect to the loan and to enforce the Fund's rights under the
loan, an insolvency, bankruptcy or reorganization of the lending institution may
delay or prevent the Fund from receiving such amounts. In such cases, the Fund
will evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged nature
of many such loans may make such loans especially vulnerable to adverse changes
in economic or market conditions. Investments in such loans may involve
additional risks to a Fund.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: When a Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of each
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, a Fund will always have cash, short-term
money market instruments or high quality debt securities sufficient to cover any
commitments or to limit any potential risk. However, although a Fund does not
intend to make such purchases for speculative purposes and intends to adhere to
the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, a Fund may have to
sell assets which have been set aside in order to meet redemptions. Also, if a
Fund determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
LENDING OF SECURITIES: Each Fund may seek to increase its income by lending
portfolio securities to entities deemed creditworthy by the Adviser or the
Sub-Adviser. Such loans would be required to be secured continuously by
collateral in cash, irrevocable letters of credit or U.S. Government securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. Each Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days).
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<PAGE> 51
During the existence of a loan, a Fund would continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
would also receive compensation based on investment of the cash collateral or a
fee. A Fund would not, however, have the right to vote any securities having
voting rights during the existence of the loan, but would call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of their consent on a material matter affecting the
investment. As with other extensions of credit there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser and the Sub-Adviser to be of good standing, and when, in
the judgment of the Adviser or the Sub-Adviser, the consideration which could be
earned currently from securities loans of this type justifies the attendant
risk. If the Adviser or the Sub-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.
WARRANTS: Each Fund will not invest more than 10% of its net assets, taken at
market value, in warrants not acquired in a unit transaction. Warrants are
securities that give a Fund the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
OPTIONS ON SECURITIES: Each Fund may write (sell) covered call and put options
on securities ("Options") 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
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
a 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 a Fund holds a call on the same
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, short-term money market
instruments, U.S. Government securities or other liquid, high grade debt
securities in a segregated account with its custodian. A put option written by a
Fund is "covered" if the Fund maintains cash, short-term money market
instruments, U.S. Government securities or other liquid, high grade debt
securities with a value equal to the exercise price in a segregated account with
its custodian, or else holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held is
(a) equal to or greater than the exercise price of the put written or (b) is
less than the exercise price of the put written if the difference is maintained
by the Fund in cash or short-term money market instruments in a segregated
account with its custodian. Put and call options written by a 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.
Each Fund may write Options for the purpose of increasing its return and for
hedging purposes. In particular, if a 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 security at
a disadvantageous price, which might only partially be offset by the amount of
the premium.
Each Fund may write Options in connection with buy-and-write transactions; that
is, a 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.
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<PAGE> 52
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 a Fund
in the same market environments in which call Options are used in equivalent
buy-and-write transactions.
Each Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle." By writing a straddle, a 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, a 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, a 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 a Fund solely for hedging purposes, and may involve certain risks
which are not present in the case of hedging transactions. Moreover, even 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.
Each Fund may also purchase put and call Options. 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. A 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 a 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 15% of a
Fund's assets. Although the Adviser disagrees with this position, the Adviser
intends to limit each 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
each 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 a Fund for writing
the Option, plus the amount, if any, of the Option's intrinsic value (i.e., the
amount that the Option is in-the-money). The formula may also include a factor
to account for the difference between the price of the security and the strike
price of the Option if the Option is written out-of-the-money. Each Fund will
treat all or a portion of the formula as illiquid for purposes of the 15% test
imposed by the SEC staff. The Fund may also write over-the-counter Options with
non-primary dealers, including foreign dealers, and will treat the assets used
to cover these Options as illiquid for purposes of such 15% test.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, each Fund may write (sell)
covered call and put options and purchase call and put options on stock indices
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser or the
Sub-Adviser, are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. Where a Fund covers a call option on a stock index
through ownership of securities, such securities may not match the composition
of the index and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. Each Fund may also cover call options on stock indices by holding a call
on the same index and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of
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the call written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. Each Fund may cover put
options on stock indices by maintaining cash or cash equivalents with a value
equal to the exercise price in a segregated account with its custodian, or else
by holding a put on the same security and in the same principal amount as the
put written where the exercise price of the put held (a) is equal to or greater
than the exercise price of the put written or (b) is less than the exercise
price of the put written if the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its custodian. Put and call
options on stock indices may also be covered in such other manner as may be in
accordance with the rules of the exchange on which, or the counterparty with
which, the option is traded and applicable laws and regulations.
Each Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which a
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, a Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by a Fund correlate with changes in the value of the index,
writing covered put options on indices will increase a Fund's losses in the
event of a market decline, although such losses will be offset in part by the
premium received for writing the option.
Each Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, a Fund will seek to offset a decline in the value of securities it owns
through appreciation of the put option. If the value of the Fund's investments
does not decline as anticipated, or if the value of the option does not
increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely depend
on the accuracy of the correlation between the changes in value of the index and
the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: Each Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of a Fund's
portfolio securities or adversely affect the prices of long-term bonds or other
securities which a Fund intends to purchase at a later date. Futures Contracts
may also be entered into for non-hedging purposes to the extent permitted by
applicable law. A "sale" of a Futures Contract means a contractual obligation to
deliver the securities or foreign currency called for by the contract at a fixed
price at a specified time in the future. A "purchase" of a Futures Contract
means a contractual obligation to acquire the securities or foreign currency at
a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. A Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
The purpose of the purchase or sale of a Futures Contract, for hedging purposes
in the case of a portfolio holding long-term debt securities, is to protect a
Fund from fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, if a Fund owned long-term bonds and
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 should increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. A Fund could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase or by buying bonds with long maturities and
selling bonds with short maturities when interest rates are expected to decline.
However, since the futures market is more liquid than the cash market, the use
of Futures Contracts as an investment technique allows a Fund to maintain a
defensive position without having to sell its portfolio securities. Transactions
entered into for non-hedging purposes have greater risk,
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including the risk of losses which are not offset by gains on other portfolio
assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, a Fund could take advantage of the
anticipated rise in the value of long-term bonds without actually buying them
until the market had stabilized. At that time, the Futures Contracts could be
liquidated and the Fund could buy long-term bonds on the cash market. Purchases
of Futures Contracts would be particularly appropriate when the cash flow from
the sale of new shares of a Fund could have the effect of diluting dividend
earnings. To the extent a Fund enters into Futures Contracts for this purpose,
the assets in the segregated asset account maintained to cover the Fund's
obligations with respect to such Futures Contracts will consist of cash, cash
equivalents or short-term money market instruments from the portfolio of the
Fund in an amount equal to the difference between the fluctuating market value
of such Futures Contracts and the aggregate value of the initial and variation
margin payments made by the Fund with respect to such Futures Contracts, thereby
assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The index underlying a Futures Contract is a broad based index of fixed-
income securities designed to reflect movements in the relevant market as a
whole.
OPTIONS ON FUTURES CONTRACTS: Each Fund may write and purchase Options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
Each Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying securities. As with
the purchase of Futures Contracts, when a Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the security underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, a Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract constitutes a partial hedge against increasing prices of the 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 a 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, a 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.
Each 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 decline in the dollar value of
foreign currencies in which portfolio securities are denominated, a 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 a Fund will increase prior to acquisition,
due to a market advance or a rise in the dollar value of foreign currencies in
which securities to be acquired are denominated, a 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 a 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 a Fund to forego all or a portion of
such benefits up to the amount of the premium paid and related transaction
costs.
The amount of risk a Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
A Fund's ability to engage in the options and futures strategies described above
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore, no assurance can be given that a Fund
will be able to utilize these
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instruments effectively for the purposes set forth above. Furthermore, a Fund's
ability to engage in options and futures transactions may be limited by tax
considerations.
Each 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, U.S.
Government securities or other liquid, high grade debt securities in a
segregated account with its custodian. A 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,
U.S. Government securities or other liquid, high grade debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written, or
is less than the exercise price of the put written if the difference is
maintained by the Fund in cash, short-term money market instruments, U.S.
Government securities or other liquid, high grade debt 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 the exercise of a call Option on a Futures Contract written by
a 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 a 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 Contact, subject to regulation by the CFTC and the
performance guarantee of the exchange clearing house. Options on Futures
Contracts, as noted in the Prospectus, are also traded on foreign exchanges.
FORWARD CONTRACTS: Each Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). Each Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. A
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, a
Fund may be required to forego the benefits of advantageous changes in exchange
rates. Each Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser or the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to the
value of the U.S. dollar, a Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative.
Each Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which a Fund
satisfies this requirement through segregation of assets, it will maintain, in a
segregated account, cash, cash equivalents or high grade debt securities, which
will be marked to market on a daily basis, in an amount equal to the value of
its commitments under Forward Contracts. While these contracts are not presently
regulated by the Commodity Futures Trading Commission (the "CFTC"), the CFTC may
in the future assert authority to regulate Forward Contracts. In such event, a
Fund's ability to utilize Forward Contracts in the manner set forth above may be
restricted.
OPTIONS ON FOREIGN CURRENCIES: Each Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund
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may purchase call options thereon. The purchase of such options could offset, at
least partially, the effects of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to a Fund deriving from
purchases of foreign currency options would be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, a Fund could
sustain losses on transactions in foreign currency options, which would require
it to forego a portion or all of the benefits of advantageous changes in such
rates.
Each Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
a Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be offset by the amount of
the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, a Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if a Fund has a call on the same foreign currency
and in the same principal amount as the call written where the exercise price of
the call held (a) is equal to or less than the exercise price of the call
written or (b) is greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or cash equivalents in a segregated
account with its custodian. A put option written by a Fund is "covered" if the
Fund maintains cash or cash equivalents with a value equal to the exercise price
in a segregated account with its custodian, or else holds a put on the same
security and in the same principal amount as the put written where the exercise
price of the put held (a) is equal to or greater than the exercise price of the
put written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in cash or cash equivalents in a segregated
account with its custodian. Call and put options on foreign currencies may also
be covered in such other manner as may be in accordance with the requirements of
the exchange on which, or the counterparty with which, the option is traded and
applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: Unlike transactions entered into by a Fund in
Futures Contracts, Options on Foreign Currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities and on
stock indices may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
A Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in options, Futures Contracts, and Forward 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, Futures Contracts or Forward
Contracts traded, a 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, Futures Contract or Forward
Contract traded and the portfolio securities being hedged, which could result in
losses both on the hedging transaction and the portfolio securities. In such
instances, a Fund's overall return could be less than if the hedging transaction
had not been undertaken. In the
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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,
a 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. Where a Fund enters into Forward Contracts as a "cross
hedge" (i.e., the purchase or sale of a Forward Contract on one currency to
hedge against risk of loss arising from changes in value of a second currency),
the Fund incurs the risk of imperfect correlation between changes in the values
of the two currencies, which could result in losses.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward 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, Futures
Contract and Forward Contract markets. 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, Futures Contract or Forward Contract
approaches.
The trading of Options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's or the Sub-Adviser's judgment as to the general
direction of exchange rates is incorrect, a Fund's overall performance may be
poorer than if it had not entered into any such contract.
It should be noted that each Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, a Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of portfolio securities or decreases in the
cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract, Option on
a Futures Contract or Option on a Foreign Currency 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 into. If no such market exists, it may not be possible to close out a
position, and a 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 a 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 a 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.
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 RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES: The available information on which a Fund will
make trading decisions concerning transactions related to foreign currencies or
foreign securities may not be as complete as the comparable data on which a Fund
makes investment and trading decisions in connection with other transactions.
Moreover, because the foreign currency market is a global, 24-hour market, and
the markets for foreign securities as well as markets in foreign countries may
be operating during non-business hours in the U.S., events could occur in such
markets which would not be reflected until the following day, thereby rendering
it more difficult for a Fund to respond in a timely manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into
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on U.S. exchanges, and may be subject to different margin, exercise, settlement
or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC has jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for a Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, a Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
A Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by a Fund is exercised
or the Fund is unable to close out a Forward Contract it has entered into. In
addition, the Fund may elect to take delivery of such currencies. Under certain
circumstances, such as where the Adviser or the Sub-Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser or the Sub-Adviser anticipates, for any other reason, that the
exchange rate will improve, a Fund may hold such currencies for an indefinite
period of time. While the holding of currencies will permit a Fund to take
advantage of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a direction
adverse to the Fund's position. Such losses could reduce any profits or increase
any losses sustained by a Fund from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that each
Fund will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that a Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of each
Fund's assets. In addition, each Fund must comply with the requirements of
various state securities laws in connection with such transactions.
Each Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, each 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 each 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 ensuring that the leveraging effect of such Futures
Contract is minimized.
INDEXED SECURITIES: Each Fund may purchase securities whose prices are indexed
to the prices of other securities, indices, currencies, or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their value may decline
substantially if the issuer's creditworthiness deteriorates.
SWAPS AND RELATED TRANSACTIONS: Each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Fund is not limited
to any particular form or variety of swap agreement if MFS determines it is
consistent with the Fund's investment objective and policies.
Each Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If a 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
13
<PAGE> 59
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount of the Fund is entitled to
receive under the agreement. If a Fund enters into a swap agreement on other
than a net basis, it will maintain cash or liquid assets with a value equal to
the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser or the Sub-Adviser is incorrect in its forecasts of such factors, the
investment performance of a Fund would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. In
addition, if the counter-party's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, a Fund's risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive. Each 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.
------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may each Fund's investment objective.
INVESTMENT RESTRICTIONS: Each Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or a Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or a Fund or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or a Fund or class, as applicable, are
represented in person or by proxy):
Each Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), any type of swap agreement,
Forward Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its assets would be invested in securities of issuers
whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
In addition, each Fund has the following nonfundamental policies which may be
changed without shareholder approval. Each Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), if more than 15% of the Fund's
assets (taken at market value) would be invested in such securities.
Repurchase agreements maturing in more than seven days will be deemed to be
illiquid for purposes of the Fund's limitation on investment in illiquid
securities. Securities that are not registered under the Securities Act of
1933, as amended, and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% limitation;
(2) invest more than 10% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such amount may be
warrants which are not listed on the New York or American Stock Exchange.
14
<PAGE> 60
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser or a sub-adviser of
the Fund, if one or more of such persons also owns beneficially more than 0.5%
of the securities of such issuer, and such persons owning more than 0.5% of
such securities together own beneficially more than 5% of such securities;
(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts, Options, Options on Stock Indices and Options on Foreign
Currencies), any type of swap agreement, any type of futures contract
(including Futures Contracts) and Forward Contracts;
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(9) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any type of swap
agreement, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(10) borrow, except as a temporary measure for extraordinary or emergency
purposes; or
(11) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities, (ii) put or call options or combinations thereof with
respect to securities or indexes of securities or (iii) Options on Foreign
Currencies, any type of swap agreement or any type of futures contract
(including Futures Contracts) or (b) the purchase, ownership, holding or sale
of contracts for the future delivery of securities or currencies.
3. MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of each
Fund's assets, and the officers of the Trust 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 (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
PETER G. HARWOOD
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES
Eastern Enterprises (diversified holding company), Chairman and Chief Executive
Officer (since December 1991); General Cinema Corporation, Vice Chairman and
Chief Financial Officer (prior to December 1991); The Neiman Marcus Group,
Inc., Vice Chairman and Chief Financial Officer (prior to February, 1992)
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge, Massachusetts
CHARLES W. SCHMIDT
Private Investor; OHM Corporation, Director; The Boston Company, Director;
Boston Safe Deposit and Trust Company, Director; Mohawk Paper Company,
Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
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<PAGE> 61
ELAINE R. SMITH
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE
North American Management Corp. (investment advisers), Chairman and Director;
Eastern Enterprises (diversified holding company), Director
Address: 10 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, General Counsel
and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer;
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, 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.
Each Fund pays the compensation of the non-interested Trustees and Mr. Bailey
(who currently receive a fee per Fund of $250 per year plus $25 per meeting and
$20 per committee meeting attended, together with such Trustee's out-of-pocket
expenses), and have adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least 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 Trust for Messrs. Brodkin, Scott and
Shames. Each Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation estimated to be paid by each Fund to the Trustees, and benefits
accrued and estimated benefits payable, under the retirement plan.
As of August 30, 1996, the Trustees and officers as a group owned less than 1%
of each Fund's shares outstanding on that date.
As of August 30, 1996, Merrill Lynch Pierce Fenner & Smith Inc., P.O. Box 4526,
Jacksonville, Florida 32232-5286 was the record owner of approximately 11.54%,
18.89% and 5.13%, respectively, of the outstanding Class A, Class B and Class C
shares of the International Growth Fund. In addition, Industricorp & Co. Inc.,
FBO 19-2996-00, 312 Central Avenue SE, Suite 508, Minneapolis, Minnesota
55414-1097 and Timothy Smith & Elizabeth R. Smith, JTWROS, P.O. Box 70055,
Metairie, Louisiana 70033-0055 were the record owners of approximately 21.29%
and 32.75%, respectively, of Class C shares of the International Growth Fund.
As of August 30, 1996, Merrill Lynch Pierce Fenner & Smith, P.O. Box 45286,
Jacksonville, Florida 32232-5286 was the record owner of approximately 7.57%,
15.14% and 58.24%, respectively, of the outstanding Class A, Class B and Class C
shares of the International Growth and Income Fund. In addition, Susan F.
Pamperin & Kevin W. Pamperin, JTWROS, 2718 College Avenue, Davenport, Iowa
52803-1933 and Roger R. Buzard & Patricia A. Buzard, JTWROS, 3037 Danny Drive,
Lima, Ohio 45801-2110 were the record owners of approximately 29.08% and 7.08%,
respectively, of the outstanding Class C shares of the International Growth and
Income Fund.
As of August 30, 1996, Merrill Lynch Pierce Fenner & Smith, P.O. Box 45286,
Jacksonville, Florida 32232-5286 was the record owner of 9.69% of the
outstanding Class B shares of the Emerging Markets Equity Fund. In addition,
NFSC FEBO #APW-640093, Bottlinger Grain Co., Sole Proprietorship, Murlin
Bottlinger, Rt. 1, Box 74, Hamilton, Texas 76531-9701, Interstate/Johnson Lane,
FBO 205-01612-11, Interstate Tower, P.O. Box 1220, Charlotte, North Carolina
28201-1220, Interstate/Johnson Lane, FBO 205-83453-11, Interstate Tower, P.O.
Box 1220, Charlotte, North Carolina 28201-1220, Veronica Lauper Messerli, C/O
Separate Property, 2224 General Pershing Street, New Orleans, Louisiana
70115-5440 and The First National Bank of Boston, TR IRA, R/O Roland J. Dupuv,
Jr., 6757 South Old Floral City Road, Floral City, Florida 34436-2332 were the
record owners of approximately 12.28%, 25.72%, 12.43%, 6.43% and 13.95%,
respectively, of the outstanding Class C shares of the Emerging Markets Equity
Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Trust or its shareholders, it is determined that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated
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<PAGE> 62
that they did not act in good faith in the reasonable belief that their actions
were in the best interests of the Trust. In the case of settlement, such
indemnification will not be provided unless it has been determined pursuant to
the Trust's Declaration of Trust that they have not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER -- MFS and its predecessor organizations have a history of
money management dating from 1924. MFS is a subsidiary of Sun Life of Canada
(U.S.), which is a wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENTS -- The Adviser manages each Fund pursuant to
separate Investment Advisory Agreements, each dated as of September 1, 1995 (the
"Advisory Agreements"). The Adviser provides each 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 each Fund. For these services and facilities, the
Adviser receives an annual management fee, computed and paid monthly, in an
amount equal to the following annual rates of the average daily net assets of
each Fund:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AVERAGE
DAILY NET ASSETS
FUND OF EACH FUND
- --------------------------- ------------------------
<S> <C>
International Growth
Fund..................... 0.975% of the first $500
million and 0.925%
thereafter
International Growth and
Income Fund.............. 0.975% of the first $500
million and 0.925%
thereafter
Emerging Markets Equity
Fund..................... 1.25%
</TABLE>
For the period ended May 31, 1996, MFS received management fees under the
Advisory Agreements of $313,570, $103,167 and $182,020 (equivalent on an
annualized basis to 0.975%, 0.975% and 1.25%, respectively, of each of the
Fund's average daily net assets) for the International Growth Fund,
International Growth and Income Fund and Emerging Markets Equity Fund,
respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse a
Fund for any expenses, exclusive of interest, taxes and brokerage commissions,
incurred by a Fund in any fiscal year to the extent such expenses exceed the
most restrictive of such state expense limitations. The Adviser will make
appropriate adjustments to such reimbursements in response to any amendment or
rescission of the various state requirements.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing each Fund's investments, effecting its
portfolio transactions, and, in general, administering its affairs.
The Advisory Agreement with each Fund will remain in effect until August 1, 1997
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Policies and Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. Each Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the Fund's shares (as defined in "Investment Policies
and Restrictions"), or by either party on not more than 60 days' nor less than
30 days' written notice. Each Advisory Agreement provides that if MFS ceases to
serve as the Adviser to the Fund, the Fund will change its name so as to delete
the initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. Each 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.
FCM -- FCM serves as each Fund's sub-adviser pursuant to separate Sub-Advisory
Agreements, each dated September 1, 1995 between the Adviser and FCM (the "FCM
Sub-Advisory Agreements"). Each FCM Sub-Advisory Agreement provides that the
Adviser may delegate to FCM the authority to make investment decisions for the
Fund. It is presently intended that FCM will provide portfolio management
services for the assets of the International Growth Fund and the Emerging
Markets Equity Fund and the equity portion of the assets of the International
Growth and Income Fund. For these services, the Adviser pays FCM an annual fee
computed and paid monthly in an amount equal to 0.80% and 1.00% of the average
daily net assets of the International Growth Fund and the Emerging Markets
Equity Fund, respectively, and 0.75% of the average daily net assets managed by
FCM of the International Growth and Income Fund.
FCEM -- FCEM serves as each Fund's sub-adviser pursuant to separate Sub-Advisory
Agreements, each dated September 1, 1995 between FCM and FCEM (the "FCEM
Sub-Advisory Agreements" and together with the FCM Sub-Advisory Agreements, the
"Sub-Advisory Agreements"). Each FCEM Sub-Advisory Agreement provides that FCM
may delegate to FCEM the authority to make investment decisions for the Fund. It
is presently intended that FCEM will provide portfolio management services for
the portion
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<PAGE> 63
of the assets of the Funds invested in emerging markets securities. For these
services, FCM pays FCEM an annual fee computed and paid monthly in an amount
equal to 1.00% of the average daily net assets managed by FCEM of each Fund.
SUB-ADVISORY AGREEMENTS -- Each Sub-Advisory Agreement will remain in effect
until August 1, 1997, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Board of Trustees
or by the vote of a majority of the relevant Fund's outstanding shares, and, in
either case, by a majority of the Trustees who are not parties to the
Sub-Advisory Agreement or interested persons of any such party. Each FCM Sub-
Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by the Trustees, by vote of a majority of the
relevant Fund's outstanding shares, by the Adviser on not less than 30 days' nor
more than 60 days' written notice or by FCM, on not less than 60 days' nor more
than 90 days' written notice. Each FCEM Sub-Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by the
Trustees, by vote of a majority of the relevant Fund's outstanding shares, by
the Adviser or FCM on not less than 30 days' nor more than 60 days' written
notice or by FCEM on not less than 60 days' nor more than 90 days' written
notice.
Each FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the Fund, the Fund will change its name so as to delete the words
"Foreign & Colonial" and that FCM may render services to others and may permit
other fund clients to use the words "Foreign & Colonial" in their names. Each
Sub-Advisory Agreement specifically provides that neither FCM or FCEM, as the
case may be, 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 relevant 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 Sub-Advisory Agreement.
For the period ended May 31, 1996, the Adviser paid the Sub-Adviser fees under
the Sub-Advisory Agreements of $255,468, $59,933 and $144,524 in connection with
its services for the International Growth Fund, International Growth and Income
Fund and Emerging Markets Equity Fund, respectively.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
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 each Fund. The Custodian does not
determine the investment policies of each Fund or decide which securities each
Fund will buy or sell. Each Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of each
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 each Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated December 19, 1985, as modified, (the
"Agency Agreement") with the Trust. 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 each Fund. For
these services, the Shareholder Servicing Agent will receive a fee calculated as
a percentage of the average daily net assets of each class of shares of each
Fund at an effective annual rate of up to 0.15%, up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively. In addition,
the Shareholder Servicing Agent will be reimbursed by each 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 each Fund, has contracted with the Shareholder Servicing Agent to
perform certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each Fund pursuant to a Distribution Agreement with the
Trust dated as of September 1, 1995.
CLASS A SHARES: MFD acts as agent in selling Class A shares of each Fund to
dealers. The public offering price of Class A shares of each 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
each 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 each 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 Accumu-
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lation) by any person, including members of a family unit (e.g., husband, wife
and minor children) and bona fide trustees, and also applies to purchases made
under the Right of Accumulation or a Letter of Intent (see "Investment and
Withdrawal Programs" below). A group might qualify to obtain quantity sales
charge discounts (see "Investment and Withdrawal Programs" in this SAI).
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or a 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" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to a Fund
and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the 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 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of each Fund, 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 AND CLASS C SHARES: MFD acts as agent in selling Class B shares
and Class C shares of each Fund to dealers. 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 a 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 period ended May 31, 1996 for the International Growth Fund, MFD and
dealers and certain other financial institutions received sales charges of
$66,057 and $685,593, respectively, (as their concession on gross sales charges
of $751,650) for selling Class A shares. The International Growth Fund received
$24,853,732, representing the aggregate net asset value of such shares.
During the period ended May 31, 1996 for the International Growth and Income
Fund, MFD and dealers and certain other financial institutions received sales
charges of $17,609 and $233,028, respectively (as their concession on gross
sales charges of $250,637), for selling Class A shares. The International Growth
and Income Fund received $8,330,330, representing the aggregate net asset value
of such shares.
During the period ended May 31, 1996 for the Emerging Markets Equity Fund, MFD
and dealers and certain other financial institutions received sales charges of
$29,368 and $279,555, respectively (as their concession on gross sales charges
of $308,923), for selling Class A shares. The Emerging Markets Equity Fund
received $11,518,725, representing the aggregate net asset value of such shares.
During the period ended May 31, 1996 the CDSC paid on Class B shares for the
International Growth Fund was $9,530. During the period ended May 31, 1996, the
CDSC paid on Class B shares for the International Growth and Income Fund was
$7,513. During the period ended May 31, 1996, the CDSC paid on Class B shares
for the Emerging Markets Equity Fund was $4,930. During the period ended May 31,
1996, there was no CDSC paid on Class A shares for any of these Funds.
The Distribution Agreement will remain in effect until September 1, 1997 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Trust's shares (as defined in "Investment Policies and
Restrictions -- 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 Funds are made by
persons affiliated with the Adviser or the Sub-Adviser. Any such person may
serve other clients of the Adviser or the Sub-Adviser, or any subsidiary of the
Adviser or the Sub-Adviser in a similar capacity. Changes in each Fund's
investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser or the Sub-Adviser has
complete freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates.
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<PAGE> 65
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 or
the Sub-Adviser normally seeks to deal directly with the primary market makers
or on major exchanges unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the best available
price, securities may, as authorized by an Advisory Agreement or a Sub-Advisory
Agreement, be bought from or sold to dealers who have furnished statistical,
research and other information or services to the Adviser or the Sub-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 National Association of Securities Dealers (the "NASD") and such other
policies as the Trustees may determine, the Adviser or the Sub-Adviser may
consider sales of shares of a Fund and of the other investment company clients
of MFD as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions.
Under an Advisory Agreement or a Sub-Advisory Agreement and as permitted by
Section 28(e) of the Securities Exchange Act of 1934, the Adviser may cause a
Fund to pay a broker-dealer which provides brokerage and research services to
the Adviser or the Sub-Adviser, an amount of commission for effecting a
securities transaction for the Fund in excess of the amount other broker-dealers
would have charged for the transaction, if the Adviser or the Sub-Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or their
respective overall responsibilities to the Fund or to their other clients. Not
all of such services are useful or of value in advising a Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser or the Sub-Adviser, be reasonable in relation to the value of the
brokerage services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of a Fund and the Adviser's or the Sub-Adviser's other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser or the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers, on behalf of a
Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $23,100 of commission business from
the MFS Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of the Lipper Directors' Analytical Data
Service (which provides information useful to the Trustees in reviewing the
relationship between a Fund and the Adviser and the Sub-Adviser).
The Adviser's and the Sub-Adviser's investment management personnel attempt to
evaluate the quality of Research provided by brokers. The Adviser or the
Sub-Adviser sometimes uses evaluations resulting from this effort as a
consideration in the selection of brokers to execute portfolio transactions.
The management fee of the Adviser or the Sub-Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent a Fund's portfolio transactions are used to obtain brokerage and research
services, the brokerage commissions paid by the Fund will exceed those that
might otherwise be paid for such portfolio transactions, or for such portfolio
transactions and research, by an amount which cannot be presently determined.
Such services would be useful and of value to the Adviser or the Sub-Adviser in
serving both a Fund and other clients and, conversely, such services obtained by
the placement of brokerage business of other clients would be useful to the
Adviser or the Sub-Adviser in carrying out its obligations to the Fund. While
such services are not expected to reduce the expenses of the Adviser or the Sub-
Adviser, the Adviser or the Sub-Adviser would, through use of the services,
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.
For the period ended May 31, 1996, the International Growth Fund ("FGF"), the
International Growth and Income Fund ("FGI") and the Emerging Markets Equity
Fund ("FEM") paid total brokerage commissions on total transactions as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
COMMISSIONS TRANSACTIONS
----------- --------------
<S> <C> <C>
FGF $ 110,176 $1,031,871,320
FGI $ 19,927 $ 387,430,280
FEM $ 119,638 $ 504,429,076
</TABLE>
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser, any subsidiary of the Adviser or the Sub-Adviser. Investment decisions
for a 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
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<PAGE> 66
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as a Fund is
concerned. In other cases, however, a Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- Each Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of a Fund alone
or in combination with all classes of shares of other MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 36-month
period, in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum by completing the Letter of Intent
section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of a Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund (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 with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a 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 a 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 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
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<PAGE> 67
prospectus of the other fund and consider the differences in objectives and
policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Reinvested Shares"; (ii) to the extent necessary, any
"Free Amount"; and (iii) to the extent necessary, the "Direct Purchase" subject
to the lowest CDSC (as such terms are defined under "Information Concerning
Shares of the Funds -- Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B and Class C shares
pursuant to a SWP, but will not be waived in the case of SWP redemptions of
Class A shares which are subject to a CDSC. To the extent that redemptions for
such periodic withdrawals exceed dividend income reinvested in the account, such
redemptions will reduce and may eventually exhaust the number of shares in the
shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be received in full and fractional shares of a 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 generally having an
aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent. With respect to Class A shares, maintaining a withdrawal plan
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases and the imposition of a CDSC on
certain redemptions. The shareholder may deposit into the account additional
shares of a 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 a 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 a Fund ceases to assume the cost of
these services. Each 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 a 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 the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder if such MFS Fund is available for sale. Under
the Automatic Exchange Plan, transfers of at least $50 each may be made to up to
four different funds effective on the seventh day of each month or of every
third month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan
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<PAGE> 68
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 each Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or within 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with a 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 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 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by 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 a 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 fund and consider the differences in
objectives and policies before making any exchange. 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 for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of each Fund, subject to the conditions, if
any, set forth in their respective prospectuses. In
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addition, unitholders of the MFS Fixed Fund (a bank collective investment fund)
have the right to exchange their units (except units acquired through direct
purchases) for shares of a 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 each Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
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.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
Each 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 each 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 any Fund will be required to pay any federal income or excise taxes,
although a Fund's foreign-source income may be subject to foreign withholding
taxes. If a Fund should fail to qualify as a "regulated investment company" in
any year, the Fund would incur a regular corporate federal income tax upon its
taxable income and Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
Shareholders of each Fund normally will have to pay federal income taxes, and
any state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains (whether paid in cash or reinvested in additional
shares) are taxable to shareholders as ordinary income for federal income tax
purposes. A portion of each Fund's ordinary income dividends (but none of its
capital gain distributions) is normally eligible for the dividends-received
deduction for corporations if the recipient otherwise qualifies for that
deduction with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
or result in certain basis adjustments. Distributions of net capital gains
(i.e., the excess of long-term capital gains over short-term capital losses),
whether paid in cash or reinvested in additional shares, are taxable to a 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 that are payable to shareholders of
record in such a month, and that are 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 will notify shareholders regarding the federal tax status of
its distributions shortly after the end of each calendar year.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in a Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
distribution may thus pay the full price for the shares and then effectively
receive a portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of a
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
24
<PAGE> 70
otherwise as a short-term capital gain or loss. However, any loss realized upon
a disposition of shares in a 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 a Fund within ninety
days after their purchase followed by any purchase (including purchases by
exchange or by reinvestment) without payment of an additional sales charge on
Class A shares of that Fund or of another MFS Fund (or any other shares of an
MFS Fund generally sold subject to a sales charge).
Each Fund's transactions in options, Futures Contracts and Forward Contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example, certain
positions held by a 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 a 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. Each Fund will limit its activities in options, Futures Contracts,
Forward Contracts and swaps and related transactions to the extent necessary to
meet the requirements of Subchapter M of the Code.
Each 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. A
Fund's investments in zero coupon securities, deferred interest bonds, payment
in kind bonds, certain stripped securities and certain securities purchased at a
market discount will cause it to recognize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
Special tax considerations apply with respect to foreign investments of a Fund.
Foreign exchange gains and losses realized by a Fund will generally be treated
as ordinary income and losses. The holding of foreign currencies for non-hedging
purposes and investment by a Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund.
Investment income received by a Fund from foreign securities may be subject to
foreign income taxes. The United States has entered into tax treaties with many
foreign countries that may entitle a Fund to a reduced rate of tax or an
exemption from tax on such income; each Fund intends to qualify for treaty
reduced rates where available. It is impossible to determine a Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known.
If a Fund holds more than 50% of its assets in foreign securities at the close
of its taxable year, the Fund may elect to "pass through" to the Fund's
shareholders foreign income taxes paid. If the Fund so elects, shareholders will
be required to treat their pro-rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includable in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would be able
(subject to such limitations) to claim a credit but not a deduction. No
deductions for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If a Fund does not qualify or elect to "pass
through" to its shareholders foreign income taxes paid by it, shareholders will
not be able to claim any deduction or credit for any part of the foreign taxes
paid by the Fund.
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%. Each Fund intends to
withhold U.S. federal income tax 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. Distributions received from a Fund by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions. Each Fund is also
required in certain circumstances to apply backup withholding at a rate of 31%
on taxable dividends and the redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding. Distributions received from a Fund by Non-
U.S. Persons may also be subject to tax under the laws of their own
jurisdictions.
No Fund will be required to pay Massachusetts income or excise taxes as long as
it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of the Class A, Class B
and Class C shares of each Fund (the
25
<PAGE> 71
"Distribution Plans") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that each Distribution Plan would benefit the applicable Fund and the
respective class of shareholders. The Distribution Plans are designed to promote
sales, thereby increasing the net assets of each Fund. Such an increase may
reduce the expense ratio to the extent a 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 a Fund required to liquidate portfolio securities
to meet redemptions. There is, however, no assurance that the net assets of a
Fund will increase or that the other benefits referred to above will be
realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to each Class A Distribution Plan, no service fees
will be paid to any insurance company which has entered into an agreement with
the applicable Fund and MFD that permits such insurance company to purchase
Class A shares from the Fund at their net asset value in connection with annuity
agreements issued in connection with the insurance company's separate accounts.
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Funds. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUNDS' LAST FISCAL PERIOD: During
the period ended May 31, 1996, the Funds paid the following Distribution Plan
expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------------ ------------- -------------
<S> <C> <C> <C>
International Growth Fund
Class A
Distribution
Plan $ 85,577 $ 43,569 $42,008
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Class B
Distribution
Plan $150,456 $ 112,848 $37,608
International Growth and Income Fund
Class A
Distribution
Plan $ 26,289 $ 13,216 $13,073
Class B
Distribution
Plan $ 53,233 $ 39,925 $13,308
Emerging Markets Equity Fund
Class A
Distribution
Plan $ 38,057 $ 22,244 $15,813
Class B
Distribution
Plan $ 69,502 $ 52,201 $17,301
</TABLE>
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the applicable Fund and MFD each
shall provide to the Trustees, and the Trustees shall review, at least
quarterly, a written report of the amounts expended (and purposes therefor)
under such Plan. Each of the Distribution Plans may be terminated at any time by
a vote of a majority of the Distribution Plan Qualified Trustees or by vote of
the holders of a majority of the respective class of the applicable Fund's
shares (as defined in "Investment Restrictions"). All agreements relating to any
of the Distribution Plans entered into between a Fund or MFD and other
organizations must be approved by the Board of Trustees, including a majority of
the Distribution Plan Qualified Trustees. Agreements under any of the
Distribution Plans must be in writing, will be terminated automatically if
assigned, and may be terminated at any time without payment or any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the applicable Fund's shares.
None of the Distribution Plans may be amended to increase materially the amount
of permitted distribution expenses without the approval of a majority of the
respective class of the applicable Fund's shares (as defined in "Investment
Restrictions") or may be materially amended in any case without a vote of the
Trustees and a majority of the Distribution Plan Qualified Trustees. The
selection and nomination of Distribution Plan Qualified Trustees shall be
26
<PAGE> 72
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of each 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 each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in a Fund's portfolio are valued at the last sale price on the exchange on which
they are primarily traded or on the NASDAQ system for unlisted national market
issues, or at the last quoted bid price for listed securities in which there
were no sales during the day or for unlisted securities not reported on the
NASDAQ system. Bonds and other fixed income securities (other than short-term
obligations) of U.S. issuers in a Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration market
data from an external pricing source. Use of the pricing services has been
approved by the Board of Trustees. All other securities, futures contracts and
options in a Fund's portfolio (other than short-term obligations) for which the
principal market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at the
settlement price prior to the determination (or if there has been no current
sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the NASDAQ system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations in a Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of a Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD or its
agent, the Shareholder Servicing Agent, prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: Each 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. Each Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge applicable to Class A shares (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.
The aggregate total rate of return for Class A shares of the International
Growth Fund for the period from October 24, 1995 (commencement of investment
operations) to May 31, 1996 was 6.13% (including the effect of the sales charge)
and 11.43% (without the effect of the sales charge). The aggregate total rate of
return for Class B shares of the International Growth Fund for the same time
period was 7.07% (including the effect of the CDSC) and 11.07% (without the
effect of the CDSC).
The aggregate total rate of return for Class A shares of the International
Growth and Income Fund for the period from October 24, 1995 (commencement of
investment operations) to May 31, 1996 was 1.62% (including the effect of the
sales charge) and 6.71% (without the effect of the sales charge). The aggregate
total rate of return for Class B shares
27
<PAGE> 73
of the International Growth and Income Fund for the same time period was 2.37%
(including the effect of the CDSC) and 6.37% (without the effect of the CDSC).
The aggregate total rate of return for Class A shares of the Emerging Markets
Equity Fund for the period from October 24, 1995 (commencement of investment
operations) to May 31, 1996 was 4.99% (including the effect of the sales charge)
and 10.24% (without the effect of the sales charge). The aggregate total rate of
return for Class B shares of the Emerging Markets Equity Fund for the same time
period was 5.85% (including the effect of the CDSC) and 9.85% (without the
effect of the CDSC). This Fund's total rate of return would have been lower if
an expense limitation were not in effect.
These figures are not calculated on an annualized basis. The aggregate total
return represents a limited time frame and may not be indicative of future
performance.
PERFORMANCE RESULTS: The performance results for Class A shares below, based on
an assumed initial investment of $10,000 in Class A shares of each fund, cover
the period from October 24, 1995 to December 31, 1995. It has been assumed that
dividend and capital gain distributions were reinvested in additional shares.
These performance results, as well as any yield or total rate of return
quotation provided by the Funds, should not be considered as representative of
the performance of the Funds in the future since the net asset value and public
offering price of shares of the Funds will vary based not only on the type,
quality and maturities of the securities held in each of the Fund's portfolio,
but also on changes in the current value of such securities and on changes in
the expenses of the Funds. 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 Funds 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. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8355).
CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL REINVESTED VALUE OF
YEAR ENDED $10,000 CAPITAL GAIN REINVESTED TOTAL
DECEMBER 31, 1995 INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ------------------ ---------- ------------- ---------- ------
<S> <C> <C> <C> <C>
Emerging Markets
Equity Fund $9,828 $ 0 $ 0 $9,838
Growth and Income
Fund 9,873 0 15 9,888
International
Growth and
Income Fund 9,803 0 2 9,805
</TABLE>
EXPLANATORY NOTES: The results in the table assume that the initial investment
on October 24, 1995 has been reduced by the current maximum sales charge of
4.75%. No adjustment has been made for any income taxes payable by shareholders.
YIELD: Any yield quotation for a class of shares of the International Growth and
Income 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 and
Class C shares.
The yield for Class A and Class B shares of the International Growth and Income
Fund for the 30-day period ended May 31, 1996 was 0.35% and -0.19%,
respectively.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the International Growth and Income Fund 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 and Class C shares assumes no CDSC is paid.
The current distribution rate calculation for Class A and Class B shares of the
International Growth and Income Fund based on the annualization of the last
dividend paid during the period from October 24, 1995 (commencement of
28
<PAGE> 74
investment operations) to May 31, 1996, was 0.15% and 0.09%, respectively.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. Each Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, each Fund and MFD may discuss or quote a Fund's current
portfolio manager(s) as well as other investment personnel, including such
persons' views on: various foreign and emerging market economies; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the Fund; the Fund's portfolio holdings; the investment
research and analysis process; the formulation and evaluation of investment
recommendations; the assessment and evaluation of credit, interest rate, market
and economic risks; and similar and related matters. In addition, from time to
time each Fund and MFD may discuss a Fund's current or anticipated allocations
of the Fund's securities by country or region. Any such allocations are subject
to change.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly. MFS FIRSTS: MFS has a long
history of innovations.
<TABLE>
<C> <S>
-- 1924 -- Massachusetts Investors Trust is
established as the first open-end mutual fund
in America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933 (the "Truth in
Securities Act" or the "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(R) Municipal Bond Fund is among
the first municipal bond funds established.
-- 1979 -- Spectrum becomes the first
combination fixed/variable annuity with no
initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is
established as America's first globally
diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is
the first open-end mutual fund to seek high
tax-free income from lower-rated municipal
securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes
the first mutual fund to target and shift
investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the
first closed-end, high-yield municipal bond
fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is
the first closed-end, multimarket high income
fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's
first non-qualified market-value-adjusted
fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the
first global balanced fund.
</TABLE>
29
<PAGE> 75
<TABLE>
<C> <S>
-- 1993 -- MFS(R) World Growth Fund is the first
global emerging markets fund to offer the
expertise of two sub-advisers.
-- 1993 -- MFS(R) Union Standard Trust is the
first mutual fund to invest solely in
companies deemed to be union-friendly by an
advisory board of senior labor officials,
senior managers of companies with signifi-
cant labor contracts, academics and other
national labor leaders or experts.
</TABLE>
FCM AND FCEM ACHIEVEMENTS: FCM & FCEM have a history of achievements and
innovations.
<TABLE>
<C> <S>
-- 1868 -- Established the world's oldest
investment trust.
-- 1882 -- Invested in Japanese bonds.
-- 1884 -- Invested in the Hong Kong bond
market.
-- 1930 -- Invested in the U.S.
-- 1961 -- Invested in the Japanese stock
market.
-- 1972 -- Launched the first European
investment trust when the UK joined the EEC.
-- 1980's -- Invested in the emerging markets of
Thailand and Korea.
-- 1987 -- Launched the first Latin America fund
in the UK.
-- 1994 -- Launched The Foreign & Colonial
Emerging Middle East Fund (a closed-end fund,
shares of which are listed on the New York
Stock Exchange).
</TABLE>
9. DESCRIPTION OF SHARES, VOTING
RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of each Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each series of the Trust (Class A, Class B, Class C
and Class P shares). Each share of a class of a Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of a Fund, shareholders of each class of the Fund are entitled to
share pro rata in the Fund's net assets allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue a
number of series and additional classes of shares, in which case the shares of
each class of a series would participate equally in the earnings, dividends and
assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares voting as a
single class, or of the affected series of the Trust, except that if the
Trustees recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares will be sufficient, or (ii) upon liquidation and distribution of the
assets of a Fund, if approved by the vote of the holders of two-thirds of its
outstanding shares of the Trust, or (iii) by the Trustees by written notice to
its shareholders. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
30
<PAGE> 76
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Funds' independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolios of Investments and the Statements of Assets and Liabilities at
May 31, 1996, the Statements of Operations for the period from October 24, 1995
(commencement of investment operations) to May 31, 1996, the Statements of
Changes in Net Assets for the period from October 24, 1995 (commencement of
investment operations) to May 31, 1996, the Notes to Financial Statements and
the Report of Independent Auditors, each of which is included in the Annual
Report to shareholders of the Funds, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
31
<PAGE> 77
APPENDIX A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
ESTIMATED
CREDITED
TRUSTEE FEES YEARS TOTAL TRUSTEE FEES
FROM EACH OF FROM FUNDS AND
TRUSTEE FUND(1) SERVICE(2) FUND COMPLEX(3)
- ---------------------------------------------------------- ------------- ----------- ------------------
<S> <C> <C> <C>
Richard B. Bailey......................................... $ 249 5 $263,815
A. Keith Brodkin.......................................... 0 N/A 0
Peter G. Harwood.......................................... 249 5 111,366
J. Atwood Ives............................................ 229 13 101,356
Lawrence T. Perera........................................ 249 12 102,546
William J. Poorvu......................................... 249 12 111,366
Charles W. Schmidt........................................ 249 5 105,411
Arnold D. Scott........................................... 0 N/A 0
Jeffrey L. Shames......................................... 0 N/A 0
Elaine R. Smith........................................... 249 23 105,411
David B. Stone............................................ 269 5 115,521
</TABLE>
- ---------------
(1) Estimated, for the period ending May 31, 1996.
(2) Based upon normal retirement age (73).
(3) Information provided is for calendar year 1995. All Trustees receiving
compensation served as Trustees of 23 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately $17.6
billion) except Mr. Bailey, who served as Trustee of 73 funds within the MFS
fund complex (having aggregate net assets at December 31, 1995, of
approximately $31.7 billion).
32
<PAGE> 78
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SUB-ADVISER
Foreign & Colonial Management Ltd.
Exchange House
Primrose Street
London EC2A 2NY, United Kingdom
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS[Registered Trademark]/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
MFS[Registered Trademark]/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME
FUND
MFS[Registered Trademark]/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFC-13 4/96/1875
<PAGE> 79
<PAGE>
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[Graphic Omitted: Busy Hong Kong Scene]
MFS(R)/ ANNUAL REPORT
Foreign & Colonial FOR YEAR ENDED
Emerging Markets MAY 31, 1996
Equity Fund
MFS(R)/
Foreign & Colonial
International Growth
and Income Fund
MFS(R)/
Foreign & Colonial
International
Growth Fund
<PAGE>
TABLE OF CONTENTS
Chairman's Letter to Shareholders ......................................... 1
MFS/Foreign & Colonial International Funds Overview ....................... 2
Investment Strategies ..................................................... 3
Objectives and Policies ................................................... 10
EMERGING MARKETS EQUITY FUND
PORTFOLIO CONCENTRATION .............................................. 11
PORTFOLIO OF INVESTMENTS ............................................. 12
INTERNATIONAL GROWTH AND INCOME FUND
PORTFOLIO CONCENTRATION .............................................. 14
PORTFOLIO OF INVESTMENTS ............................................. 15
INTERNATIONAL GROWTH FUND
PORTFOLIO CONCENTRATION .............................................. 18
PORTFOLIO OF INVESTMENTS ............................................. 19
Financial Statements ..................................................... 23
Notes to Financial Statements ............................................ 27
Report of Independent Auditors ........................................... 33
HIGHLIGHTS
* RISING GLOBAL LIQUIDITY HAS PROVIDED SUPPORT FOR INTERNATIONAL STOCK
MARKETS, WITH EQUITIES SO FAR IGNORING THE "GROWTH SCARE" THAT HAS
AFFECTED MOST BOND MARKETS IN 1996.
* LOW INTEREST RATES IN EUROPE AND JAPAN AND GROWING MONEY SUPPLIES, PLUS
SIGNS OF ECONOMIC RECOVERY AND ACCELERATING CORPORATE EARNINGS, HAVE
REINFORCED THE POSITIVE MESSAGE OF THE U.S. EQUITY MARKET, ALTHOUGH THE
INTERNATIONAL MARKETS APPEAR TO BE IN AN EARLIER PHASE OF THEIR CYCLE.
* WHILE THE PERFORMANCE OF EMERGING MARKETS HAS BEEN MIXED, WE EXPECT
RISING GLOBAL LIQUIDITY TO BE GENERALLY POSITIVE FOR THESE MARKETS AS THE
YEAR PROGRESSES.
* THE EMERGING MARKETS EQUITY SERIES AND THE INTERNATIONAL GROWTH SERIES
HAVE BEEN ADDED TO THE MFS REGATTA GOLD ANNUITY, JOINING THE MFS/F&C
GROWTH AND INCOME SERIES, BRINGING THE INVESTMENT OPPORTUNITIES OF ALL
THREE MFS/F&C PRODUCTS TO PEOPLE USING ANNUITIES FOR THEIR LONG-TERM, TAX-
DEFERRED RETIREMENT INVESTING.
* AS OF MAY 31, 1996, ASSETS IN THE THREE MFS/F&C FUNDS, WHICH COMMENCED
OPERATIONS IN OCTOBER 1995, EXCEEDED $150 MILLION.
<PAGE>
LETTER TO SHAREHOLDERS
[Photo of A. Keith Brodkin]
A. Keith Brodkin
Dear Shareholders:
While the MFS/Foreign & Colonial (F&C) International Funds have been in
operation for less than a year, we are pleased to report significant progress
for these Funds as well as news of some positive developments that have occurred
since our last report.
First, we are happy to report that since commencement of operations on
October 24, 1995 through May 31, 1996, shareholders of all three Funds have seen
strong performance, with total returns ranging from 6.37% for Class B shares of
MFS/F&C Growth and Income Fund to 11.43% for Class A shares of MFS/F&C
International Growth Fund.
Second, assets in the three Funds have reached over $150 million as of May
31, 1996, a level we consider encouraging given the facts that these were all
new funds; that London-based F&C Management Ltd. while unfamiliar to most U.S.
investors has over 127 years of experience in international investing; and most
overseas investment markets had been underperforming the U.S. markets when the
Funds were introduced. Much of the credit for this growth, of course, goes to
investors such as you who understand that international investing can give you
greater diversification, which may help to lower a portfolio's overall risk
while providing exposure to a range of dynamic investment markets around the
world.
Third, as planned, three MFS analysts have been assigned to the London
offices of F&C, which will provide even closer ties between MFS and F&C. In the
long run, we believe the synergies that grow out of these ties will benefit
investors as the two companies share their extensive information and research
capabilities.
Finally, MFS/F&C Emerging Markets Equity Series and MFS/F&C International
Growth Series are now available through the MFS Regatta Gold fixed/variable
annuity, joining MFS/F&C Growth and Income Series and, thus, bringing the
investment opportunities of all three MFS/ F&C products to people using
annuities for their long-term, tax-deferred retirement investing.
This annual report to shareholders covers all three MFS/F&C Funds: MFS/F&C
Emerging Markets Equity Fund, MFS/F&C International Growth and Income Fund, and
MFS/ F&C International Growth Fund. Each of these Funds has varying objectives,
which are outlined on page 10 of this report.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman
June 10, 1996
<PAGE>
MFS/FOREIGN & COLONIAL INTERNATIONAL FUNDS OVERVIEW
[Photo of Tony Thomson]
Tony Thomson
Rising global liquidity underpinned international equity markets during the
period from October 24, 1995 (the inception date of the Funds) through May 31,
1996.
Equities so far have ignored the "growth scare" that has affected most bond
markets in 1996. Low interest rates in Europe and Japan and a growing money
supply, plus signs of economic recovery and accelerating corporate earnings in
those areas, reinforced the positive message coming from the U.S. equity
markets. Investors in these markets believe that the same trends are at work
there as in the United States, but that the international markets are in an
earlier phase of their cycle.
This has caused a shift in performance leadership from the United States to
the large international markets. Through the end of May, the Japanese Nikkei was
up 10.5% for the year, the German DAX was up 11.6%, and the French CAC was up
10.5%, versus a gain of 9.67% for the Standard & Poor's 500 Composite Index (the
S&P 500) over the same period. The United Kingdom has been a laggard, with the
Financial Times Stock Exchange (FTSE 100) rising only 1.6% over the same period,
largely due, in our opinion, to political uncertainty since the U.K.'s economic
performance has been excellent. The above indices are all unmanaged and offer no
guarantees of how an individual's future investments will fare and, while
investing in foreign and emerging market securities may provide greater returns,
it also involves greater risk than investing in the United States.
The performance of emerging markets has been mixed, but we believe rising
global liquidity to be generally positive for these markets as the year
progresses. Small companies in the United Kingdom, Japan, and Europe have
generally done well, although stock picking among small companies has proven
beneficial because there has been significant variation in the movement of
small-company stocks.
MFS/F&C International Growth Fund has benefited from its overweighting in
Japan among its larger-company holdings and from its structural overweighting in
selected smaller international companies. The performance of MFS/F&C
International Growth and Income Fund, on the other hand, was held back by its
bond exposure in a period of rising interest rates. Should the long-anticipated
correction in the United States occur, however, we believe the Growth and Income
Fund could offer some protection.
Respectfully,
/s/ Tony Thomson
Tony Thomson
Chief Investment Officer
Foreign & Colonial Management Ltd.
INVESTMENT STRATEGIES
MFS/F&C EMERGING MARKETS EQUITY FUND
[Photo of Arnab Kumar Banerji]
Arnab Kumar Banerji
From the commencement of investment operations on October 24, 1995 through
May 31, 1996, Class A shares of the Fund provided a total return of 10.24%,
while Class B shares provided a total return of 9.85%. These returns assume the
reinvestment of distributions but exclude the effects of any sales charges, and
they compare to a 14.69% return for the Lipper Emerging Markets Funds Index (the
Lipper Index) and a 12.81% return for the Morgan Stanley Capital International
(MSCI) Emerging Markets Free (EMF) Index. The Lipper mutual fund indices are
unmanaged indices of the largest qualifying mutual funds within their respective
investment objectives, adjusted for the reinvestment of capital gains
distributions and income dividends, while the MSCI EMF Index is a broad,
unmanaged, market-capitalization- weighted index of equities in 19 emerging
markets. It is not possible to invest in an index. Emerging markets have shown
better performance in 1996 after a generally poor performance in 1994 and 1995.
The Fund has underperformed its benchmark, the MSCI EMF Index, by having
above-index weightings in Brazil, Hong Kong, India, Taiwan, Hungary, and Poland,
and below-index weightings in Thailand and South Africa. The Fund has
underperformed the Lipper Index primarily due to the Fund's higher weightings in
Chile, Colombia, Peru, and South Korea, while having lower weightings in Hong
Kong, Indonesia, and the Philippines.
The Fund remains well diversified at the country level, with major industry
weightings in telecommunications, banking, electric utilities, food and
beverages, and oil and gas. The largest country weightings are Brazil, Mexico,
Malaysia, India, and South Africa. Within Asia, we have built up a strong
position in Hong Kong, which we believe will be re-rated upward as the handover
to China in mid-1997 approaches. We are also positive on India following its
recent national elections due to strong earnings growth and improving domestic
liquidity. We have recently purchased a small position in Pakistan because we
expect an economic recovery in the next 12 months and consider valuations there
to be among the cheapest in Asia.
Our largest position in Latin America remains in Brazil, where interest
rates have been steadily easing and reforms are continuing while the stock
market is below its level when Fernando Henrique Cardoso was elected president.
We are also positive on the smaller Latin American markets of Colombia and Peru.
In Colombia, political worries have overshadowed what we believe to be an
improving inflation environment and very attractive valuations. In Peru, an
agreement has recently been signed with the International Monetary Fund, which
we expect to help the economy in the medium term.
In other emerging markets, we find Poland and Hungary attractive. The
Polish economy is growing strongly, led by exporters, and even though it has
been one of the best-performing markets in the world in 1996, stocks with
uncommonly attractive single-digit price-to- earnings multiples are still
available. In Hungary, reforms are starting to take effect and companies there
have announced good results. We have also recently established a small position
in Russia, where we felt the risk/reward picture appeared favorable heading into
mid-June's presidential election. We have reduced our weighting in South Africa
as that market appears expensive given the political and economic risks there.
Respectfully,
/s/ Arnab Kumar Banerji
Arnab Kumar Banerji
Portfolio Manager
PORTFOLIO MANAGER PROFILE
ARNAB BANERJI IS CHIEF INVESTMENT OFFICER OF FOREIGN & COLONIAL MARKETS LTD. DR.
BANERJI EARNED DEGREES IN PHYSIOLOGY AND MEDICINE FROM OXFORD UNIVERSITY BEFORE
ENTERING THE INVESTMENT MANAGEMENT BUSINESS WITH J. HENRY SCHRODER WAGG IN
LONDON. HE LEFT THAT FIRM TO BECOME A RESEARCH ANALYST AND LATER DIRECTOR OF
NOMURA SECURITIES. HE JOINED CITIBANK INITIALLY AS HEAD OF EQUITY RESEARCH AT
CITIBANK SCRIMGEOUR VICKERS BEFORE MOVING TO CITIBANK GLOBAL ASSET MANAGEMENT TO
SET UP THEIR EMERGING MARKETS OPERATION, WHICH HE HEADED UNTIL 1993, WHEN HE
JOINED FOREIGN & COLONIAL.
<PAGE>
INVESTMENT STRATEGIES - continued
MFS/F&C INTERNATIONAL GROWTH AND INCOME FUND
[Photo of Atul Patel]
Atul Patel
[Photo of Richard O. Hawkins]
Richard O. Hawkins
From the commencement of investment operations on October 24, 1995 through May
31, 1996, Class A shares of the Fund provided a total return of 6.71%, while
Class B shares provided a total return of 6.37%. These returns assume the
reinvestment of distributions but exclude the effects of any sales charges, and
they compare to an 11.76% return for the Lipper International Funds Index, and a
7.94% return for a blend (70% and 30%, respectively) of the unmanaged MSCI
Europe, Australia, Far East (EAFE) and the J.P. Morgan Global Government Bond
indices. The EAFE Index is an unmanaged index of international stocks, while the
Morgan Index is an unmanaged index of bonds issued from 13 non-U.S. countries
with remaining maturities of at least one year.
We currently prefer international equities to international bonds as we
believe the synchronized pickup in economic growth among the "G7" major
industrialized nations (Canada, France, Germany, Italy, Japan, the United
Kingdom, and the United States) provides a more favorable environment for
equities.
Japan remains one of our favored areas within the equity portfolio. Our
positive stance in Japan is based on a significant earnings recovery and the
return of domestic investors to the equity market. We expect interest rates to
remain low, which could provide support for equities and allow financial
institutions to rebuild their balance sheets. Within the Japanese portfolio, we
are underweighted in banks and automobiles and overweighted in the electrical
and electronics exporting sector, with holdings in Canon, Ricoh, and Kyocera,
among others. We are also overweighted in the Far East which we believe offers
excellent long-term growth prospects and, in the shorter term, could continue to
benefit from U.S. mutual fund flows.
The Fund is underweighted in the United Kingdom and the rest of Europe. In
our opinion, the equity market in the United Kingdom is unlikely to make much
progress as investors become increasingly concerned about the prospect of a
general election within the next 12 months. We remain overweighted in some
cyclical areas such as building materials and construction, which we believe
have been heavily oversold. We are underweighted in financial services,
chemicals, and pharmaceuticals.
Equity markets in the rest of Europe have rallied on the basis of falling
short-term interest rates so far this year. Although economic growth prospects
appear favorable, we believe that growth will be capped by the tight fiscal
requirements of the Maastricht criteria, leading to closer economic and monetary
ties among European economies. We are overweighted in cyclicals such as Bayer
and BASF, and in auto companies such as Volvo and Volkswagen.
The fixed-income portion of the Fund reflects our ongoing concerns about
further increases in long-term interest rates. With growth in the United States
straining the availability of capacity and labor, we believe the bond market
will likely continue to discount the possibility of higher official interest
rates. Despite lower growth and inflation risks in Europe, interest rates there
will, in our opinion, likely be pulled higher by U.S. rates. In Japan, the
current interest rate levels already reflect expectations of rate increases
which we believe may not occur for some time, so the bond market there may
better resist the general rise in rates elsewhere.
Our bond holdings have been designed to limit interest rate sensitivity and
to focus on overperformance by countries such as Canada, Spain, and Sweden,
where inflation prospects appear to be improving and official rates may be
falling. A portion of our European currency exposure is hedged back into the
U.S. dollar, reflecting stronger U.S. growth and higher interest rate levels.
Respectfully,
/s/ Tony Thomson /s/ Atul Patel /s/ Richard O. Hawkins
Tony Thomson Atul Patel Richard O. Hawkins
Portfolio Manager Portfolio Manager Portfolio Manager
PORTFOLIO MANAGER PROFILES
TONY THOMSON IS CHIEF INVESTMENT OFFICER OF FOREIGN & COLONIAL MANAGEMENT LTD.
HE JOINED FOREIGN & COLONIAL IN 1994 FROM BANKERS TRUST INVESTMENT MANAGEMENT IN
LONDON, WHERE HE HAD BEEN CHIEF INTERNATIONAL INVESTMENT OFFICER. PRIOR TO
BANKERS TRUST, HE HAD BEEN INTERNATIONAL DIRECTOR WITH GARTMORE INVESTMENT
MANAGEMENT, DIRECTOR OF EQUITIES WITH POSTHORN ASSET MANAGEMENT, AND VICE
PRESIDENT/ PORTFOLIO MANAGER WITH MORGAN GUARANTY. MR. THOMSON IS A GRADUATE OF
YALE UNIVERSITY AND HAS A MASTER'S DEGREE FROM OXFORD UNIVERSITY AND AN M.B.A.
FROM STANFORD UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST.
ATUL PATEL IS ASSISTANT DIRECTOR AND GLOBAL FUNDS MANAGER OF FOREIGN &
COLONIAL MANAGEMENT LTD. MR. PATEL JOINED FOREIGN & COLONIAL IN 1994 FROM
BANKERS TRUST INVESTMENT MANAGEMENT IN LONDON, WHERE HE HAD BEEN INVESTMENT
MANAGER FOR INTERNATIONAL EQUITIES. PRIOR TO BANKERS TRUST, HE HAD BEEN GLOBAL
FUND MANAGER WITH GARTMORE INVESTMENT MANAGEMENT. MR. PATEL IS A GRADUATE OF
BRUNEL UNIVERSITY AND HAS AN M.B.A. FROM THE WARWICK BUSINESS SCHOOL.
RICHARD HAWKINS JOINED MFS IN 1988 AS ASSISTANT VICE PRESIDENT -
INVESTMENTS. A GRADUATE OF BROWN UNIVERSITY AND THE UNIVERSITY OF PENNSYLVANIA'S
WHARTON GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, HE WAS NAMED VICE PRESIDENT
- - INVESTMENTS IN 1991 AND SENIOR VICE PRESIDENT IN 1993. ON JANUARY 1, 1996, MR.
HAWKINS BECAME DIRECTOR OF THE INTERNATIONAL FIXED INCOME DEPARTMENT OF MFS.
<PAGE>
INVESTMENT STRATEGIES - continued
MFS/F&C INTERNATIONAL GROWTH FUND
[Photo of Ian K. Wright]
Ian K. Wright
[Photo of June Scott]
June Scott
From commencement of operations on October 24, 1995 through May 31, 1996, Class
A shares of the Fund provided a total return of 11.43%, while Class B shares
provided a total return of 11.07%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges. They compare to an
11.76% return for the Lipper International Funds Index and an 11.32% return for
the unmanaged EAFE Index.
The Fund is invested in three asset classes on an international basis.
Blue-chip stocks currently comprise 30% of the portfolio, small-capitalization
stocks 49%, and emerging market stocks make up the remaining 21%.
In Japan, we expect interest rates to remain low, which could provide
support for equities. In addition, we expect to see significant recovery in
earnings. The low interest rate environment and the recovery in the Japanese
economy, together with continuing deregulation and restructuring, are expected
to benefit the small- capitalization asset class.
The United Kingdom market appears unlikely to make much progress for the
rest of the year as investors become increasingly concerned about the political
situation there. Small companies have strongly outperformed the large caps since
the beginning of the year, and we believe this trend will continue for the
remainder of the year, although we expect the degree of outperformance to be
somewhat lower.
We remain cautious on the outlook for continental Europe, where a
low-growth, low-inflation environment looks likely for the rest of the year.
Consumer confidence is low, with most countries experiencing high levels of
unemployment, job insecurity, and fiscal tightening as governments attempt to
reform inefficient state sectors and bring budget deficits in line with the
Maastricht criteria. In this economic environment, we believe that small,
flexible companies in niche businesses which are able to exploit opportunities
that do exist could be able to outperform larger companies.
In the blue-chip portion of the Fund, Japan remains our most favored area,
with a weighting of 47% versus 41% for the EAFE Index. Within this segment, the
Fund is underweighted in banks and autos, and overweighted in the electrical and
electronics sector, with holdings in companies such as Canon and Kyocera. The
Fund is underweighted in the United Kingdom, but remains overweighted in such
U.K. cyclicals as building materials and construction, which, in our opinion,
have been heavily oversold. The tight fiscal policies required to meet the
Maastricht criteria are likely to cap growth in Europe and, taking account of
this, the Fund is underweighted in the region.
In the small-cap section, the Fund's largest position is in Japan.
Continuing deregulation in the consumer finance industry has benefited stocks
such as Aeon Credit, which has also been able to piggy-back on the expansion of
its parent company, Jusco, into the growing economies of Asia. Ryohin Keikaku
has been one of the major successes in the Fund. This company was founded on a
"no frills" concept known as "muji," meaning unbranded. The concept has been
such a success that Muji is now a brand in itself. The Fund is overweighted in
small U.K. companies, where our bullish view on building merchants and materials
has yet to pay off. However, there are now tentative signs of consumer
confidence returning, which we believe could benefit this sector. The majority
of the U.K. small-cap companies in the Fund have a relatively high overseas
exposure, which could provide downside protection following any shakeout
resulting from political concerns leading up to the general election. Stocks
that have performed particularly well over the past several months include
British Borneo and Independent Insurance. British Borneo has benefited from a
joint venture agreement with Shell in the Gulf of Mexico and from a number of
other discoveries. Independent Insurance is a niche insurance underwriter. As a
result of its size, the company is able to be more selective in the business it
takes on and can move quickly to take advantage of opportunities. In the
Netherlands, we believe that Ahrend, a company which assembles high-quality
office furniture, is well placed to outperform. This company has simply been
overlooked by the investment community and, we believe, is extremely cheap. In
our opinion, small companies in Germany could benefit from the weakening German
mark and from German monetary easing. Tarkett, a German flooring company
dependent on the refurbishment cycle, appears well placed to benefit from these
developments.
Emerging markets have shown better performance in 1996 after a generally
poor performance in 1994 and 1995. The Fund has recently purchased a small
position in Pakistan, where we expect to see an economic recovery in the next 12
months and where valuations are among the cheapest in Asia.
Our largest position in Latin America is in Brazil. Interest rates have
been easing steadily and reforms are continuing, while the stock market there is
still below the level it was when Fernando Henrique Cardoso was elected
president. We are also positive on the smaller Latin American markets of
Colombia and Peru. In Colombia, political worries have overshadowed what we
believe to be an improving inflation environment and very attractive valuations.
In Peru, an agreement has recently been signed with the International Monetary
Fund, which we expect to help the economy in the medium term.
In other emerging markets, we find Poland and Hungary attractive. The
Polish economy is growing strongly, led by exporters. In Hungary, reforms are
beginning to take effect, and companies there have announced good results
providing what we regard as interesting investment opportunities.
Respectfully,
/s/ Atul Patel /s/ June Scott /s/ Ian K. Wright
Atul Patel June Scott Ian K. Wright
Portfolio Manager Portfolio Manager Portfolio Manager
PORTFOLIO MANAGER PROFILES
IAN K. WRIGHT IS A DIRECTOR OF FOREIGN & COLONIAL MANAGEMENT LTD. MR. WRIGHT
JOINED FOREIGN & COLONIAL IN 1981 FROM STOCKBROKERS BUCKMASTER & MOORE, WHERE HE
WAS MANAGER OF PENSION FUNDS AND CHARITIES. MR. WRIGHT HEADS UP FOREIGN &
COLONIAL'S JAPANESE EQUITY INVESTMENT TEAM AND IS THE MANAGER OF THE FOREIGN &
COLONIAL PACIFIC INVESTMENT TRUST. HE IS A GRADUATE OF THE UNIVERSITY OF
SOUTHAMPTON AND IS AN ASSOCIATE OF THE INSTITUTE OF ACTUARIES.
JUNE SCOTT IS A GLOBAL FUNDS MANAGER OF FOREIGN & COLONIAL MANAGEMENT LTD.
A GRADUATE OF LONDON GUILDHALL UNIVERSITY, MS. SCOTT JOINED FOREIGN & COLONIAL
IN 1995, AFTER COMPLETING HER MBA AT THE LONDON BUSINESS SCHOOL. BEFORE
COMPLETING HER MBA, MS. SCOTT WORKED AS A QUANTITATIVE PORTFOLIO ANALYST IN THE
EQUITY RESEARCH GROUP AT J.P. MORGAN INVESTMENT MANAGEMENT IN LONDON.
<PAGE>
OBJECTIVES AND POLICIES
MFS/F&C Emerging Markets Equity Fund
The Fund seeks capital appreciation by investing, under normal market
conditions, at least 65% of its total assets in securities of companies whose
principal activities are located in emerging market countries. The Fund also has
the ability to invest up to 35% (noninclusive) of assets in lower-rated or
unrated fixed-income securities. The Fund's exposure to emerging markets is
highly diversified across countries and regions in order to seek to capture the
long-term returns from emerging market equities without allowing specific
countries to dominate the portfolio. Markets are selected on a top-down basis
using a core and satellite approach, while stocks are selected after fundamental
research and on a basis of seeking growth at the right price.
MFS/F&C International Growth and Income Fund
The Fund seeks capital appreciation and current income by investing primarily in
companies and issuers whose principal activities are located outside the United
States. It seeks to achieve its objective by investing in a combination of
foreign blue-chip and growth stocks and foreign fixed-income instruments. In
addition, up to 10% of the Fund's assets may be invested in emerging market
securities. The Fund defines foreign blue-chip stocks as companies having a
market capitalization of more than $1 billion. The Fund may allocate up to 50%
of net assets to foreign government and corporate fixed-income securities,
although no more than 25% of net assets will be invested in
below-investment-grade instruments. The Fund places emphasis on country
allocation based on relative economic, political, and market factors,
supplemented by fundamental research on stocks. Characteristics such as strong
management, dominant market position, and above-average earnings growth are
considered when looking for valuations which may be depressed.
MFS/F&C International Growth Fund
The Fund seeks capital appreciation through investing, under normal market
conditions, at least 65% of its total assets in companies whose principal
activities are located outside the United States and which offer above-average
growth potential over the long term. The Fund seeks to capture this
above-average growth potential by investing in a combination of foreign growth
stocks, foreign blue-chip stocks, and emerging market securities. The Fund
places emphasis on country allocation based on relative economic, political, and
market factors, supplemented by fundamental research on stocks. Characteristics
such as strong management, dominant market position, and above-average earnings
growth are considered when looking for valuations which may be depressed.
<PAGE>
PORTFOLIO CONCENTRATION AS OF MAY 31, 1996
MFS/F&C EMERGING MARKETS EQUITY FUND
COUNTRY WEIGHTINGS (% OF NET ASSETS)
South Africa .......................... 7.0%
India ................................. 10.3%
Malaysia .............................. 11.0%
Mexico ................................ 11.8%
Brazil ................................ 13.8%
Other ................................. 46.1%
TOP 5 INDUSTRY WEIGHTINGS (% OF NET ASSETS)
Telecommunications 15.43%
Banks 14.64%
Electric Utilities 11.82%
Food and Beverages 9.31%
Oil and Gas 7.51%
TOP 10 EQUITY HOLDINGS (% OF NET ASSETS)
Telecomunicacoes Brasileiras S.A., ADR 4.8%
Brazilian telecommunications company
Gruma S.A., "B" 3.0%
Mexican food company
Banco Industrial Colombiano, ADR 2.6%
Colombian bank
Usinas Siderurgicas de Minas Gerais S.A., ADR 2.6%
Brazilian iron and steel manufacturer
Siam City Cement Co. Ltd., Foreign Registered 2.3%
Thai building materials manufacturer
Empresas ICA Sociedad Controladora S.A., ADR 2.3%
Mexican construction company
Companhia Energetica S.A., ADR 2.1%
Brazilian electric utility
Bank of Ayudhya Ltd. 2.0%
Thai bank
Malayan Banking Berhad 2.0%
Malaysian bank
Tenaga Nasional Berhad 1.9%
Malaysian electric utility
PORTFOLIO STRUCTURE (% OF NET ASSETS)
Stocks 98.9%
Cash 1.1%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - May 31, 1996
MFS/F&C EMERGING MARKETS EQUITY FUND
Stocks - 98.9%
<CAPTION>
- -------------------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina - 5.5%
Banco de Galicia y Buenos Aires S.A., ADR (Banks) 11,100 $ 262,238
Buenos Aires Embotelladora S.A., ADR (Beverages) 12,700 203,200
Molinos Rio de la Plata S.A. (Food) 2,212 25,227
Perez Companc S.A. (Oil and Gas) 71,080 453,672
Telefonica de Argentina, ADR
(Utilities - Telephone) 22,150 645,119
YPF Sociedad Anonima, ADR (Oil and Gas) 27,700 609,400
-----------
$ 2,198,856
- -------------------------------------------------------------------------------------------
Brazil - 13.8%
Centrais Electricas Brasile, ADR
(Utilities - Electric) 50,050 $ 581,581
Cia Acos Especia Itab, ADR (Iron/Steel)* 61,970 464,775
Companhia Energetica S.A., ADR
(Utilities - Electric) 32,100 826,575
Lojas Americanas S.A., ADR (Retail)* 33,830 659,685
Telecomunicacoes Brasileiras S.A., ADR (Telecommunications) 29,650 1,912,425
Usinas Siderurgicas de Minas Gerais S.A., ADR, Preferred
(Iron/Steel) 96,600 1,043,280
-----------
$ 5,488,321
- -------------------------------------------------------------------------------------------
China - 0.4%
Huaneng Power International, Inc., ADR (Utilities -
Electric)* 10,000 $ 163,750
- -------------------------------------------------------------------------------------------
Colombia - 4.0%
Banco Industrial Colombiano, ADR (Finance) 55,450 $ 1,046,619
Cementos Diamante S.A., ADR (Construction)# 30,900 540,750
-----------
$ 1,587,369
- -------------------------------------------------------------------------------------------
Hong Kong - 4.9%
Henderson China Holding Ltd. (Real Estate)* 145,000 $ 345,827
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 79,500 254,867
Qingling Motors Co., "H" (Automotive) 494,000 174,016
Shanghai Petrochemical Co. Ltd. (Chemicals) 550,000 163,525
Wharf Holdings Ltd. (Real Estate) 177,000 682,987
Yizheng Chemical Fibre Co. Ltd. (Textiles) 686,000 166,716
Zhenhai Refining and Chemical Co. Ltd., "H" (Oil and Gas) 515,000 153,119
-----------
$ 1,941,057
- -------------------------------------------------------------------------------------------
Hungary - 1.2%
Magyar Olaj es Gas (Oil and Gas) 17,700 $ 206,205
Pannonplast Muanuagipari (Chemicals)* 9,600 266,326
-----------
$ 472,531
- -------------------------------------------------------------------------------------------
India - 10.3%
Bajaj Auto Ltd. (Automotive) 15,500 $ 426,462
Hindalco Industries Ltd., ADR
(Manufacturing)*# 14,000 609,000
Hindustan Lever Ltd.
(Consumer Goods and Services) 18,500 416,530
Hindustan Petroleum Corp. Ltd.
(Oil and Gas)* 37,000 405,071
ITC Ltd., GDR (Tobacco)* 46,100 386,088
Industrial Development Bank of India (Banks) 120,000 404,494
Mahanagar Telephone Nigam Ltd. (Telecommunications) 78,000 489,326
State Bank of India (Banks)* 52,000 420,974
Tata Engineering and Locomotive Co. Ltd. (Automotive) 30,000 540,000
-----------
$ 4,097,945
- -------------------------------------------------------------------------------------------
Indonesia - 0.7%
PT Indofood Sukses Makmur (Food)* 13,500 $ 61,219
PT Indosat (Telecommunications) 49,000 168,621
PT Inti Indorayon Utama
(Forest and Paper Products) 54,000 48,628
-----------
$ 278,468
- -------------------------------------------------------------------------------------------
Malaysia - 11.0%
Malayan Banking Berhad (Finance) 82,600 $ 784,460
Nylex (Malaysia) Berhad (Chemicals) 60,000 238,028
Perusahaan Otomobl (Automobiles) 66,000 341,174
Petronas Gas Berhad (Oil and Gas)# 150,000 655,179
Resorts World Berhad (Entertainment) 63,000 363,534
Sime Darby Berhad (Holding Company) 267,000 716,850
Telekom Malaysia Berhad (Telecommunications) 59,000 539,050
Tenaga Nasional Berhad (Utilities - Electric) 180,000 764,576
-----------
$ 4,402,851
- -------------------------------------------------------------------------------------------
Mexico - 11.8%
Cemex S.A., "B" (Construction) 115,000 $ 429,255
Empresas ICA Sociedad Controladora S.A., ADR (Engineering/
Construction)* 62,400 897,000
Fomento Economico Mexicano S.A., "B" (Brewery) 204,376 604,508
Gruma S.A., "B" (Food)* 240,680 1,199,995
Grupo Carso, "A1" (Conglomerate)* 80,201 590,079
Grupo Embotelladoras de Mexico S.A. (Beverages)* 377,000 635,022
Tubos de Acero de Mexico S.A. (Iron/Steel)* 38,678 351,287
-----------
$ 4,707,146
- -------------------------------------------------------------------------------------------
Pakistan - 2.5%
Hub Power Co. Ltd., GDR
(Utilities - Electric)* 19,600 $ 494,900
Pakistan Telecommunications Corp., GDR (Utilities -
Telephone)* 4,450 498,400
-----------
$ 993,300
- -------------------------------------------------------------------------------------------
Peru - 3.6%
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 287,100 $ 568,256
Compania de Minas Buenaventura S.A. (Mining) 66,640 579,202
Credicorp Ltd. (Holding Co.)* 15,120 279,720
-----------
$ 1,427,178
- -------------------------------------------------------------------------------------------
Philippines - 1.5%
Ayala Land, Inc., "B" (Real Estate) 88,600 $ 152,467
Manila Electric Co., "B"
(Utilities - Electric) 15,700 160,602
Philippine Long Distance Telephone Co., ADR (Utilities -
Telephone) 2,200 127,036
Pilipino Telegraph & Telephone Corp. (Telecommunications) 99,500 159,809
-----------
$ 599,914
- -------------------------------------------------------------------------------------------
Poland - 4.1%
Bank Slaski S.A. w Katowicach (Banks) 3,800 $ 278,619
Bydgoska Fabryka Kabli S.A.
(Electrical Equipment)* 9,275 228,414
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 63,500 426,493
Mostostal Zabrze S.A. (Holding Co.)* 88,900 388,108
Stomil Olsztyn S.A. (Tire and Rubber)* 26,500 311,474
-----------
$ 1,633,108
- -------------------------------------------------------------------------------------------
Portugal - 1.3%
Cimentos de Portugal S.A.
(Building Materials) 13,500 $ 248,972
Portugal Telecom S.A. (Telecommunications)* 11,000 266,767
-----------
$ 515,739
- -------------------------------------------------------------------------------------------
Russia - 3.3%
Lukoil Oil Co., ADR (Oil and Gas) 18,100 $ 579,200
Mosenergo, ADR (Utilities - Electric)*# 34,000 748,000
-----------
$ 1,327,200
- -------------------------------------------------------------------------------------------
South Africa - 7.0%
Anglo American Corp. of South Africa Ltd. (Mining) 7,500 $ 486,766
Nedcor Ltd. (Financial Services) 36,894 509,468
Sasol Ltd. (Oils) 69,861 696,198
South African Breweries Ltd. (Brewery) 19,123 584,253
South African Iron & Steel Industries
(Iron/Steel) 683,267 526,800
-----------
$ 2,803,485
- -------------------------------------------------------------------------------------------
South Korea - 3.1%
Korea Electric Power Corp., ADR
(Utilities - Electric) 24,400 $ 631,350
Korea International Trust (Finance)*+ 11 627,000
-----------
$ 1,258,350
- -------------------------------------------------------------------------------------------
Taiwan - 1.2%
Taipei Fund (Financial Services)* 60 $ 462,000
- -------------------------------------------------------------------------------------------
Thailand - 6.6%
Bank of Ayudhya Ltd. (Banks) 135,300 $ 813,513
Bank of Ayudhya Ltd., Rights (Banks)* 33,825 116,407
Siam City Cement Co. Ltd., Foreign Registered (Building
Materials) 70,000 924,842
TelecomAsia Corp. Ltd., Foreign Registered (Utilities -
Telephone)* 348,000 764,003
-----------
$ 2,618,765
- -------------------------------------------------------------------------------------------
Turkey - 1.1%
Netas Telekomunik (Telecommunications) 819,000 $ 164,384
Trakya Cam Sanayil (Manufacturing) 2,288,000 288,661
-----------
$ 453,045
- -------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $37,971,454) $39,430,378
- -------------------------------------------------------------------------------------------
Short-Term Obligations - 5.5%
- -------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/17/96 $ 450 $ 448,956
Federal National Mortgage Assn.,
due 6/04/96 1,280 1,279,445
General Electric Co., due 6/03/96 480 479,856
- -------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,208,257
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $40,179,711) $41,638,635
Other Assets, Less Liabilities - (4.4)% (1,756,971
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $39,881,664
- -------------------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
</TABLE>
<PAGE>
PORTFOLIO CONCENTRATION AS OF MAY 31, 1996
MFS/F&C INTERNATIONAL GROWTH AND INCOME FUND
COUNTRY WEIGHTINGS (% OF NET ASSETS)
Netherlands ........................... 4.2%
France ................................ 4.5%
Germany ............................... 7.9%
United Kingdom ........................ 12.0%
Japan ................................. 34.8%
Other ................................. 36.6%
TOP 5 INDUSTRY WEIGHTINGS (% OF NET ASSETS)
Commercial and Other Banks 9.61%
Financial Institutions/Services 5.66%
Utilities 5.17%
Chemicals 5.16%
Retail Trade 5.05%
TOP 10 EQUITY HOLDINGS (% OF NET ASSETS)
Industrial Bank of Japan 1.4%
Leading Japanese long-term credit bank
Fujisawa Pharmaceutical 1.4%
Japanese pharmaceutical firm
Hitachi Zosen Corp. 1.4%
Major Japanese machinery and engineering company
DDI Corp. 1.4%
Japanese telecommunications company
Ito Yokado Co. 1.3%
Japan's largest department store chain
Canon, Inc. 1.3%
Japanese office equipment and imaging company
NKK Corp. 1.3%
Leading Japanese steel company
Nippon Yusen Kabushiki Kaish 1.3%
Japanese shipping company
Mitsubishi Heavy Industries Ltd. 1.3%
Largest Japanese heavy machinery manufacturer
Mitsubishi Estate Co. Ltd. 1.3%
Japanese real estate company
PORTFOLIO STRUCTURE (% OF NET ASSETS)
Stocks 69.8%
Bonds 19.8%
Cash 10.4%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - May 31, 1996
MFS/F&C INTERNATIONAL GROWTH AND INCOME FUND
Stocks - 69.8%
<CAPTION>
- -------------------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Australia - 1.7%
Broken Hill Proprietary (Mining) 9,900 $ 149,295
Mayne Nickless Ltd. (Commercial Services) 26,700 157,010
Westpac Bank Corp. (Finance) 25,800 120,427
-----------
$ 426,732
- -------------------------------------------------------------------------------------------
Austria - 0.4%
OMV AG (Oil and Gas) 1,100 $ 113,698
- -------------------------------------------------------------------------------------------
Belgium - 0.7%
Generale de Banque (Finance) 250 $ 87,460
Solvay et Cie (Chemicals) 140 83,978
-----------
$ 171,438
- -------------------------------------------------------------------------------------------
France - 4.5%
Accor (Lodging) 1,720 $ 248,840
Compagnie de St. Gobain (Building Materials) 1,400 179,435
Credit Local de France (Finance) 2,010 165,304
Eaux (Cie Generale) (Utilities - Water) 1,150 123,497
Lafarge-Coppee, Bearer Shares
(Building Materials) 3,260 215,497
Legrand, Preference Shares
(Electrical Equipment) 800 96,320
TOTAL S.A., "B" (Oils) 1,660 120,467
-----------
$ 1,149,360
- -------------------------------------------------------------------------------------------
Germany - 4.4%
BASF AG (Chemicals) 400 $ 111,432
Bayer AG (Chemicals) 650 217,806
Deutsche Bank AG (Finance) 1,250 58,845
Mannesmann AG (Diversified Machinery) 550 191,272
Preussag AG (Metals/Hardware) 600 153,548
Siemens AG (Electrical Equipment) 2,100 118,080
VEBA AG (Oil and Gas) 2,800 146,899
Volkswagen AG (Automobiles) 380 134,423
-----------
$ 1,132,305
- -------------------------------------------------------------------------------------------
Hong Kong - 3.7%
Cheung Kong Holdings Ltd. (Real Estate) 21,000 $ 155,414
HSBC Holdings PLC (Finance) 6,800 102,847
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 47,000 150,676
New World Development Co. (Real Estate) 32,000 151,814
Swire Pacific Air Ltd., "A"
(Transportation - Air) 22,000 195,520
Wharf Holdings Ltd. (Real Estate) 51,000 196,793
-----------
$ 953,064
- -------------------------------------------------------------------------------------------
Italy - 0.7%
Fiat S.p.A. (Automobiles) 14,000 $ 49,545
Italgas (Utilities - Gas) 20,200 73,127
Telecom Italia S.p.A. (Telecommunications) 22,150 44,444
-----------
$ 167,116
- -------------------------------------------------------------------------------------------
Japan - 31.2%
Asahi Chemical Industry Co. Ltd. (Chemicals) 40,000 $ 290,505
Canon, Inc. (Consumer Goods) 17,000 333,858
DDI Corp. (Telecommunications) 40 346,827
Dai-Ichi Kangyo Bank Ltd. (Banks) 16,000 289,023
Fujisawa Pharmaceutical (Pharmaceuticals) 33,000 351,552
Hitachi (Electronics) 16,000 148,217
Hitachi Zosen Corp. (Manufacturing) 63,000 349,579
Honshu Paper Co. Ltd.
(Forest and Paper Products) 43,000 304,724
Industrial Bank of Japan (Finance) 14,000 360,537
Isetan (Retail) 22,000 299,583
Ito-Yokado Co. Ltd. (Retail) 6,000 340,713
Kajima Corp. (Engineering/Construction) 26,000 272,163
Kyocera Corp. (Electronics) 4,000 274,201
Marubeni Corp. (Distribution/Wholesale) 49,000 267,355
Matsushita Electric Industrial Co. (Electrical Equipment) 18,000 310,144
Mitsubishi Estate Co. Ltd. (Real Estate) 23,000 321,723
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 38,000 327,022
Mitsubishi Trust & Banking (Finance) 16,000 266,790
NKK Corp. (Steel)* 114,000 333,710
Nippon Yusen Kabushiki Kaish (Transportation - Marine) 56,000 328,893
Nomura Securities Co. Ltd. (Finance) 14,000 264,567
Omron Corp. (Electronics) 15,000 304,308
Pioneer Electronic Corp. (Electronics) 14,000 311,255
Ricoh Co. Ltd. (Office/Business Equipment) 30,000 302,918
Sakura Bank Ltd. (Finance) 20,000 218,620
Tokyo Broadcasting System (Broadcasting) 9,000 148,402
Toyo Trust & Banking (Banks) 33,000 314,868
-----------
$ 7,982,057
- -------------------------------------------------------------------------------------------
Malaysia - 1.4%
Genting Berhad (Entertainment) 11,000 $ 93,448
Malayan Banking Berhad (Finance) 9,000 85,474
Petronas Gas Berhad (Oil and Gas)# 18,000 78,622
Sime Darby Berhad (Holding Company) 36,000 96,654
-----------
$ 354,198
- -------------------------------------------------------------------------------------------
Netherlands - 4.2%
ABN Amro Holding N.V. (Finance) 4,300 $ 237,907
Akzo Nobel (Chemicals) 1,800 218,525
KNP BT (Koninklijke) N.V. (Forest and Paper Products) 5,550 138,864
Philips Electronics N.V. (Manufacturing) 5,080 180,811
Vendex International N.V. (Retail) 3,700 118,871
Verenigde Nederlandse Uitgeversbedrijven Verenigd Bezit
(Publishing) 11,300 185,833
-----------
$ 1,080,811
- -------------------------------------------------------------------------------------------
Singapore - 1.6%
City Developments Ltd. (Real Estate) 22,000 $ 168,846
Development Bank of Singapore Ltd. (Banks) 8,000 94,940
Keppel Corp. Ltd. (Transportation - Marine) 9,000 75,469
Overseas-Chinese Banking Corp. Ltd. (Finance) 6,000 76,748
-----------
$ 416,003
- -------------------------------------------------------------------------------------------
Spain - 1.3%
Repsol S.A. (Oils) 5,050 $ 173,161
Telefonica de Espana (Utilities - Telephone) 8,850 159,316
-----------
$ 332,477
- -------------------------------------------------------------------------------------------
Sweden - 1.1%
Ericsson LM, "B" (Telecommunications) 9,320 $ 209,087
Swedish Match AB (Tobacco)* 3,200 10,685
Volvo AB, "B" (Automotive) 3,200 67,973
-----------
$ 287,745
- -------------------------------------------------------------------------------------------
Switzerland - 2.4%
Nestle AG, Registered Shares
(Food and Beverage Products) 130 $ 146,993
Roche Holdings AG (Pharmaceuticals) 30 230,954
Sandoz AG (Pharmaceuticals) 30 31,227
Winterthur (Insurance) 350 206,856
-----------
$ 616,030
- -------------------------------------------------------------------------------------------
United Kingdom - 10.5%
Allied Domecq PLC
(Food and Beverage Products) 16,650 $ 125,764
BAT Industries PLC (Tobacco) 14,750 118,962
BTR PLC (Holding Company) 22,940 99,980
Bass PLC (Brewery) 8,200 103,590
British Gas PLC (Utilities - Gas) 32,850 97,060
British Petroleum Co. PLC (Oil and Gas) 11,200 96,410
British Telecommunications PLC (Telecommunications) 19,750 108,898
Caradon PLC (Holding Company) 29,330 105,766
Carlton Communications PLC (Broadcasting) 22,500 168,730
Dalgety PLC (Food Products) 12,050 69,806
General Accident PLC (Insurance) 8,700 89,801
General Electric Co. PLC (Electronics) 16,300 94,046
Glaxo Wellcome PLC (Pharmaceuticals) 6,700 87,342
Granada Group PLC (Leisure) 10,960 139,902
Inchcape PLC (Commercial Services) 33,770 159,227
Johnson Matthey PLC (Metals) 10,700 109,947
Kingfisher PLC (Retail) 12,000 113,347
Land Securities PLC (Real Estate) 9,350 92,957
London Electricity PLC (Utilities - Electric) 7,900 88,711
NFC PLC (Transportation) 36,800 87,328
National Westminster (Finance) 9,000 87,104
Peninsular & Oriental Steam Navigation Co. (Transportation -
Marine) 15,020 122,071
Sainsbury (J.) PLC (Retail) 24,050 147,901
Shell Transport & Trading Co. PLC
(Oil and Gas) 3,590 51,171
Wimpey (George) PLC (Construction) 53,600 117,218
-----------
$ 2,683,039
- -------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $16,775,135) $17,866,073
- -------------------------------------------------------------------------------------------
Bonds - 19.8%
- -------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------------
Australia - 1.0%
Government of Australia, 7s, 2000 AUD 320 $ 242,689
- -------------------------------------------------------------------------------------------
Belgium - 1.4%
Kingdom of Belgium, 8.75s, 2002 BEF 10,000 $ 365,495
- -------------------------------------------------------------------------------------------
Canada - 0.6%
Government of Canada, 9.5s, 2010 CAD 200 $ 164,599
- -------------------------------------------------------------------------------------------
Denmark - 1.8%
Kingdom of Denmark, 8s, 2001 DKK 2,535 $ 459,889
- -------------------------------------------------------------------------------------------
Germany - 3.5%
German Unity Fund, 8.5s, 2001 DEM 1,000 $ 741,787
Treuhandanstalt Obligationen, 6.375s, 1999 224 154,534
-----------
$ 896,321
- -------------------------------------------------------------------------------------------
Italy - 2.8%
Republic of Italy, 8.5s, 1999 ITL 340,000 $ 220,448
Republic of Italy, 9.5s, 1999 500,000 331,686
Republic of Italy, 8.5s, 2004 265,000 164,696
-----------
$ 716,830
- -------------------------------------------------------------------------------------------
Japan - 3.6%
Export-Import Bank of Japan,
4.375s, 2003 JPY 30,000 $ 300,000
World Bank, 4.5s, 2000 31,000 315,600
World Bank, 5.25s, 2002 30,000 316,813
-----------
$ 932,413
- -------------------------------------------------------------------------------------------
Spain - 1.9%
Government of Spain, 8.3s, 1998 ESP 32,000 $ 251,272
Government of Spain, 10.1s, 2001 14,000 115,637
Government of Spain, 10s, 2005 13,000 105,817
-----------
$ 472,726
- -------------------------------------------------------------------------------------------
Sweden - 1.7%
Government of Sweden, 10.25s, 2000 SEK 2,600 $ 424,813
- -----------------------------------------------------------------------------------------------
United Kingdom - 1.5%
United Kingdom Gilts, 9s, 2000 GBP 125 $ 203,811
United Kingdom Gilts, 7s, 2001 125 188,241
-----------
$ 392,052
- -------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $5,231,708) $ 5,067,827
- -------------------------------------------------------------------------------------------
Short-Term Obligation - 9.5%
- -------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/03/96, at Amortized Cost $ 2,435 $ 2,434,283
- -------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- -------------------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- -------------------------------------------------------------------------------------------
Australian Dollars
July/0.80 AUD 261 $ 1,811
Canadian Dollars
October/1.332 CAD 443 834
Deutsche Marks
June/1.53 DEM 768 6,016
Spanish Pesetas/Deutsche Marks
June/83.97 ESP 27,906 363
August/83.65 33,878 542
- -------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $8,004) $ 9,566
- -------------------------------------------------------------------------------------------
Put Options Purchased - 0.1%
- -------------------------------------------------------------------------------------------
Deutsche Marks
July/1.55 DEM 1,557 $ 2,636
August/2.3316 1,443 13,565
Italian Lire
April/1155.85 ITL 3,209,037 3,209
Japanese Yen
June/107.56 JPY 37,754 2,718
Swiss Francs/Deutsche Marks
July/0.805 CHF 274 3,913
- -------------------------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $42,520) $ 26,041
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $24,491,650) $25,403,790
- -------------------------------------------------------------------------------------------
Call Options Written - (0.1)%
- -------------------------------------------------------------------------------------------
Deutsche Marks
July/1.492 DEM 1,499 $ (2,896)
Deutsche Marks/British Pounds
August/2.239 1,386 (216)
Italian Lire/Deutsche Marks
April/1015 ITL 2,817,989 (14,090)
- -------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $31,676) $ (17,202)
- -------------------------------------------------------------------------------------------
Put Options Written
- -------------------------------------------------------------------------------------------
Canadian Dollars
June/1.385 CAD 996 $ (519)
October/1.3858 461 (1,734)
Japanese Yen
June/109.5 JPY 122,808 (1,719)
Spanish Pesetas/Deutsche Marks
June/86.35 ESP 28,697 (29)
August/86 34,830 (767)
- -------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $12,693) $ (4,768)
- -------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.8% $ 209,053
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $25,590,873
- -------------------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
</TABLE>
<PAGE>
PORTFOLIO CONCENTRATION AS OF MAY 31, 1996
MFS/F&C INTERNATIONAL GROWTH FUND
COUNTRY WEIGHTINGS (% OF NET ASSETS)
Netherlands ........................... 3.6%
Germany ............................... 3.9%
France ................................ 4.5%
United Kingdom ........................ 14.2%
Japan ................................. 32.5%
Other ................................. 41.3%
TOP 5 INDUSTRY WEIGHTINGS (% OF NET ASSETS)
Engineering 7.98%
Banks, Retail 7.63%
Electronics and Electricals 6.76%
Telecommunications 6.46%
Other Services/Businesses 6.14%
TOP 10 EQUITY HOLDINGS (% OF NET ASSETS)
Telecomunicacoes Brasileiras S.A., ADR 1.2%
Brazilian telecommunications company
Memtec Ltd. 0.8%
Australian manufacturer of filtration products
Taipei Fund 0.8%
Closed-end Taiwan country fund
Wharf Holdings Ltd. 0.7%
Hong Kong real estate company
CPT Telefonica del Peru S.A., "B" 0.7%
Peruvian telecommunications company
Inchcape Berhad 0.7%
Singaporeon distributor of motors and agricultural equipment
Ryohin Keikaku Corp. Ltd. 0.7%
Japanese retailer
Korea International Trust 0.7%
Closed-end South Korean country fund
Associated International Hotels 0.7%
Hong Kong hotel operator
Lindt & Spruengli AG 0.7%
Swiss chocolate manufacturer
PORTFOLIO STRUCTURE (% OF NET ASSETS)
Stocks 93.8%
Cash 6.2%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - May 31, 1996
MFS/F&C INTERNATIONAL GROWTH FUND
Stocks - 93.8%
<CAPTION>
- -------------------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Argentina - 1.4%
Banco de Galicia y Buenos Aires S.A., ADR (Banks) 1,500 $ 35,438
Banco Frances del Rio de la Plata S.A., ADR (Banks) 3,800 106,875
Buenos Aires Embotelladora S.A., ADR (Beverages) 5,200 83,200
Molinos Rio de la Plata S.A. (Food) 4,170 47,557
Perez Companc S.A. (Oil and Gas) 38,866 248,064
Telefonica de Argentina, ADR
(Utilities - Telephone) 12,100 352,413
YPF Sociedad Anonima, ADR (Oil and Gas) 15,100 332,200
-----------
$ 1,205,747
- -------------------------------------------------------------------------------------------
Australia - 2.2%
Broken Hill Proprietary (Mining) 15,500 $ 233,745
Futuris Corp. Ltd. (Machines) 453,847 557,671
Mayne Nickless Ltd. (Commercial Services) 26,700 157,010
Memtec Ltd. (Manufacturing) 23,362 717,661
Westpac Bank Corp. (Finance) 43,400 202,579
-----------
$ 1,868,666
- -------------------------------------------------------------------------------------------
Austria - 0.2%
OMV AG (Oil and Gas) 1,495 $ 154,526
- -------------------------------------------------------------------------------------------
Belgium - 0.2%
Colruyt S.A. (Stores) 115 $ 38,395
Generale de Banque (Finance) 250 87,460
Solvay et Cie (Chemicals) 100 59,984
-----------
$ 185,839
- -------------------------------------------------------------------------------------------
Brazil - 3.0%
Centrais Electricas Brasile, ADR
(Utilities - Electric) 30,980 $ 359,988
Cia Acos Especia Itab, ADR (Iron/Steel) 25,268 189,510
Companhia Energetica S.A., ADR
(Utilities - Electric) 9,250 238,187
Lojas Americanas S.A., ADR (Retail)* 17,900 349,050
Telecomunicacoes Brasileiras S.A., ADR (Telecommunications) 15,400 993,300
Usinas Siderurgicas de Minas Gerais S.A.,
ADR (Iron/Steel) 41,000 442,800
-----------
$ 2,572,835
- -------------------------------------------------------------------------------------------
Colombia - 0.6%
Banco Industrial Colombiano, ADR (Finance) 26,800 $ 505,850
- -------------------------------------------------------------------------------------------
Finland - 0.2%
OY Tamro AB (Pharmaceuticals)# 34,660 $ 191,435
- -------------------------------------------------------------------------------------------
France - 4.5%
Accor (Lodging) 2,200 $ 318,283
Compagnie de St. Gobain
(Building Materials) 1,700 217,885
Credit Local de France (Finance) 1,700 139,810
Eaux (Cie Generale) (Utilities - Water) 1,950 209,409
Filipacchi Medias (Publishing) 800 153,180
Fromageries Bel S.A. (Food) 200 196,524
Guilbert S.A. (Distributing) 2,895 433,449
IMETAL (Building Materials) 1,000 155,549
Lafarge-Coppee, Bearer Shares
(Building Materials) 3,400 224,752
Lapeyre S.A., Bearer Shares
(Building Materials) 6,790 410,077
Legrand, Preference Shares
(Electrical Equipment) 860 103,544
Primagaz Cie (Oil and Gas) 3,800 406,603
SEB S.A. (Household Goods) 2,800 485,562
Strafor-Facom S.A. (Office Equipment) 2,200 154,442
TOTAL S.A., "B" (Oils) 2,550 185,054
-----------
$ 3,794,123
- -------------------------------------------------------------------------------------------
Germany - 3.9%
BASF AG (Chemicals) 400 $ 111,432
Bayer AG (Chemicals) 950 318,331
Berentzen Gruppe AG (Beverages) 9,450 409,790
Buderus AG (Manufacturing) 903 364,878
Durr Beteil AG (Hand/Machine Tools) 800 290,145
Fresenius AG (Medical Supplies) 1,200 210,118
Gehe AG (Pharmaceuticals) 300 193,561
Jungheinrich AG (Machines) 500 80,815
Mannesmann AG (Diversified Machinery) 500 173,883
Preussag AG (Metals/Hardware) 600 153,548
Siemens AG (Electrical Equipment) 3,000 168,686
Tarkett AG (Homebuilders)# 14,000 326,544
VEBA AG (Oil and Gas) 4,000 209,855
Volkswagen AG (Automobiles) 500 176,873
Wuerttembergische Metallwarenfabrik AG (Household Products) 620 118,949
-----------
$ 3,307,408
- -------------------------------------------------------------------------------------------
Hong Kong - 3.4%
Associated International Hotels (Lodging) 747,000 $ 569,728
Chen Hsong Holdings (Machines) 456,000 244,629
Cheung Kong Holdings Ltd. (Real Estate) 38,000 281,225
Dah Sing Financial Group (Banks) 165,200 474,087
HSBC Holdings PLC (Finance) 14,200 214,768
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 63,000 201,970
New World Development Co. (Real Estate) 39,000 185,023
Swire Pacific Air Ltd., "A"
(Transportation - Air) 13,000 115,534
Wharf Holdings Ltd. (Real Estate) 164,000 632,824
-----------
$ 2,919,788
- -------------------------------------------------------------------------------------------
Hungary - 0.3%
Magyar Olaj es Gas (Oil and Gas) 8,900 $ 103,685
Pannonplast Muanuagipari (Chemicals)* 5,750 159,518
-----------
$ 263,203
- -------------------------------------------------------------------------------------------
India - 0.7%
ITC Ltd., GDR (Tobacco)* 11,000 $ 92,125
Reliance Industries, GDR
(Consumer Goods and Services)*+ 36,770 542,357
-----------
$ 634,482
- -------------------------------------------------------------------------------------------
Indonesia - 0.2%
PT Indofood Sukses Makmur (Food)* 8,500 $ 38,545
PT Indosat (Telecommunications) 29,000 99,796
PT Inti Indorayon Utama
(Forest and Paper Products) 32,000 28,816
-----------
$ 167,157
- -------------------------------------------------------------------------------------------
Italy - 0.9%
Fiat S.p.A. (Automobiles) 25,000 $ 88,474
Industria Macchine Automatiche (Machines) 19,700 149,285
Industrie Natuzzi S.p.A., ADR (Furniture) 6,910 361,048
Italgas (Utilities - Gas) 32,600 118,016
Telecom Italia S.p.A. (Telecommunications) 30,500 61,198
-----------
$ 778,021
- -------------------------------------------------------------------------------------------
Japan - 32.5%
Aeon Credit Service Co. Ltd.
(Financial Services) 9,000 $ 487,726
Ariake Japan Co. Ltd. (Food) 13,200 464,660
Asahi Chemical Industry Co. Ltd. (Chemicals) 57,000 413,969
Canon, Inc. (Consumer Goods) 24,000 471,329
Chofu Seisakusho Co. (Machines) 17,000 434,646
DDI Corp. (Telecommunications) 58 502,899
DMS, Inc. (Commercial Services) 13,000 276,980
Dai-Ichi Kangyo Bank Ltd. (Banks) 23,000 415,470
Daimei Telecom Engineer Corp. (Telecommunications) 46,000 481,519
Daimon Co. Ltd. (Food Retail) 7,000 385,178
Daiwa Industries Co. Ltd. (Distributor) 41,000 440,574
Diamond Computer Service Co.
(Computers - Software) 23,000 409,078
Exedy Corp. (Automotive Parts) 23,700 406,160
Fujisawa Pharmaceuticals (Pharmaceuticals) 47,000 500,695
Fukuda Denshi (Electronics) 16,000 438,722
Hitachi Zosen Tomioka (Automotive)* 82,000 455,007
Homac Corp. (Retail) 19,300 429,088
Honshu Paper Co. Ltd.
(Forest and Paper Products) 69,000 488,976
Industrial Bank of Japan (Finance) 17,000 437,795
Isetan (Retail) 23,000 313,201
Itariyard Co. Ltd. (Textiles) 11,000 477,906
Ito-Yokado Co. Ltd. (Retail) 8,000 454,284
Japan Transcity Corp. (Storage) 66,000 434,090
Kajima Corp. (Engineering/Construction) 43,000 450,116
Kasumi Convenience Networks (Retail) 23,400 427,031
Kato Denki (Retail) 19,800 390,681
Kyocera Corp. (Electronics) 7,000 479,852
Marubeni Corp. (Distribution/Wholesale) 79,000 431,042
Maruko Co. Ltd. (Textiles) 6,100 519,870
Matsuda Sangyo Co. Ltd. (Food) 16,000 560,259
Matsushita Electric Industrial Co.
(Electrical Equipment) 19,000 327,374
Mitsubishi Estate Co. Ltd. (Real Estate) 34,000 475,591
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 50,000 430,292
Mitsubishi Trust & Banking (Finance) 19,000 316,813
Miura (Machines) 24,000 429,088
NAC Co. Ltd. (Commercial Services)* 17,600 456,508
NKK Corp. (Steel)* 148,000 433,238
Nippon Yusen Kabushiki Kaish (Transportation - Marine) 76,000 446,355
Nissha Printing (Manufacturing) 35,000 525,243
Nomura Securities Co. Ltd. (Finance) 22,000 415,748
Oi Electric Co. (Electronics) 19,000 401,297
Omron Corp. (Electronics) 20,000 405,743
Pioneer Electronic Corp. (Electronics) 21,000 466,883
Ricoh Co. Ltd. (Office/Business Equipment) 38,000 383,696
Ryohin Keikaku Co. Ltd. (Retail) 6,500 572,024
Sakura Bank Ltd. (Finance) 27,000 295,137
Sanshin Electronics Co. Ltd. (Electronics) 25,000 396,017
Sato Corp. (Machines) 17,600 430,421
Sawai Pharmaceutical Co. Ltd. (Pharmaceuticals) 16,000 440,204
Sawako Corp. (Engineering/Construction) 14,000 426,679
Seiyo Food Systems (Restaurants) 34,000 368,504
Sodick (Electrical Equipment)* 24,000 280,130
Sundrug Co. Ltd. (Retail) 12,000 475,776
TKC (Computer Software and Services) 16,000 481,704
Taihei Dengyo (Engineering/Construction) 27,500 420,333
Tochigi Fuji Industrial (Automotive Parts) 51,000 420,472
Tokyo Broadcasting System (Broadcasting) 18,000 296,804
Tokyu Store Chain (Retail) 53,000 476,239
Topre Corp. (Automotive Parts) 52,000 443,168
Toyo Trust & Banking (Banks) 53,000 505,697
Tsukishima Kikai (Machines) 20,000 424,270
Tsutsunaka Plastic Industry (Chemicals) 43,000 442,149
Yaoko (Retail) 25,000 460,862
Yoshinoya D&C Co. Ltd. (Retail) 18 250,116
-----------
$27,499,378
- -------------------------------------------------------------------------------------------
Malaysia - 3.0%
Genting Berhad (Entertainment) 13,000 $ 110,439
Malayan Banking Berhad (Finance) 48,000 455,861
Nylex (Malaysia) Berhad (Chemicals) 102,000 404,648
Perusahaan Otomobl (Automobiles) 39,000 201,603
Petronas Gas Berhad (Oil and Gas)# 27,000 117,932
Resorts World Berhad (Entertainment) 27,000 155,800
Sime Darby Berhad (Holding Company) 170,500 457,764
Telekom Malaysia Berhad (Telecommunications) 30,000 274,093
Tenaga Nasional Berhad (Utilities - Electric) 82,000 348,307
-----------
$ 2,526,447
- -------------------------------------------------------------------------------------------
Mexico - 2.4%
Cemex S.A., "B" (Construction) 54,000 $ 201,563
Empresas ICA Sociedad Controladora S.A., ADR (Engineering/
Construction)* 24,000 345,000
Fomento Economico Mexicano S.A., "B" (Brewery) 86,950 257,183
Gruma S.A., "B" (Food)* 72,222 360,088
Grupo Carso, "A1" (Conglomerate)* 52,800 388,476
Grupo Embotelladoras de Mexico S.A. (Beverages) 181,000 304,878
Tubos de Acero de Mexico S.A. (Iron/Steel)* 17,340 157,488
-----------
$ 2,014,676
- -------------------------------------------------------------------------------------------
Netherlands - 3.6%
ABN Amro Holding N.V. (Finance) 6,400 $ 354,094
Ahold (Koninklijke) N.V. (Retail - Grocery) 1,500 80,700
Ahrend Groep N.V. (Furniture) 9,200 410,666
Akzo Nobel (Chemicals) 2,000 242,805
Grolsch N.V. (Brewery) 10,530 448,388
Hagemeyer N.V. (Distributing) 6,210 428,565
KNP BT (Koninklijke) N.V.
(Forest and Paper Products) 9,300 232,691
Philips Electronics N.V. (Manufacturing) 6,700 238,471
Sphinx Kon Gustavsberg N.V.
(Building Materials) 16,100 276,119
Vendex International N.V. (Retail) 3,700 118,871
Verenigde Nederlandse Uitgeversbedrijven Verenigd Bezit
(Publishing) 11,500 189,123
-----------
$ 3,020,493
- -------------------------------------------------------------------------------------------
New Zealand - 0.8%
Creditcorp Holdings Ltd. (Financial Services)* 19,440 $ 359,640
Trust Bank New Zealand Ltd. (Banks) 220,182 331,702
-----------
$ 691,342
- -------------------------------------------------------------------------------------------
Pakistan - 1.2%
Hub Power Co. Ltd., GDR
(Utilities - Electric)* 20,000 $ 505,000
Pakistan Telecommunications Corp., GDR (Utilities -
Telephone)* 4,800 537,600
-----------
$ 1,042,600
- -------------------------------------------------------------------------------------------
Peru - 1.2%
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 318,080 $ 629,574
Compania de Minas Buenaventura S.A. (Mining) 41,260 358,612
-----------
$ 988,186
- -------------------------------------------------------------------------------------------
Philippines - 0.4%
Ayala Land, Inc., "B" (Real Estate) 45,000 $ 77,438
Manila Electric Co., "B"
(Utilities - Electric) 10,000 102,294
Philippine Long Distance Telephone Co., ADR (Utilities -
Telephone) 1,300 75,067
Pilipino Telegraph & Telephone Corp. (Telecommunications) 50,700 81,430
-----------
$ 336,229
- -------------------------------------------------------------------------------------------
Poland - 0.8%
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 56,500 $ 379,478
Stomil Olsztyn S.A. (Tire and Rubber)* 22,500 264,459
-----------
$ 643,937
- -------------------------------------------------------------------------------------------
Singapore - 1.3%
City Developments Ltd. (Real Estate) 14,000 $ 107,447
Development Bank of Singapore Ltd. (Banks) 12,000 142,410
Inchcape Berhad (Automotive) 179,000 608,030
Keppel Corp. Ltd. (Transportation - Marine) 12,000 100,625
Overseas-Chinese Banking Corp. Ltd. (Finance) 14,000 179,079
-----------
$ 1,137,591
- -------------------------------------------------------------------------------------------
South Africa - 1.3%
Nedcor Ltd. (Financial Services) 17,576 $ 242,707
Sasol Ltd. (Oils) 32,975 328,612
South African Breweries Ltd. (Brewery) 9,235 282,151
South African Iron & Steel Industries
(Iron/Steel) 329,597 254,120
-----------
$ 1,107,590
- -------------------------------------------------------------------------------------------
South Korea - 1.1%
Korea Electric Power Corp., ADR
(Utilities - Electric) 8,000 $ 207,000
Korea Fund, Inc. (Other - Finance)* 7,000 154,000
Korea International Trust (Finance)*+ 10 570,000
-----------
$ 931,000
- -------------------------------------------------------------------------------------------
Spain - 1.0%
BCO Intercont (Banks) 1,500 $ 154,652
Europistas Concesionaria Espanola S.A. (Engineering/
Construction) 8,600 66,216
Hidroel Canabrico (Utilities - Electric) 5,000 161,705
Repsol S.A. (Oils) 8,000 274,314
Telefonica de Espana (Utilities - Telephone) 9,500 171,018
-----------
$ 827,905
- -------------------------------------------------------------------------------------------
Sweden - 2.2%
Ericsson LM, "B" (Telecommunications) 6,700 $ 150,309
Munksjo AB (Forest and Paper Products) 59,700 449,407
Noble Biocare AB (Medical Supplies) 23,500 425,617
PLM AB (Packaging and Containers) 11,400 175,032
Securitas AB, "B" (Commercial Services) 7,990 506,186
Swedish Match AB (Tobacco)* 6,300 21,036
Volvo AB, "B" (Automotive) 6,300 133,823
-----------
$ 1,861,410
- -------------------------------------------------------------------------------------------
Switzerland - 2.4%
Fotolabo S.A. (Leisure) 1,000 $ 421,010
Lindt & Spruengli AG (Food) 30 565,357
Nestle AG, Registered Shares
(Food and Beverage Products) 200 226,143
Roche Holdings AG (Pharmaceuticals) 32 246,351
Sandoz AG (Pharmaceuticals) 200 208,180
Sika Finanz AG (Building Materials) 800 202,727
Winterthur (Insurance) 330 195,036
-----------
$ 2,064,804
- -------------------------------------------------------------------------------------------
Taiwan - 0.8%
Taipei Fund (Financial Services)* 90 $ 693,000
- -------------------------------------------------------------------------------------------
Thailand - 1.4%
Bank of Ayudhya Ltd. (Banks) 64,100 $ 385,411
Bank of Ayudhya Ltd., Rights (Banks)* 16,025 55,149
Siam City Cement Co. Ltd., Foreign Registered (Building
Materials) 29,000 383,149
TelecomAsia Corp. Ltd., Foreign Registered (Utilities -
Telephone)* 158,500 347,973
-----------
$ 1,171,682
- -------------------------------------------------------------------------------------------
Turkey - 0.5%
Netas Telekomunik (Telecommunications) 695,400 $ 139,576
Trakya Cam Sanayil (Manufacturing) 1,913,000 241,349
-----------
$ 380,925
- -------------------------------------------------------------------------------------------
United Kingdom - 14.2%
Allied Domecq PLC
(Food and Beverage Products) 24,120 $ 182,187
Anglian Group PLC (Building Materials) 152,896 398,398
Asda Property Holdings PLC (Real Estate) 119,200 270,848
BAT Industries PLC (Tobacco) 22,250 179,451
BTR PLC (Holding Company) 30,860 134,497
Bass PLC (Brewery) 8,700 109,906
Blick PLC (Electrical) 34,400 291,849
British Gas PLC (Utilities - Gas) 41,400 122,323
British Petroleum PLC (Oil and Gas) 11,900 102,436
British Telecommunications PLC (Telecommunications) 32,200 177,545
British-Borneo Petroleum Syndicate PLC
(Oil and Gas) 32,100 296,233
Bullough PLC (Manufacturing) 275,900 457,876
Caradon PLC (Holding Company) 49,450 178,320
Carlton Communications PLC (Broadcasting) 39,700 297,714
City Centre Restaurants PLC (Restaurants) 153,100 276,639
Close Brothers Group PLC (Banks) 45,800 268,871
Courtaulds Textiles PLC (Textiles) 20,900 122,046
Dalgety PLC (Food Products) 31,830 184,391
David Brown Group PLC
(Engineering/Construction) 63,900 225,968
Devro International PLC (Food) 71,900 260,950
Fairey Group PLC (Manufacturing) 21,100 224,992
General Accident PLC (Insurance) 9,250 95,478
General Electric Co. PLC (Electronics) 21,750 125,491
Graham Group PLC (Distributing) 103,696 257,332
Granada Group PLC (Leisure) 5,200 66,377
Hazlewood Foods PLC (Food) 280,800 435,521
Hunting PLC (Holding Company) 67,800 189,284
Inchcape PLC (Commercial Services) 54,150 255,320
Independent Insurance Group PLC (Insurance) 34,600 267,250
Johnson Matthey PLC (Metals) 10,900 112,002
Kingfisher PLC (Retail) 15,950 150,657
Laird Group PLC (Automotive Parts) 28,500 205,988
Land Securities PLC (Real Estate) 9,950 98,922
Marley PLC (Building Materials) 118,400 246,994
Meggitt Holdings PLC (Engineering) 148,800 228,481
Midland Independent Newspapers PLC (Publishing) 51,200 116,734
NFC PLC (Transportation) 66,500 157,807
National Westminster (Finance) 12,000 116,139
Nelson Hurst PLC (Insurance) 75,200 232,104
OGC International PLC (Oil and Gas) 56,800 218,480
Peninsular & Oriental Steam Navigation Co.
(Transportation - Marine) 16,500 134,100
RJB Mining PLC (Mining) 29,800 268,999
Roxboro Group PLC (Manufacturing) 60,500 269,308
SIG PLC (Building Materials) 82,940 295,872
Sainsbury (J.) PLC (Retail) 22,600 138,984
Scapa Group PLC (Building Materials) 70,000 247,540
Serco Group PLC (Commercial Services) 31,500 259,428
Seton Healthcare Group PLC
(Medical Supplies) 32,800 251,820
Shell Transport & Trading Co. PLC
(Oil and Gas) 7,600 108,328
T & S Stores PLC (Retail) 78,500 264,205
Triplex Lloyd PLC (Hardware) 121,600 311,193
Vardon PLC (Entertainment) 79,500 149,199
Wagon Industrial Holdings PLC (Manufacturing) 44,000 257,962
Walker Greenbank PLC (Manufacturing) 247,300 383,562
Wimpey (George) PLC (Construction) 146,800 321,039
-----------
$12,001,340
- -------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $74,009,641) $79,489,615
- -------------------------------------------------------------------------------------------
Short-Term Obligations - 11.7%
- -------------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 6/07/96 $ 3,670 $ 3,666,807
Federal Home Loan Mortgage Corp.,
due 6/03/96 2,540 2,539,265
Federal National Mortgage Assn., due 6/12/96 3,675 3,669,161
- -------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 9,875,233
- -------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $83,884,874) $89,364,848
Other Assets, Less Liabilities - (5.5)% (4,618,064)
- -------------------------------------------------------------------------------------------
Net Assets - 100.0% $84,746,784
- -------------------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
</TABLE>
Portfolio Footnotes:
*Non-income producing security.
+Restricted security.
#SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars FIM = Finnish Markkaa
BEF = Belgian Francs FRF = French Francs
CAD = Canadian Dollars GBP = British Pounds
CHF = Swiss Francs IEP = Irish Punts
DEM = Deutsche Marks ITL = Italian Lire
DKK = Danish Kroner JPY = Japanese Yen
ESP = Spanish Pesetas SEK = Swedish Kronor
<PAGE>
FINANCIAL STATEMENTS
Statements of Assets and Liabilities
- ------------------------------------------------------------------------------
Emerging International
Markets Growth International
May 31, 1996 Equity and Income Growth
- ------------------------------------------------------------------------------
Assets:
Investments, at value
(identified cost, $40,179,711,
$24,491,650, and $83,884,874,
respectively) $41,638,635 $25,403,790 $89,364,848
Cash 10,234 3,118 9,375
Foreign currency, at value
(identified cost $4,393,
$49,652, and $57,550) 4,302 49,998 58,163
Net receivable for forward
foreign currency exchange
contracts sold -- 19,406 --
Net receivable for forward
foreign currency exchange
contracts -- 2,215 --
Receivable for Fund shares sold 113,808 163,196 1,170,474
Receivable for investments sold -- 2,755 --
Interest and dividends
receivable 120,951 230,550 261,326
Deferred organization expenses 22,883 23,488 23,769
----------- ----------- -----------
Total assets $41,910,813 $25,898,516 $90,887,955
----------- ----------- -----------
Liabilities:
Payable for Fund shares
reacquired $ 59,009 $ 7,291 $ 173,147
Payable for investments
purchased 1,925,111 86,024 5,807,267
Written options outstanding, at
value (premiums received,
$44,369) -- 21,970 --
Net payable for forward foreign
currency exchange contracts
purchased -- 144,702 --
Payable to affiliates -
Management fee 1,365 671 2,218
Shareholder servicing agent
fee 203 129 423
Distribution fee 16,304 10,557 34,393
Accrued expenses and other
liabilities 27,157 36,299 123,723
----------- ----------- -----------
Total liabilities $ 2,029,149 $ 307,643 $ 6,141,171
----------- ----------- -----------
Net assets $39,881,664 $25,590,873 $84,746,784
=========== =========== ===========
Net assets consist of:
Paid-in capital $37,921,871 $24,632,031 $78,970,863
Unrealized appreciation on
investments and translation of
assets and liabilities in
foreign currencies 1,456,082 810,229 5,452,080
Accumulated undistributed net
realized gain on investments
and foreign currency
transactions 526,811 24,924 544,069
Accumulated undistributed
(distributions in excess of)
net investment income (23,100) 123,689 (220,228)
----------- ----------- -----------
Total $39,881,664 $25,590,873 $84,746,784
=========== =========== ===========
Shares of beneficial interest
outstanding 2,417,917 1,603,495 5,079,531
=========== =========== ===========
Class A shares:
Net asset value and redemption
price per share
(net assets of $19,860,577,
$11,949,595, and
$41,483,016 / 1,202,479,
747,922, and 2,482,504
shares of beneficial interest
outstanding, respectively) $16.52 $15.98 $16.71
====== ====== ======
Offering price per share (100/
95.25 of net asset value per
share) $17.34 $16.78 $17.54
====== ====== ======
Class B shares:
Net asset value and offering
price per share
(net assets of $20,021,087,
$13,641,278, and
$43,263,768 / 1,215,438,
855,573, and 2,597,027
shares of beneficial interest
outstanding, respectively) $16.47 $15.94 $16.66
====== ====== ======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ---------------------------------------------------------------------------------------
Emerging International
Markets Growth International
Period Ended May 31, 1996* Equity and Income Growth
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Interest $ 98,540 $ 225,928 $ 242,105
Dividends 343,802 174,811 652,224
Foreign taxes withheld (25,682) (22,627) (78,963)
----------- ----------- ----------
Total investment income $ 416,660 $ 378,112 $ 815,366
----------- ----------- ----------
Expenses -
Management fee $ 182,020 $ 103,167 $ 313,570
Trustees' compensation 1,993 1,993 1,993
Shareholder servicing agent fee (Class A) 11,417 7,887 25,673
Shareholder servicing agent fee (Class B) 15,291 11,711 33,100
Distribution and service fee (Class A) 38,057 26,289 85,577
Distribution and service fee (Class B) 69,502 53,233 150,456
Custodian fee 34,141 10,811 47,516
Registration fees 46,834 38,762 65,772
Printing 17,183 7,771 23,278
Postage 3,373 1,572 5,363
Auditing fees 23,600 25,100 36,600
Amortization of organization expenses 3,118 3,118 3,118
Legal fees 4,571 4,571 4,571
Miscellaneous 12,631 4,186 23,049
----------- ----------- ----------
Total expenses $ 463,731 $ 300,171 $ 819,636
Fees paid indirectly (14) (3,124) --
Reduction of expenses by investment
adviser (60,059) -- --
----------- ----------- ----------
Net expenses $ 403,658 $ 297,047 $ 819,636
----------- ----------- ----------
Net investment income (loss) $ 13,002 $ 81,065 $ (4,270)
----------- ----------- ----------
Realized and unrealized gain (loss)
on investments:
Realized gain (loss) (identified
cost basis) -
Investment transactions $ 526,811 $ 18,766 $ 544,069
Written option transactions -- (2,926) --
Foreign currency transactions (23,880) 71,233 (209,305)
----------- ----------- ----------
Net realized gain on investments and
foreign currency transactions $ 502,931 $ 87,073 $ 334,764
----------- ----------- ----------
Change in unrealized appreciation
(depreciation) -
Investments $ 1,458,832 $ 912,486 $5,480,588
Written options -- 22,399 --
Translation of assets and
liabilities in foreign currencies (2,750) (124,656) (28,508)
----------- ----------- ----------
Net unrealized gain on investments
and foreign currency translation $1,456,082 $ 810,229 $5,452,080
----------- ----------- ----------
Net realized and unrealized gain on
investments and foreign currency $1,959,013 $ 897,302 $5,786,844
----------- ----------- ----------
Increase in net assets from
operations $1,972,015 $ 978,367 $5,782,574
========== =========== ==========
<FN>
* For the period from the commencement of investment operations, October 24, 1995 to May 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Emerging International
Markets Growth International
Period Ended May 31, 1996* Equity and Income Growth
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 13,002 $ 81,065 $ (4,270)
Net realized gain on investments
and foreign currency
transactions 502,931 87,073 334,764
Net unrealized gain on
investments and foreign
currency translation 1,456,082 810,229 5,452,080
----------- ----------- -----------
Increase in net assets from
operations $ 1,972,015 $ 978,367 $ 5,782,574
----------- ----------- -----------
Distributions declared to
shareholders -
From net investment income
(Class A) $ (8,868) $ (12,226) $ (6,653)
From net investment income
(Class B) -- (7,299) --
In excess of net investment
income (Class B) (3,354) -- --
----------- ----------- -----------
Total distributions declared
to shareholders $ (12,222) $ (19,525) $ (6,653)
----------- ----------- -----------
Fund share (principal)
transactions -
Net proceeds from sale of shares $46,419,714 $27,711,754 $84,291,229
Net asset value of shares issued
to shareholders in
reinvestment of distributions 12,183 15,767 5,219
Cost of shares reacquired (8,510,026) (3,095,490) (5,325,585)
----------- ----------- -----------
Increase in net assets from
Fund share transactions $37,921,871 $24,632,031 $78,970,863
----------- ----------- -----------
Total increase in net assets $39,881,664 $25,590,873 $84,746,784
Net assets:
At beginning of period -- -- --
----------- ----------- -----------
At end of period (including
accumulated undistributed
(distributions in excess of)
net investment
income of $(23,100), $123,689
and $(220,228), respectively) $39,881,664 $25,590,873 $84,746,784
=========== =========== ===========
* For the period from the commencement of investment operations, October 24,
1995 to May 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Emerging Markets Equity International Growth and Income International Growth
- -----------------------------------------------------------------------------------------------------------------------------------
Period Ended May 31, 1996* Class A Class B Class A Class B Class A Class B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout the period):
Net asset value -
beginning of period $15.00 $15.00 $15.00 $15.00 $15.00 $15.00
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income (loss) $ 0.04 $(0.02) $ 0.11 $ 0.05 $ 0.03 $ (0.03)
Net realized and unrealized
gain on investments and
foreign currency
transactions 1.50 1.50 0.90 0.90 1.69 1.69
------ ------ ------ ------ ------ ------
Total from investment
operations $ 1.54 $ 1.48 $ 1.01 $ 0.95 $ 1.72 $ 1.66
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income $(0.02) $ -- $(0.03) $(0.01) $(0.01) $ --
In excess of net
investment income -- (0.01) -- -- -- --
Total distributions
declared to
shareholders $(0.02) $(0.01) $(0.03) $(0.01) $(0.01) $ --
------ ------ ------ ------ ------ ------
Net asset value - end of
period $16.52 $16.47 $15.98 $15.94 $16.71 $16.66
====== ====== ====== ====== ====== ======
Total return(++) 10.24%(+)(+) 9.85%(+)(+) 6.71%(+)(+) 6.37%(+)(+) 11.43%(+)(+) 11.07%(+)(+)
Ratios (to average daily net
assets)/Supplemental
data(S):
Expenses## 2.48%(+) 3.06%(+) 2.52%(+) 3.11%(+) 2.24%(+) 2.85%(+)
Net investment income
(loss) 0.35%(+) (0.19)%(+) 1.04%(+) 0.49%(+) 0.24%(+) (0.31)%(+)
Portfolio turnover 22% 22% 29% 29% 11% 11%
Average commission rate $0.0136 $0.0136 $0.0291 $0.0291 $0.0107 $0.0107
Net assets at end of
period (000 omitted) $19,861 $20,021 $11,950 $13,641 $41,483 $43,264
<FN>
* For the period from the commencement of investment operations, October 24, 1995 to May 31, 1996.
(+) Annualized.
(+)(+) Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(++) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The Adviser voluntarily agreed to maintain the expenses of the Emerging Markets Equity Fund at not more than 2.50% and 3.07%
of average daily net assets for Class A and Class B shares, respectively. To the extent actual expenses were over/under
these limitations, the net investment income (loss) per share and the ratios would have been:
Net investment income
(loss) $ 0.02 $ (0.08) -- -- -- --
Ratios (to average net assets):
Expenses 2.73%(+) 3.30%(+) -- -- -- --
Net investment
income (loss) 0.10%(+) (0.44)%(+) -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
(1) Business and Organization
MFS/Foreign & Colonial Emerging Markets Equity Fund (Emerging Markets Equity),
MFS/Foreign & Colonial International Growth and Income Fund (International
Growth and Income), and MFS/Foreign & Colonial International Growth Fund
(International Growth) (the Funds) are each a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Funds commenced investment
operations on October 24, 1995.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
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 Funds may enter into repurchase agreements with
institutions that the Funds' investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Funds require that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Funds to obtain those securities in the
event of a default under the repurchase agreement. The Funds monitor, 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 Funds under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by the Funds in connection with
their organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of the Funds.
Written Options - The Funds may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Funds. The Funds, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bear the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Funds' management on the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Funds may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Funds will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Funds may enter into contracts to deliver or receive foreign
currency they will receive from or require for their normal investment
activities. They may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Funds may enter into
contracts with the intent of changing the relative exposure of the Funds'
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
Fees Paid Indirectly - The Funds' custodian bank calculates its fee based on
each Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Funds. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Funds' policies are to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of their taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Funds file 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 Funds' tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Funds distinguish between distributions on a tax basis and a financial
reporting basis and require that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the period ended May 31, 1996, the following amounts were
reclassified due to differences between book and tax accounting for currency
transactions. These changes had no effect on the net assets or net asset value
per share.
<TABLE>
<CAPTION>
Emerging International
Markets Growth and International
Equity Income Growth
---------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease):
Accumulated undistributed net realized gain on
investments and foreign currency
transactions ............................... $23,880 $(62,149) $209,305
Accumulated undistributed (distributions in
excess of) net investment income ........... (23,880) 62,149 (209,305)
</TABLE>
Multiple Classes of Shares of Beneficial Interest - The Funds offer both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of each Fund pro rata based on average daily net assets
of each class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.975% of average daily net assets for the International Growth Fund and the
International Growth and Income Fund, and 1.25% of average daily net assets for
the Emerging Markets Equity Fund. The advisory agreements permit the adviser to
engage one or more sub-advisers and the adviser, MFS, has engaged Foreign &
Colonial Management Ltd., an England and Wales Company, to assist in the
performance of its services.
Under a temporary expense reimbursement agreement with MFS, MFS has voluntarily
agreed to pay all of the Emerging Markets Equity Fund's operating expenses,
exclusive of management, distribution and service fees. The Emerging Markets
Equity Fund in turn will pay MFS an expense reimbursement fee not greater than
.60% of average daily net assets for Class A and Class B shares. To the extent
that the expense reimbursement fee exceeds the Emerging Markets Equity Fund's
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At May 31, 1996, the aggregate unreimbursed expenses owed to MFS by the
Emerging Markets Equity Fund amounted to $57,434.
The Funds pay no compensation directly to their Trustees who are officers of the
investment adviser, or to officers of the Funds, all of whom receive
remuneration for their services to the Funds from MFS. Certain of the officers
and Trustees of the Funds are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC).
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$29,368, $17,609, and $66,057 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the period ended May 31, 1996 as its portion of the sales
charge on sales of Class A shares of each Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares of each Fund pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
Each Class A distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.25% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $3,215, $71 and $780
for the Emerging Markets Equity Fund, International Growth and Income Fund and
International Growth Fund, respectively, for the period ended May 31, 1996. Fees
incurred under each Class A distribution plan during the period ended May 31,
1996 were 0.50% of average daily net assets attributable to Class A shares on an
annualized basis.
Each Class B distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B shares. MFD will
pay to securities dealers that enter into a sales agreement with MFD all or a
portion of the service fee attributable to Class B shares. The service fee is
intended to be additional consideration for services rendered by the dealer with
respect to Class B shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $74, $0 and $6 for the
Emerging Markets Equity Fund, International Growth and Income Fund and
International Growth Fund, respectively, for the period ended May 31, 1996. Fees
incurred under each Class B distribution plan during the period ended May 31,
1996 were 1.00% of the Fund's average daily net assets attributable to Class B
shares on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. There were no contingent
deferred sales charges imposed during the period ended May 31, 1996 for Class A
shares. Contingent deferred sales charges for Class B shares imposed during the
period ended May 31, 1996 were $4,930, $7,513 and $9,530 for the Emerging
Markets Equity Fund, International Growth and Income Fund and International
Growth Fund, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares of each Fund
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 U.S. government securities,
purchased option transactions and short-term obligations, aggregated $42,307,042
and $4,862,399, $26,479,981 and $4,493,461, and $78,486,835 and $5,021,263 for
the Emerging Markets Equity Fund, International Growth and Income Fund and
International Growth Fund, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Funds, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
Emerging International Growth
Markets Equity and Income International Growth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate cost $40,179,711 $24,491,650 $83,884,874
=========== =========== ===========
Gross unrealized appreciation $ 3,561,477 $ 1,397,170 $ 7,558,732
Gross unrealized depreciation (2,102,553) (485,030) (2,078,758)
----------- ----------- -----------
Net unrealized appreciation $ 1,458,924 $ 912,140 $ 5,479,974
=========== =========== ===========
</TABLE>
(5) Shares of Beneficial Interest
The Funds' Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
International Growth
Emerging Markets Equity and Income International Growth
Class A Shares -------------------------------- -------------------------------- --------------------------------
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares in public offering 1,490,414 $23,464,680 793,963 $12,142,184 2,712,981 $42,075,064
Shares issued to
shareholders in
reinvestment of
distributions 514 7,966 658 10,210 367 5,219
Shares reacquired (288,449) (4,694,661) (46,699) (723,607) (230,844) (3,729,818)
--------- ----------- ------- ----------- --------- -----------
Net increase 1,202,479 $18,777,985 747,922 $11,428,787 2,482,504 $38,350,465
========= =========== ======= =========== ========= ===========
<CAPTION>
International Growth
Emerging Markets Equity and Income International Growth
Class B Shares -------------------------------- -------------------------------- --------------------------------
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares in public offering 1,451,675 $22,955,034 1,009,636 $15,569,570 2,695,977 $42,216,165
Shares issued to
shareholders in reinvestment
of distributions 268 4,217 358 5,557 -- --
Shares reacquired (236,505) (3,815,365) (154,421) (2,371,883) (98,950) (1,595,767)
--------- ----------- ------- ----------- --------- -----------
Net increase 1,215,438 $19,143,886 855,573 $13,203,244 2,597,027 $40,620,398
========= =========== ======= =========== ========= ===========
<FN>
* For the period from the commencement of investment operations, October 24, 1995 to May 31, 1996.
</TABLE>
(6) Line of Credit
The Funds entered into agreements which enable them to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fees allocated to the Funds for the period ended May 31,
1996 were $147, $98, and $313 for the Emerging Markets Equity Fund,
International Growth and Income Fund and International Growth Fund,
respectively.
(7) Financial Instruments
The Funds trade financial instruments with off-balance sheet risk in the normal
course of their investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options and forward foreign currency exchange
contracts. The notional or contractual amounts of these instruments represent
the investment the Funds have in particular classes of financial instruments and
do 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.
<PAGE>
Written Option Transactions
International Growth and Income Fund
1996 Calls 1996 Puts
---------------------------- -----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -----------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
Options written -
Australian Dollars 144 $ 780 -- --
Canadian Dollars -- -- 1,457 3,828
Deutsche Marks 1,499 6,983 -- --
Deutsche Marks/
British Pounds 1,386 4,209 -- --
Italian Lire/
Deutsche Marks 2,817,989 20,484 -- --
Japanese Yen 129,952 1,632 122,808 7,290
New Zealand Dollars -- -- 753 1,120
Spanish Pesetas/
Deutsche Marks -- -- 63,527 1,575
Options terminated in
closing transactions -
Australian Dollars (144) (780) -- --
Japanese Yen (129,952) (1,632) -- --
New Zealand Dollars -- -- (753) (1,120)
--------- ------- ------- -------
OUTSTANDING,
END OF PERIOD 2,820,874 $31,676 187,792 $12,693
========= ======= ======= =======
OPTIONS OUTSTANDING AT END OF PERIOD CONSIST OF:
Canadian Dollars -- -- 1,457 $ 3,828
Deutsche Marks 1,499 6,983 -- --
Deutsche Marks/
British Pounds 1,386 4,209 -- --
Italian Lire/
Deutsche Marks 2,817,989 20,484 -- --
Japanese Yen -- -- 122,808 7,290
Spanish Pesetas/
Deutsche Marks -- -- 63,527 1,575
--------- ------- ------- -------
OUTSTANDING,
END OF PERIOD 2,820,874 $31,676 187,792 $12,693
========= ======= ======= =======
At May 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
<PAGE>
Forward Foreign Currency Exchange Contracts
International Growth and Income Fund
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 8/22/96 BEF 11,969,832 $ 382,056 $ 384,315 $ (2,259)
8/30/96 - 11/01/96 CAD 231,117 170,099 169,183 916
8/14/96 CHF 475,618 384,572 383,609 963
6/12/96 - 4/28/97 DEM 9,014,573 5,981,720 5,985,257 (3,537)
9/09/96 DKK 2,760,147 467,347 471,726 (4,379)
8/13/96 ESP 30,961,076 241,780 240,320 1,460
8/02/96 FIM 1,208,026 250,218 258,362 (8,144)
8/09/96 GBP 213,772 327,413 331,213 (3,800)
7/24/96 - 8/06/96 ITL 1,027,790,652 656,394 663,313 (6,919)
6/07/96 - 7/25/96 JPY 230,974,652 2,203,024 2,153,213 49,811
8/02/96 SEK 2,003,625 293,572 298,278 (4,706)
----------- ----------- ---------
$11,358,195 $11,338,789 $ 19,406
=========== =========== =========
Purchases 8/20/96 AUD 222,714 $ 176,190 $ 176,916 $ 726
6/12/96 - 8/29/96 DEM 9,432,364 6,312,280 6,208,295 (103,985)
8/02/96 FIM 428,459 88,722 91,635 2,913
9/09/96 FRF 3,517,361 679,815 685,942 6,127
9/23/96 IEP 161,794 252,959 257,077 4,118
4/28/97 ITL 1,403,139,851 880,190 886,784 6,594
6/07/96 - 8/29/96 JPY 306,201,699 2,916,061 2,854,866 (61,195)
----------- ----------- ---------
$11,306,217 $11,161,515 $(144,702)
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $2,215 at May 31, 1996.
At May 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Funds may invest not more than 15% of their net assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 1996, the
Funds owned the following restricted securities (constituting 8.0%, 0.3% and
2.1% of net assets, for the Emerging Markets Equity Fund, International Growth
and Income Fund, and International Growth Fund, respectively) which may not be
publicly sold without registration under the Securities Act of 1933 (the 1933
Act). The Funds do not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees. Certain of these securities may be offered and sold
to "qualified institutional buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Emerging Markets Equity Fund
Date of Share
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cementos Diamante S.A., ADR 5/10/96 30,900 $600,129 $ 540,750
Hindalco Industries Ltd., ADR 3/29/96 14,000 525,000 609,000
Korea International Trust 11/08/95 11 661,556 627,000
Mosenergo, ADR 5/13/96 34,000 460,137 748,000
Petronas Gas Berhad 2/09/96 150,000 572,634 655,179
----------
$3,179,929
==========
<CAPTION>
International Growth and Income Fund
Date of Share
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Petronas Gas Berhad 2/09/96 18,000 $ 71,084 $ 78,622
==========
<CAPTION>
International Growth Fund
Date of Share
Description Acquisition Amount Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Korea International Trust 11/08/95 10 $586,626 $ 570,000
Oy Tamro AB 5/15/96 34,660 185,714 191,435
Petronas Gas Berhad 2/09/96 27,000 111,221 117,932
Reliance Industries, GDR 2/16/96 36,770 530,810 542,357
Tarkett AG 5/30/96 14,000 317,115 326,544
----------
$1,748,268
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust X and Shareholders of MFS/Foreign & Colonial
International Funds:
We have audited the accompanying statements of assets and liabilities of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund, (the Funds) (three of the portfolios constituting MFS Series Trust
X) including the schedules of portfolio investments, as of May 31, 1996, and the
related statements of operations and the statements of changes in net assets and
financial highlights for the period from October 24, 1995 (commencement of
operations) to May 31, 1996. These financial statements and financial highlights
are the responsibility of the Funds' 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 audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/ Foreign & Colonial International
Growth Fund at May 31, 1996, and the results of their operations, the changes in
their net assets and financial highlights for the period from October 24, 1995
(commencement of operations) to May 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 3, 1996
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. For more complete information regarding MFS
Regatta Gold and, MFS/Sun Life Series Trust, including charges and expenses,
call your financial adviser for the prospectuses, which should be read carefully
before investing or sending any money.
<PAGE>
MFS/FOREIGN & COLONIAL INTERNATIONAL FUNDS
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), AUDITORS
Massachusetts Financial Services Company; Ernst & Young LLP
Director, Cambridge Bancorp; Director,
Cambridge Trust Company INVESTOR INFORMATION
Peter G. Harwood - Private Investor For MFS stock and bond market outlooks, call toll free:
J. Atwood Ives - Chairman and Chief Executive Officer, 1-800-637-4458 anytime from a touch-tone telephone.
Eastern Enterprises For information on MFS mutual funds, call your
Lawrence T. Perera - Partner, Hemenway & Barnes financial adviser or, for an information kit, call toll
William J. Poorvu - Adjunct Professor, Harvard University free:
Graduate School of Business Administration 1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Charles W. Schmidt - Private Investor Eastern time (or leave a message anytime).
Arnold D. Scott* - Senior Executive Vice President,
Director and Secretary, Massachusetts Financial Services INVESTOR SERVICE
Company MFS Service Center, Inc.
Jeffrey L. Shames* - President and Director, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management For general information, call toll free: 1-800-225-2606
Corp. (investment advisers) any business day from 8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll
INVESTMENT ADVISER free: 1-800-637-6576 any business day from 9 a.m. to 5 p.m.
Massachusetts Financial Services Company Eastern time. (To use this service, your phone must be
500 Boylston Street equipped with a Telecommunications Device for the
Boston, MA 02116-3741 Deaf.) For share prices, account balances and exchanges,
call toll free: 1-800-MFS-TALK (1-800-637-8255) anytime from
DISTRIBUTOR a touch-tone telephone.
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741 TOP-RATED SERVICE
[DALBAR Seal]
PORTFOLIO MANAGERS FOR THE SECOND YEAR IN A ROW, MFS EARNED A #1 RANKING IN DALBAR,
Arnab K. Banerji INC.'S BROKER/DEALER SURVEY, MAIN OFFICE OPERATIONS SERVICE QUALITY
Richard O. Hawkins* CATEGORY. THE FIRM ACHIEVED A 3.49 OVERALL SCORE -- ON A SCALE OF 1
Atul Patel TO 4 -- IN THE 1995 SURVEY. A TOTAL OF 71 FIRMS RESPONDED, OFFERING
June Scott INPUT ON THE QUALITY OF SERVICE THEY RECEIVE FROM 36 MUTUAL FUND
Tony Thomson COMPANIES NATIONWIDE. THE SURVEY CONTAINED QUESTIONS ABOUT SERVICE
Ian Wright QUALITY IN 17 CATEGORIES, INCLUDING "KNOWLEDGE OF PHONE SERVICE
CONTACTS," "ACCURACY OF TRANSACTION PROCESSING," AND "OVERALL EASE OF
TREASURER DOING BUSINESS WITH THE FIRM."
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) FOREIGN & COLONIAL INTERNATIONAL [DALBAR SEAL] BULK RATE
INCOME FUND U.S. POSTAGE
P A I D
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
[MFS logo]
85
86
87
285
286
MFC-2 7/96/xxM 287
<PAGE> 80
PART C
------
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
------------------------------------------------
For the period from the commencement of investment operations,
October 24, 1995 to May 31, 1996:
Financial Highlights*
FINANCIAL STATEMENTS INCLUDED IN PART B:
At May 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
<PAGE> 81
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Operations*
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Changes in Net Assets*
- -----------------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated May 31, 1996, filed with the SEC via EDGAR on August 5, 1996.
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME
------------------------------------------------------
FUND
----
For the period from the commencement of investment operations,
October 24, 1995 to May 31, 1996:
Financial Highlights*
FINANCIAL STATEMENTS INCLUDED IN PART B:
At May 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Operations*
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Changes in Net Assets*
- -----------------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated May 31, 1996, filed with the SEC via EDGAR on August 5, 1996.
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
---------------------------------------------------
For the period from the commencement of investment operations,
October 24, 1995 to May 31, 1996:
Financial Highlights*
FINANCIAL STATEMENTS INCLUDED IN PART B:
At May 31, 1996:
Portfolio of Investments*
<PAGE> 82
Statement of Assets and Liabilities*
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Operations*
For the period from the commencement of investment operations
October 24, 1995, to May 31, 1996:
Statement of Changes in Net Assets*
- -----------------------------------
* Incorporated herein by reference to the Fund's Annual Report to Shareholders
dated May 31, 1996, filed with the SEC via EDGAR on August 5, 1996.
(b) EXHIBITS
1 (a) Amended and Restated Declaration of Trust,
dated January 19, 1995. (3)
(b) Amendment to the Declaration of Trust dated
June 2, 1995 to change the name of the Trust
and for the establishment and designation of
series and classes. (4)
(c) Amendment to the Declaration of Trust -
Designation of Class C shares, dated May 15,
1996. (9)
(d) Amendment to the Declaration of Trust -
Designation of Class P shares, dated June 20,
1996. (11)
2 Amended and Restated By-Laws, dated December
21, 1994. (3)
3 Not Applicable.
4 Form of Share Certificate for Classes of
Shares. (10)
5 (a) Investment Advisory Agreement for MFS
Government Mortgage Fund, dated December 19,
1985. (7)
(b) Amendment to Investment Advisory Agreement
for MFS Government Mortgage Fund, dated
January 1, 1996. (7)
(c) Investment Advisory Agreement for MFS Series
Trust X (the "Trust") on behalf of
MFS/Foreign & Colonial International Growth
Fund, dated September 1, 1995. (7)
(d) Investment Advisory Agreement for the Trust
on behalf of MFS/Foreign & Colonial
International Growth and Income Fund, dated
September 1, 1995. (7)
<PAGE> 83
(e) Investment Advisory Agreement for the Trust
on behalf of MFS/Foreign & Colonial Emerging
Markets Equity Fund, dated September 1,
1995. (7)
(f) Sub-Advisory Agreement between Massachusetts
Financial Services Company (the "Adviser" or
"MFS") and Foreign & Colonial Management Ltd.
(the "Sub-Adviser") with respect to
MFS/Foreign & Colonial International Growth
Fund, dated September 1, 1995. (7)
(g) Sub-Advisory Agreement between the Adviser
and the Sub-Adviser with respect to
MFS/Foreign & Colonial International Growth
and Income Fund, dated September 1, 1995. (7)
(h) Sub-Advisory Agreement between the Adviser
and the Sub-Adviser with respect to
MFS/Foreign & Colonial Emerging Markets
Equity Fund, dated September 1, 1995. (7)
(i) Sub-Advisory Agreement between the
Sub-Adviser and Foreign & Colonial Emerging Markets
Limited ("FCEM") with respect to the MFS/Foreign &
Colonial International Growth Fund, dated September 1,
1995. (7)
(j) Sub-Advisory Agreement between the
Sub-Adviser and FCEM with respect to the
MFS/Foreign & Colonial International Growth
and Income Fund, dated September 1, 1995. (7)
(k) Sub-Advisory Agreement between the
Sub-Adviser and FCEM with respect to the
MFS/Foreign & Colonial Emerging Markets
Equity Fund, dated September 1, 1995. (7)
6 (a) Distribution Agreement between MFS Series
Trust X and MFS Fund Distributors, Inc.,
dated September 1, 1995. (7)
(b) Dealer Agreement between MFS Funds
Distributors, Inc. and a dealer, dated
December 28, 1994 and the Mutual Funds
Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (1)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (7)
8 (a) Custodian Agreement, dated February 19,
1988. (7)
(b) Amendment No. 1 to Custodian Agreement, dated
February 29, 1988. (7)
<PAGE> 84
(c) Amendment No. 2 to Custodian Agreement, dated
October 1, 1989. (7)
(d) Amendment No. 3 to Custodian Agreement, dated
September 17, 1991. (7)
9 (a) Shareholder Servicing Agent Agreement, dated
September 1, 1995. (7)
(b) Amendment to Shareholder Servicing
Agent Agreement to add Class P shares dated
June 28, 1996; filed herewith.
(c) Exchange Privilege Agreement, dated September
1, 1995. (7)
(d) 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. (2)
(e) Dividend Disbursing Agency Agreement, dated
February 1, 1986. (5)
10 Consent and Opinion of Counsel previously filed with the
Registrant's 24(e) share registration as part of
Post-Effective Amendment No. 13 on behalf of MFS
Government Mortgage Fund for its fiscal year ended July
31, 1995, and with the Rule 24f-2 Notice filed on behalf
of MFS/Foreign & Colonial International Growth Fund,
MFS/Foreign & Colonial International Growth and Income
Fund and MFS/Foreign & Colonial Emerging Markets Equity
Fund on July 23, 1996 for their fiscal year ended May
31, 1996.
11 Consent of Ernst & Young LLP; filed
herewith..
12 Not Applicable.
13 Investment Representation Letter for MFS
Government Mortgage Fund. (7)
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in effect. (6)
<PAGE> 85
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (6)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans and Funds Agreement as
currently in effect. (6)
15 (a) Amended and Restated Distribution Plan for
Class A shares of MFS Government Mortgage
Fund dated December 21, 1994. (3)
(b) Distribution Plan for Class B shares of MFS
Government Mortgage Fund dated December 21,
1994. (3)
(c) Distribution Plan for Class A shares of
MFS/Foreign & Colonial International Growth
Fund dated September 1, 1995. (7)
(d) Distribution Plan for Class A shares of
MFS/Foreign & Colonial International Growth
and Income Fund dated September 1, 1995. (7)
(e) Distribution Plan for Class A shares of
MFS/Foreign & Colonial Emerging Markets
Equity Fund dated September 1, 1995. (7)
(f) Distribution Plan for Class B shares of
MFS/Foreign & Colonial International Growth
Fund dated September 1, 1995. (7)
(g) Distribution Plan for Class B shares of
MFS/Foreign & Colonial International Growth
and Income Fund dated September 1, 1995. (7)
(h) Distribution Plan for Class B shares of
MFS/Foreign & Colonial Emerging Markets
Equity Fund dated September 1, 1995. (7)
(i) Distribution Plan for Class C shares of
MFS/Foreign & Colonial International Growth
Fund. (9)
(j) Distribution Plan for Class C shares of
MFS/Foreign & Colonial International Growth
and Income Fund. (9)
(k) Distribution Plan for Class C shares of
MFS/Foreign & Colonial Emerging Markets
Equity Fund. (9)
16 Schedule for Computation of Performance
Quotations - Average Annual Total Rate of
Return, Aggregate Total Rate of Return,
Standardized Yield and Distribution Rate. (1)
<PAGE> 86
17 Financial Data Schedules for each class of
each series.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (10)
Power of Attorney, dated September 21, 1994. (3)
- -----------------------------
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(3) Incorporated by reference to Post-Effective Amendment No. 11 filed with the
SEC via EDGAR on March 30, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 12 filed with the
SEC via EDGAR on June 16, 1995.
(5) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(6) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(7) Incorporated by reference to Post-Effective Amendment No. 13 filed with the
SEC via EDGAR on November 28, 1995.
(8) Incorporated by reference to Post-Effective Amendment No. 14 filed with the
SEC via EDGAR on April 24, 1996.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 15
filed with the SEC via EDGAR on May 28, 1996.
(10) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 25 filed with the SEC via EDGAR on
August 27, 1996.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 16
filed with the SEC via EDGAR on August 29, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
MFS GOVERNMENT MORTGAGE FUND
----------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
CLASS A SHARES
--------------
Shares of Beneficial Interest 36,575
(without par value) (as of August 30, 1996)
<PAGE> 87
CLASS B SHARES
--------------
Shares of Beneficial Interest 32,889
(without par value) (as of August 30, 1996)
CLASS P SHARES
--------------
Shares of Beneficial Interest 0
(without par value) (as of August 30, 1996)
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH FUND
------------------------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
CLASS A SHARES
--------------
Shares of Beneficial Interest 4,088
(without par value) (as of August 30, 1996)
CLASS B SHARES
--------------
Shares of Beneficial Interest 4,727
(without par value) (as of August 30, 1996)
CLASS C SHARES
--------------
Shares of Beneficial Interest 53
(without par value) (as of August 30, 1996)
CLASS P SHARES
--------------
Shares of Beneficial Interest 0
(without par value) (as of August 30, 1996)
MFS/FOREIGN & COLONIAL INTERNATIONAL GROWTH AND INCOME FUND
-----------------------------------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
CLASS A SHARES
--------------
Shares of Beneficial Interest 1,137
(without par value) (as of August 30, 1996)
<PAGE> 88
CLASS B SHARES
--------------
Shares of Beneficial Interest 1,637
(without par value) (as of August 30, 1996)
CLASS C SHARES
--------------
Shares of Beneficial Interest 10
(without par value) (as of August 30, 1996)
CLASS P SHARES
--------------
Shares of Beneficial Interest 0
(without par value) (as of August 30, 1996)
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
---------------------------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
CLASS A SHARES
--------------
Shares of Beneficial Interest 2,517
(without par value) (as of August 30, 1996)
CLASS B SHARES
--------------
Shares of Beneficial Interest 2,732
(without par value) (as of August 30, 1996)
CLASS C SHARES
--------------
Shares of Beneficial Interest 28
(without par value) (as of August 30, 1996)
CLASS P SHARES
--------------
Shares of Beneficial Interest 0
(without par value) (as of August 30, 1996)
ITEM 27. INDEMNIFICATION
---------------
Reference is hereby made to (a) Article V of the Registrant's Declaration
of Trust, incorporated by reference to the Registrant's Post-Effective Amendment
No. 11, filed with the SEC via EDGAR on March 30, 1995; and (b) Section 9 of the
Shareholder Servicing Agent Agreement, filed with the Registrant's
Post-Effective Amendment No. 13 with the SEC via EDGAR on November 28, 1995.
<PAGE> 89
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser are insured under an errors and omissions
liability insurance policy. The Registrant and its officers are also insured
under the fidelity bond required by Rule 17g-1 under the Investment Company Act
of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market
Fund, MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has
two series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI
(which has three series: MFS World Total Return Fund, MFS Utilities Fund and
MFS World Equity Fund), MFS Series Trust VII (which has two series: MFS World
Governments Fund and MFS Value Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Series Trust
IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS
Municipal Limited Maturity Fund), MFS Series Trust X (which has four series:
MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity
Fund, MFS/Foreign & Colonial International Growth Fund and MFS/Foreign &
Colonial International Growth and Income Fund), and MFS Municipal Series Trust
(which has 16 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal
Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund,
MFS Georgia Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS
Massachusetts Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New
York Municipal Bond Fund, MFS North Carolina Municipal Bond Fund, MFS
Pennsylvania Municipal Bond Fund, MFS South Carolina Municipal Bond Fund, MFS
Tennessee Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS West
Virginia Municipal Bond Fund and MFS Municipal Income Fund) (the "MFS Funds").
The principal business address of each of the aforementioned Funds is 500
Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load, open-end
Funds: MFS Institutional Trust ("MFSIT") (which has seven series), MFS Variable
Insurance Trust ("MVI") (which has twelve series) and MFS Union Standard Trust
("UST") (which has two series). The principal business address of each of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following closed-end
Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust
and
<PAGE> 90
MFS Special Value Trust (the "MFS Closed-End Funds"). The principal business
address of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account. The
principal business address of each is One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized under
the laws of the Republic of Ireland and a subsidiary of MFS, whose principal
business address is 41-45 St. Stephen's Green, Dublin 2, Ireland, serves as
investment adviser to and distributor for MFS International Fund (which has five
portfolios: MFS International Funds-U.S. Equity Fund, MFS International
Funds-U.S. Emerging Growth Fund, MFS International Funds-Global Governments
Fund, MFS International Funds - U.S. Dollar Reserve Fund and MFS International
Funds-Charter Income Fund) (the "MIL Funds"). The MIL Funds are organized in
Luxembourg and qualify as an undertaking for collective investments in
transferable securities (UCITS). The principal business address of the MIL Funds
is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for MFS Meridian
U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian Global
Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS Meridian Global
Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian World Growth Fund,
MFS Meridian Money Market Fund, MFS Meridian World Total Return Fund, MFS
Meridian U.S. Equity Fund and MFS Meridian Research Fund (collectively the "MFS
Meridian Funds"). Each of the MFS Meridian Funds is organized as an exempt
company under the laws of the Cayman Islands. The principal business address of
each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands,
British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of MFS,
serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary of
MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
<PAGE> 91
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, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr.
Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a Senior
Vice President, General Counsel and an Assistant Secretary, Joseph W. Dello
Russo is a Senior Vice President, Chief Financial Officer and Treasurer, Robert
T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice President and
Associate General Counsel of MFS,is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg, Senior
Vice President of MFS, is a Vice President, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer, and
James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 92
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T. Swanson, Robert J.
Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice Presidents of MFS,
Bernard Scozzafava, Vice President of MFS, and Matthew Fontaine, Assistant Vice
President of MFS, are Vice Presidents, Sheila Burns-Magnan and Daniel E.
McManus, Assistant Vice Presidents of MFS, are Assistant Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames, Leslie
J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D. Laupheimer, Jr.,
Vice President of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary,
W. Thomas London is the Treasurer, James O. Yost is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter and David
R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E. McManus,
Assistant Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 93
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and Robert
J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, is the Assistant Treasurer and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and James
T. Swanson are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Vice President of MFS, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, and James O. Yost, is the Assistant Treasurer
and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President and
the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo is
the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott, Jeffrey
L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan is a
Director and
<PAGE> 94
the Secretary, Ziad Malek is the President, James E. Russell is the Treasurer,
and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters are
Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer,
James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director, Richard B.
Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott, Jeffrey L. Shames
and William F. Waters are Directors, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James R. Bordewick, Jr., is the Assistant
Secretary, James O. Yost is the Assistant Treasurer, and Ziad Malek is a Senior
Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert T.
Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer, and
Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings
is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T.
Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive Vice
President, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
AMI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames, and
Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President and a
Director, Leslie J. Nanberg is a Senior Vice President, a Managing Director and
a Director, George F. Bennett, Carol A. Corley, John A. Gee, Brianne Grady and
Kevin R. Parke are Senior
<PAGE> 95
Vice Presidents and Managing Directors, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns is the
Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold D. Scott is
the Chairman and a Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary and Sharon A. Brovelli and Martin E.
Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of MFS, have the
affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance
Company of Canada (U.S.), One Sun
Life Executive Park, Wellesley
Hills, Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67
Broad Street, New York, New York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun
Life Centre, 150 King Street
West, Toronto, Ontario, Canada
(Mr. Stewart is also an officer
and/or Director of various
subsidiaries and affiliates of
Sun Life)
John D. McNeil Chairman, Sun Life Assurance
Company of Canada, Sun Life
Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
McNeil is also an officer and/or
Director of various subsidiaries
and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund
Operations, The Boston Company,
Exchange Place, Boston,
Massachusetts (until August, 1994)
ITEM 29. DISTRIBUTORS
------------
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal business
address of each of these persons is 500 Boylston Street, Boston, Massachusetts
02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
<PAGE> 96
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant at the following locations:
NAME ADDRESS
---- -------
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Funds 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.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being Registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE> 97
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 26th day of September, 1996.
MFS SERIES TRUST X
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 September 26, 1996.
SIGNATURE TITLE
A. KEITH BRODKIN* Chairman, President
- ----------------------------- (Principal Executive
A. Keith Brodkin Officer) and Trustee
W. THOMAS LONDON* Treasurer (Principal
- ----------------------------- Financial Officer
W. Thomas London 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> 98
LAWRENCE T. PERERA* Trustee
- -----------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- -----------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- -----------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- -----------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- -----------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- -----------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- -----------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated September 21,
1994, incorporated by reference to the
Registrant's Post-Effective Amendment
No. 11 filed with the Securities and
Exchange Commission via EDGAR on March
30, 1995.
<PAGE> 99
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
9 (b) Amendment to Shareholder Servicing Agent
Agreement to add Class P shares dated
June 28, 1996.
11 Consent of Ernst & Young LLP.
<PAGE> 1
EXHIBIT NO. 99.9(b)
MFS SERIES TRUST X
500 BOYLSTON - BOSTON - MASSACHUSETTS 02116-3741
(617) - 954-5000
June 28, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated September 1, 1995, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS Series Trust X
By: W. THOMAS LONDON
----------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
----------------------
Joseph W. Dello Russo
Treasurer
<PAGE> 2
ATTACHMENT 1
June 28, 1996
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST X (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to
Class A shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable to
such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
2. The fees to be paid by the Fund on behalf of its series with respect to
Class B shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.22% of the first $500 million of the assets of the series attributable to
such class;
0.18% of the second $500 million of the assets of the series attributable
to such class;
0.13% over $1 billion of the assets of the series attributable to such
class.
3. The fees to be paid by the Fund on behalf of its series with respect to
Class C shares of each series of the Fund to MFSC, for MFSC's services as
shareholder servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable to
such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
<PAGE> 1
EXHIBIT 99.11
-------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Condensed
Financial Information" in the Prospectus and "Independent Auditors and Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment No. 17 to Registration Statement
No. 33-1657 on Form N-1A of our report dated July 3, 1996, on the financial
statements and financial highlights of MFS/Foreign & Colonial Emerging Markets
Equity Fund, MFS/Foreign & Colonial International Growth and Income Fund and
MFS/Foreign & Colonial International Growth Fund included in the 1996 Annual
Report to Shareholders.
ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Boston, Massachusetts
September 23, 1996
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<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 1,009,636
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<SHARES-REINVESTED> 358
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<NAME> MFS F & C INTERNATIONAL GROWTH FUND CLASS A
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<TABLE> <S> <C>
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<CIK> 0000783740
<NAME> MFS SERIES TRUST X
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<NAME> MFS F & C INTERNATIONAL GROWTH FUND CLASS B
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<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000783740
<NAME> MFS SERIES TRUST X
<SERIES>
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<NAME> MFS F & C EMERGING MARKETS EQUITY FUND CLASS A
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<S> <C>
<PERIOD-TYPE> YEAR
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<TABLE> <S> <C>
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<CIK> 0000783740
<NAME> MFS SERIES TRUST X
<SERIES>
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<NAME> MFS F & C EMERGING MARKETS EQUITY FUND CLASS B
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<S> <C>
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