As filed with the Securities and Exchange Commission on November 26, 1997
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. 20
AND
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 21
MFS SERIES TRUST X
(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 November 28, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(i)
|_| on [date] pursuant to paragraph (a)(i)
|_| 75 days after filing pursuant to paragraph (a)(ii)
|_| on [date] pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
================================================================================
<PAGE>
MFS GOVERNMENT MORTGAGE FUND
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)
<TABLE>
<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 Fund; Investment Objective *
and Policies; Investment
Techniques; Risk Factors
(b), (c) Investment Objective and *
Policies; Risk Factors
5 (a) The Fund; Management of the *
Fund - Investment Adviser
(b) Front Cover Page; - Management *
of the Fund; Back Cover Page
(c) Management of the Fund;- *
Investment Adviser; Portfolio
Managers
(d) Management of the Fund - *
Investment Adviser;
Administrator - Back Cover
Page
(e) Management of the Fund - *
Shareholder Servicing Agent;
Back Cover Page
(f) Expense Summary; Condensed *
Financial Information;
Information Concerning Shares
of the Fund - Expenses
(g) Investment Objective and *
Policies - Portfolio Trading;
Information Concerning
Shares of the Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Information
Concerning Shares of the Fund -
Description of Shares, Voting
Rights and Liabilities
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares *
of the Fund - Distributions;
Shareholder Services -
Distribution Options
(g) Information Concerning Shares *
of the Fund - Distributions;
Information Concerning Shares
of the Fund - Tax Status
(h) * *
7 (a) Front Cover Page; Management *
of the Fund - Distributor; Back
Cover Page
(b) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Net Asset Value
(c) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Exchanges;
Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Expense Summary; Information *
Concerning Shares of the Fund -
Purchases; Information Concerning
Shares of the Fund - Distribution
Plan
(f) Information Concerning Shares *
of the Fund - Distribution Plan
(g) Expense Summary; Information *
Concerning Shares of the
Fund - Purchases; Information
Concerning Shares of the
Fund - Exchanges; Information
Concerning Shares of the Fund Redemptions
and Repurchases; Information Concerning
Shares of the Fund - Distribution Plan;
Information Concerning Shares of the Fund -
Distributions; Information Concerning
Shares of the Fund - Performance
Information; Shareholder Services
8 (a) Information Concerning Shares *
of the Fund - Purchases;
Information Concerning Shares
of the Fund - Redemptions and
Repurchases; Shareholder Services
(b), (c), (d) Information Concerning Shares *
of the Fund - Redemptions and
Repurchases
9 * *
<PAGE>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Trustee Compensation
Table
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a), (b) Management of the Fund Management of the Fund -
Investment Adviser;
Management of the Fund -
Trustees and Officers
(c) * *
(d) * Management of the Fund -
Investment Adviser;
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Distribution Plan
Shares of the Fund -
Distribution Plan
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing
Agent
17 (a), (b) (c), (d), (e) * Portfolio Transactions and
Brokerage Commissions
18 (a) Information Concerning Description of Shares,
Shares of the Fund - Voting Rights and
Description of Shares, Voting Liabilities
Rights and Liabilities
(b) * *
19 (a) Information Concerning Shareholder Services
Shares of the Fund -
Purchases; Shareholder
Services
(b) Information Concerning Management of the Fund -
Shares of the Fund - Net Distributor; Determination
Asset Value; Information of Net Asset Value and
Concerning Shares of the Performance - Net Asset
Fund - Purchases Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plan
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
</TABLE>
- ---------------
* Not Applicable
** Contained in Annual Report
<PAGE>
MFS GOVERNMENT MORTGAGE FUND
SUPPLEMENT TO THE DECEMBER 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED DECEMBER 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
CLASS I
-------
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................ None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable). None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees..................................................... 0.45%
Rule 12b-1 Fees..................................................... None
Other Expenses(1)(2)................................................ 0.31%
-----
Total Operating Expenses............................................ 0.76 %
- -----------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended July 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
PERIOD CLASS I
------ -------
1 year........................................ $8
3 years....................................... 24
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are
Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
YEAR ENDED
JULY 31,1997*
------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 6.59
-------
Income from investment operations # -
Net investment income $ 0.31
Net realized and unrealized gain
on investments 0.09
-------
Total from investment operations $ 0.40
-------
Less distributions declared to shareholders -
From net investment income $ (0.26)
From tax return of capital (0.01)
--------
Total distributions declared to shareholders $ (0.27)
--------
Net asset value - end of period $ 6.72
-------
Total return 6.19%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.73%+
Net investment income 7.06%+
Portfolio turnover 33%
Net assets, end of period
(000,000 omitted) $113
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997 through
July 31, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Three classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares and Class I shares. Class I shares are available for
purchase only by Eligible Purchasers, as defined above, and are described in
this Supplement. Class A shares and Class B shares are described in the Fund's
Prospectus and are available for purchase by the general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class I shares do not convert to any
other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares and Class B shares because expenses
attributable to Class A shares and Class B shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS DECEMBER 1, 1997
<PAGE>
PROSPECTUS
MFS(R) GOVERNMENT December 1, 1997
MORTGAGE FUND Class A Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Page
1. Expense Summary ..................................................... 2
2. Condensed Financial Information ..................................... 3
3. The Fund ............................................................ 6
4. Investment Objectives and Policies .................................. 6
5. Management of the Fund .............................................. 11
6. Information Concerning Shares of the Fund ........................... 12
Purchases ....................................................... 12
Exchanges ....................................................... 17
Redemptions and Repurchases ..................................... 17
Distribution Plan ............................................... 20
Distributions ................................................... 21
Tax Status ...................................................... 22
Net Asset Value ................................................. 22
Description of Shares, Voting Rights and Liabilities ............ 22
Performance Information ......................................... 23
7. Shareholder Services ................................................ 23
Appendix A .......................................................... A-1
Appendix B .......................................................... B-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS GOVERNMENT MORTGAGE FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to the MFS Government Mortgage Fund (the "Fund"), a
diversified series of MFS Series Trust X (the "Trust"), an open-end investment
company presently consisting of four series. The primary investment objective of
the Fund is to provide a high level of current income. The secondary objective
of the Fund is to protect shareholders' capital. The Fund seeks to achieve its
objectives by investing, under normal circumstances, at least 65% of its total
assets in obligations issued or guaranteed by the Government National Mortgage
Association ("GNMA") (including pass-through certificates of GNMA) and in
obligations fully collateralized or otherwise fully secured by obligations
issued or guaranteed by GNMA (see "Investment Objectives and Policies"). The
minimum initial investment is generally $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund that a
prospective investor ought to know before investing. The Fund has filed with the
Securities and Exchange Commission (the "SEC") a Statement of Additional
Information dated December 1, 1997, as amended or supplemented from time to time
(the "SAI"), which contains more detailed information about the Fund. The SAI is
incorporated into this Prospectus by reference. See page 25 for a further
description of the information set forth in the SAI. A copy of the SAI may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). The SEC maintains an Internet World Wide
Web site (http://www.sec.gov) that contains the SAI, materials that are
incorporated by reference into this Prospectus and the SAI, and other
information regarding the Fund. This Prospectus is available on the Adviser's
Internet World Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price) .......................................... 4.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) ................................. See below(1) 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees ................................................................ 0.45% 0.45%
Rule 12b-1 Fees ................................................................ 0.25%(2) 1.00%(3)
Other Expenses(4) .............................................................. 0.31% 0.31%
--- ---
Total Operating Expenses ....................................................... 1.01% 1.76%
- ------------
(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 (a "CDSC") of 1% will be imposed on such purchases
in the event of certain redemption transactions within 12 months following such purchases (see "Information
Concerning Shares of the Fund -- Purchases").
(2) The Fund has adopted a distribution plan for its shares in accordance with Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 0.35% per annum of the average
daily net assets attributable to Class A shares. Payment of the 10% per annum Class A distribution fee has
been suspended indefinitely, and will only be implemented on such date as the Trustees of the Trust may
determine. Distribution expenses paid under this Plan, together with the initial sales charge, may cause
long-term shareholders to pay more than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge. See "Information Concerning Shares of the Fund -- Distribution Plan".
(3) The Fund's Distribution Plan provides that it will pay distribution/ service fees aggregating up to 1.00%
per annum of the average daily net assets attributable to Class B shares. Distribution expenses paid under
the Distribution Plan, together with any CDSC payable upon redemption of Class B shares, may cause long-term
shareholders to pay more than the maximum sales charge that would have been permissible if imposed entirely
as an initial sales charge. See "Information Concerning Shares of the Fund -- Distribution Plan".
(4) The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of
cash maintained by the Fund with its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the effect of reducing the Fund's
expenses). Any such fee reductions are not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
</TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
PERIOD CLASS A CLASS B
- ------ ------- ------------------
(1)
1 year ..................................... $ 57 $ 58 $ 18
3 years .................................... 78 85 55
5 years .................................... 100 115 95
10 years .................................... 165 187(2) 187(2)
- ------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on share purchases --
"Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management fees --
"Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan) fees --
"Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
<PAGE>
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to Shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, given upon their authority as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
EIGHT MONTHS YEAR ENDED
YEAR ENDED JULY 31, ENDED JULY 31, NOVEMBER 30,
----------------------------------------- ---------- -------------------------
1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of
period ............................ $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
------ ------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) .......... $ 0.44 $ 0.45 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain
(loss) on investments ........... 0.18 (0.14) 0.14 (0.36) 0.20 0.09
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.62 $ 0.31 $ 0.59 $(0.07) $ 0.54 $ 0.55
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ........ $(0.42) $(0.42) $(0.42) $(0.20) $(0.47) $(0.42)
In excess of net realized gain on
investments ..................... -- -- -- -- (0.04) --
From paid-in capital .............. -- -- -- (0.09) -- (0.26)
Tax return of capital ............. (0.01) (0.01) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders .................. $(0.43) $(0.43) $(0.43) $(0.29) $(0.51) $(0.68)
------ ------ ------ ------ ------ ------
Net asset value -- end of period .... $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
====== ====== ====== ====== ====== ======
Total return(+) ..................... 9.90% 4.76% 9.60% (1.5)%++ 8.11% 8.25%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ........................ 1.09% 1.16% 1.25% 1.27%+ 1.38% 1.42%
Net investment income ............. 6.75% 6.75% 6.99% 6.46%+ 6.30% 6.57%
PORTFOLIO TURNOVER .................. 33% 25% 87% 37% 167% 484%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) .......................... $653 $541 $534 $424 $522 $715
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income ............. -- -- -- $ 0.29 $ 0.34 --
RATIOS (TO AVERAGE NET ASSETS):
Expenses ........................ -- -- -- 1.28%+ 1.46% --
Net investment income ........... -- -- -- 6.45%+ 6.22% --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------------
1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period ........... $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
------ ------ ------ ------ ------
Income from investment operations --
Net investment income .......................... $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75
Net realized and unrealized gain (loss) on
investments .................................. 0.25 (0.40) 0.48 (0.06) (1.08)
------ ------ ------ ------ ------
Total from investment operations ............. $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33)
------ ------ ------ ------ ------
Less distributions declared to shareholders --
From net investment income ..................... $(0.44) $(0.49) $(0.58) $(0.64) $(0.82)
In excess of net realized gain on investments .. -- -- -- -- (0.01)
From paid-in capital ........................... (0.35) (0.49) (0.45) (0.46) (0.32)
------ ------ ------ ------ ------
Total distributions declared to shareholders . $(0.79) $(0.98) $(1.03) $(1.10) $(1.15)
------ ------ ------ ------ ------
Net asset value -- end of period ................. $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
====== ====== ====== ====== ======
Total return(+) .................................. 11.00% 2.05% 14.72% 7.39% (3.37)%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Expenses ....................................... 1.44% 1.40% 1.37% 1.38% 1.34%
Net investment income .......................... 6.91% 7.29% 7.57% 7.88% 8.34%
PORTFOLIO TURNOVER ............................... 731% 507% 489% 285% 212%
NET ASSETS AT END OF PERIOD (000,000 OMITTED) .... $ 886 $1,068 $1,380 $1,295 $1,129
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EIGHT
MONTHS
YEAR ENDED JULY 31, ENDED PERIOD ENDED
------------------------------------------ JULY 31, NOVEMBER 30,
1997 1996 1995 1994 1993**
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------ ------
Income from investment operations# --
Net investment income(S) ........... $ 0.40 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain
(loss) on investments ............ 0.17 (0.13) 0.14 (0.35) (0.44)
------ ------ ------ ------ ------
Total from investment operations . $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------
Less distributions declared to
shareholders --
From net investment income ......... $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From paid-in capital ............... -- -- -- (0.08) --
Tax return of capital .............. (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders ................... $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------
Net asset value -- end of period ..... $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ======
Total return ......................... 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## ......................... 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income .............. 6.02% 6.01% 6.28% 5.80%+ 5.92%+
PORTFOLIO TURNOVER ................... 33% 25% 87% 37% 167%
NET ASSETS AT END OF PERIOD (000,000
OMITTED) ........................... $286 $553 $812 $1,229 $1,628
** For the period from the commencement of the Fund's offering of Class B shares, September 7, 1993, through November 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income .............. -- -- -- $ 0.26 $ 0.38
RATIOS (TO AVERAGE NET ASSETS):
Expenses ......................... -- -- -- 1.94%+ 1.94%+
Net investment income ............ -- -- -- 5.80%+ 5.85%+
</TABLE>
<PAGE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1985. The Trust presently consists of four
series, each of which represents a portfolio with separate investment objectives
and policies. Shares of the Fund are continuously sold to the public and the
Fund then uses the proceeds to buy securities for its portfolio. Two classes of
shares of the Fund currently are offered for sale to the general public. Class A
shares are offered at net asset value plus an initial sales charge up to a
maximum of 4.75% of the offering price (or a CDSC upon redemption of 1.00%
during the first year in the case of certain purchases of $1 million or more and
certain purchases by retirement plans) and subject to an annual distribution and
service fee up to a maximum of 0.35% per annum. Class B shares are offered at
net asset value without an initial sales charge but subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class B shares will convert to Class A shares approximately eight years
after purchase. In addition, the Fund offers an additional class of shares,
Class I shares, exclusively to certain institutional investors. Class I shares
are made available by means of a separate Prospectus Supplement provided to
institutional investors eligible to purchase Class I shares, and are offered at
net asset value without an initial sales charge or CDSC upon redemption and
without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objectives and policies. A majority of the Trustees are not affiliated with the
Adviser. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The Fund's primary investment objective is to provide a
high level of current income. The Fund's secondary objective is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its objectives.
INVESTMENT POLICIES -- The Fund seeks to achieve its investment objectives by
investing at least 65% of its total assets, under normal circumstances, in
obligations issued or guaranteed by GNMA (including pass-through certificates of
GNMA which are described below) and in obligations fully collateralized or
otherwise fully secured by obligations issued or guaranteed by GNMA. The Fund
may also invest in other securities that are issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("Government Securities"). Such Government Securities include
(1) the following U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturities of one
year or less), U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years) all of which are
backed by the full faith and credit of the United States; and (2) obligations
issued or guaranteed by U.S. Government agencies or instrumentalities, some of
which are backed by the full faith and credit of the U.S. Treasury; some of
which are supported by the right of the issuer to borrow from the U.S.
Government, e.g., obligations of Federal Home Loan Banks; some of which are
backed only by the credit of the issuer itself, e.g., obligations of the Student
Loan Marketing Association; and some of which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations, e.g.,
obligations of the Federal National Mortgage Association ("FNMA"). No assurance
can be given that the U.S. Government will provide financial support to these
agencies and instrumentalities because it is not obligated by law, in certain
instances, to do so. The primary types of Government Securities in which the
Fund invests are described in Appendix B.
The Fund may invest in pass-through certificates of GNMA. These certificates are
mortgage-backed securities which represent a partial ownership interest in a
pool of mortgage loans issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations. Each mortgage loan included in the pool
is either insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. For a further description of these and other such
obligations and of the consequences of the prepayment of mortgages underlying
these certificates, see "Mortgage Pass-Through Securities" below and Appendix B.
When and if available, Government Securities may be purchased at a discount from
face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive.
Depending on market conditions, the Fund may temporarily take a defensive
position by investing a substantial portion of its assets in cash, short-term
Government Securities and related repurchase agreements.
Government Securities do not generally involve the credit risks associated with
other types of fixed income securities, although, as a result, the yields
available from Government Securities are generally lower than the yields
available from corporate fixed income securities. Like other fixed income
securities, however, the values of Government Securities change as interest
rates fluctuate. THEREFORE, THE NET ASSET VALUE OF THE SHARES OF AN OPEN-END
INVESTMENT COMPANY SUCH AS THE FUND WHICH INVESTS IN FIXED INCOME SECURITIES
CHANGES AS THE GENERAL LEVELS OF INTEREST RATES FLUCTUATE. WHEN INTEREST RATES
DECLINE, THE VALUE OF A PORTFOLIO INVESTED AT HIGHER YIELDS CAN BE EXPECTED TO
RISE. CONVERSELY, WHEN INTEREST RATES RISE, THE VALUE OF A PORTFOLIO INVESTED AT
LOWER YIELDS CAN BE EXPECTED TO DECLINE. Although changes in the value of the
Fund's portfolio securities subsequent to their acquisition are reflected in the
net asset value of shares of the Fund, such changes will not affect the income
received by the Fund from such securities. While the Fund seeks to maintain a
relatively high, stable dividend, no specific level of income or yield
differential can ever be assured since available yields vary over time. The
dividends paid by the Fund will increase or decrease in relation to the income
received by the Fund from its investments which will in any case be reduced by
the Fund's expenses before being distributed to the Fund's shareholders.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities that are Government Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgage loans. Monthly payments
of interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
Fund may be different from the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise, the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed income securities.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
"WHEN-ISSUED" SECURITIES: Some Government Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited as to the amount of Government Securities for which it may have
commitments to purchase on such bases, it is expected that under normal
circumstances the Fund will not commit more than 30% of its total assets to such
purchases. The Fund does not pay for the securities until received, and does not
start earning interest on the securities until the contractual settlement date.
While awaiting delivery of the securities purchased on such bases, the Fund will
segregate liquid assets or Government Securities sufficient to cover its
commitments.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended ("1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made based upon a continuing review of the
trading markets for a specific Rule 144A security, whether such security is
liquid and thus not subject to the Fund's limitation on investing not more than
10% of its net assets in illiquid investments. The Board of Trustees has adopted
guidelines and delegated to MFS the daily function of determining and monitoring
the liquidity of Rule 144A securities. The Board, however, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 10%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
ZERO COUPON BONDS: The Fund may invest in zero coupon bonds, which are debt
obligations issued or purchased at a significant discount from face value. The
Fund will only purchase zero coupon bonds which are Government Securities. The
discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. Zero coupon bonds do not
require the periodic payment of interest. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments may experience greater volatility in market value due to
changes in interest rates than debt obligations which make regular payments of
interest. The Fund will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or mortgage
pass- through securities (such collateral collectively hereinafter referred to
as "Mortgage Assets"). Mortgage Assets underlying CMOs purchased by the Fund
must be issued or guaranteed by the U.S. Government, its agencies, authorities
or instrumentalities. The Fund may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. In a CMO, a series of bonds or certificates
is usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche," is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates
resulting in a loss of all or part of the premium, if any has been paid. Certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage- related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs and the risks related to transactions
therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS") which are derivative multiclass
mortgage securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. The Fund will only invest in SMBS whose mortgage assets are
issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. For a further description of SMBS and the risks related to
transactions therein, see the SAI.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps and
other types of available swap agreements. Swaps involve the exchange by the Fund
with another party of cash payments based upon different interest rate indexes,
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for further information on, and the risks involved
in, these activities.
LENDING OF SECURITIES AND SHORT SALES: The Fund may make loans of its portfolio
securities. Such loans will usually be made to member banks of the Federal
Reserve System and member firms (and subsidiaries thereof) of the New York Stock
Exchange (the "Exchange") under contracts calling for collateral in U.S.
Government Securities, cash or an irrevocable letter of credit. The Fund will
continue to collect the equivalent of interest on the securities loaned and will
also receive either interest (through investment of cash collateral) or a fee
(if the collateral is Government Securities or a letter of credit). The Fund may
pay finder's and other fees in connection with securities loans. The Fund may
also make short sales involving either securities retained in the Fund's
portfolio or securities which the Fund has the right to acquire without paying
additional consideration.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to interest rates, commodities, indices or other financial indicators.
Most indexed securities are short to intermediate term fixed-income securities
whose values at maturity (i.e., principal value) or interest rates rise or fall
according to changes in the value of one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their principal value or interest rates may increase or decrease if the
underlying instrument appreciates), and may have return characteristics similar
to direct investments in the underlying instrument or to one or more options on
the underlying instrument. Indexed securities may be more volatile than the
underlying instrument itself and could involve the loss of all or a portion of
the principal amount of the instrument.
PORTFOLIO TRADING: The Fund intends to manage its portfolio by buying and
selling Government Securities, as well as holding selected obligations to
maturity, and by engaging in transactions involving related options, Futures
Contracts and swap transactions. In managing its portfolio the Fund seeks to
maximize the return on its portfolio by taking advantage of market developments
and yield disparities. For a description of the strategies which may be used by
the Fund in managing its portfolio, see the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Conduct Rules
of the National Association of Securities Dealers, Inc. ("NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of the Fund and of other investment company clients of MFD, the Fund's
distributor, as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions. From time to time, the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Fund's operating expenses (e.g., fees charged by the custodian
of the Fund's assets). For a further discussion of portfolio trading, see the
SAI.
OPTIONS ON FIXED INCOME SECURITIES: The Fund may write (sell) covered put and
call options on fixed income securities and purchase put and call options. The
Fund will write such options for hedging purposes and to increase its return;
however, it will not write such options for the purpose of attempting to pay out
a pre-established level of dividends or distributions. The Fund may also write
combinations of put and call options on the same security, known as "straddles."
The Fund may purchase put or call options in anticipation of declines in the
value of fixed income portfolio securities or increases in the value of
securities to be acquired.
For hedging purposes, the Fund may also enter into options on the yield
"spread," or yield differential, between two securities. This transaction is
referred to as a "yield curve" option. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities rather than the actual prices of the individual securities, and is
settled through cash payments. Accordingly, a yield curve option is profitable
to the holder if this differential widens (in the case of a call) or narrows (in
the case of a put), regardless of whether the yields of the underlying
securities increase or decrease. Yield curve options written by the Fund will be
covered as described in the SAI. The trading of yield curve options is subject
to all the risks associated with trading other types of options, as discussed
below under "Risks of Investment in Options, Futures Contracts and Options on
Futures Contracts" and in the SAI. In addition, such options present risks of
loss even if the yield on one of the underlying securities remains constant, if
the spread moves in a direction or to an extent which was not anticipated.
In certain instances, the Fund may enter into options on Treasury Securities.
This type of option is referred to as "reset" options or "adjustable strike"
options. These options provide for periodic adjustment of the strike price and
may also provide for the periodic adjustment of the premium during the term of
the option.
The Fund may purchase and sell options that are traded on U.S. exchanges, and
options traded over-the-counter, with broker- dealers who deal in these options.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Fund
will treat assets used to cover over-the-counter options as illiquid unless the
dealer is a primary dealer in U.S. Government securities and has given the Fund
the unconditional right to close such options at a formula price, in which event
only an amount of the cover determined with reference to the formula will be
considered illiquid. The Fund may also write over-the-counter options with
non-primary dealers and will treat the assets used to cover these options as
illiquid. See "Investment Objectives, Policies and Restrictions -- Options on
Fixed Income Securities" in the SAI for a further discussion of options on fixed
income securities, as well as the associated risks.
FUTURES CONTRACTS: The Fund may enter into futures contracts on fixed income
securities ("Futures Contracts"). Such transactions may be used to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of the Fund's portfolio securities or adversely
affect the prices of Government Securities which the Fund intends to purchase at
a later date. Should interest rates move in an unexpected manner, the Fund may
not achieve the anticipated benefits of Futures Contracts or may realize a loss.
The Fund may also enter into Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law, which involves greater risks. See
"Investment Objectives, Policies and Restrictions -- Futures Contracts" in the
SAI for a further discussion of Futures Contracts, as well as the associated
risks.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of fixed income portfolio securities or against
increases in the cost of such securities to be acquired, as well as for
non-hedging purposes to the extent permitted by applicable law. Purchases of
Options on Futures Contracts may present less risk in hedging the portfolio of
the Fund than the purchase or sale of the underlying Futures Contracts, because
the potential loss is limited to the amount of the premium paid for the option,
plus related transaction costs. The writing of such options, however, does not
present less risk than the trading of Futures Contracts, and will constitute
only a partial hedge, up to the amount of the premium received, less related
transaction costs. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction. See "Investment Objectives, Policies and Restrictions
- -- Options on Futures Contracts" in the SAI for a further discussion of Options
on Futures Contracts, as well as the associated risks.
RISKS OF INVESTMENT IN OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS: The Fund's use of options, Futures Contracts and Options on Futures
Contracts involves certain risks. For example, a lack of correlation between
the instrument underlying an option or Futures Contract and the assets being
hedged, or unexpected adverse price movements, could render the Fund's hedging
strategy unsuccessful and could result in losses. The Fund also may enter into
transactions in such instruments for non-hedging purposes to the extent
permitted by applicable law, which involves greater risk. In particular, such
transactions may result in losses for the Fund which are not offset by gains
on other portfolio positions, thereby reducing gross income. There also can be
no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses. The SAI contains a
description of the nature and trading mechanics of options, Futures Contracts
and Options on Futures Contracts and includes a discussion of the risks
related to transactions therein.
--------------------
The investment objectives and the policies described above may be changed
without shareholder approval.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. Except with respect to the
Fund's policy on borrowing and investing in illiquid securities, the Fund's
investment limitations and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the assets of the Fund pursuant to an
Investment Advisory Agreement, dated December 19, 1985, as amended (the
"Advisory Agreement"). Under the Advisory Agreement, the Adviser provides the
Fund with overall investment advisory services. James J. Calmas, a Vice
President of the Adviser, is the Fund's portfolio manager. Mr. Calmas became the
portfolio manager of the Fund in January of 1993. Mr. Calmas joined the Adviser
in 1988 as an Investment Analyst. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services, the Adviser receives a management fee, computed and paid monthly,
equal to 0.45% of the Fund's average daily net asset value.
For the Fund's fiscal year ended July 31, 1997, management fees paid to MFS
under the Advisory Agreement amounted to $4,551,885, equivalent on an annualized
basis, to 0.45% of the Fund's average daily net assets.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., also provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $66.3 billion on behalf of over 2.7 million investor accounts as
of October 31, 1997. As of such date, the MFS organization managed approximately
$20.1 billion of assets in fixed income securities and $42.0 billion of assets
in equity securities. MFS is a subsidiary of Sun Life of Canada (U.S.), a
subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
Donald A. Stewart and John D. McNeil. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Stewart are the Chairman and President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been operating in the
U.S. since 1895, establishing a headquarters office here in 1973. The executive
officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman,
President and a Trustee of the Fund. W. Thomas London, Stephen E. Cavan, James
R. Bordewick, Jr., James O. Yost, Ellen M. Moynihan and Mark E. Bradley, all
of whom are officers of MFS, are also officers of the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997.
Under this Agreement, the Fund pays MFS an administrative fee of up to 0.015%
per annum of the Fund's average daily net assets. This fee reimburses MFS for a
portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and serves as distributor for each of the other MFS Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B shares of the Fund may be purchased at the public offering price
through any dealer. As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
This Prospectus offers two classes of shares to the general public (Class A and
B shares) which bear sales charges and distribution fees in different forms and
amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF:
DEALER ALLOWANCE
OFFERING NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE PRICE INVESTED OF OFFERING PRICE
------------------ ----- -------- -----------------
<S> <C> <C> <C>
Less than $100,000 ............................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000 ............... 4.00 4.17 3.20
$250,000 but less than $500,000 ............... 2.95 3.04 2.25
$500,000 but less than $1,000,000 ............. 2.20 2.25 1.70
$1,000,000 or more ............................ None** None** See Below**
- -----------------------------------------------------------------------------------------------------------------------------
* Because of rounding in the calculation of offering price, actual sales charges may be more or less then those calculated
using the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following five circumstances, Class A shares are offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if, prior to July 1, 1996: (a) the plan had established
an account with the Shareholder Servicing Agent and (b) the
sponsoring organization has demonstrated to the satisfaction of MFD
that either (i) the employer had at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of
Funds in the MFS Funds would be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in shares
of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE INVESTED
IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE SHAREHOLDER
SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER
SUCH A PLAN QUALIFIES UNDER THIS CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c)
the sponsoring organization demonstrates to the satisfaction of MFD
that, at the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least $2,000,000.
In the case of all such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- --------------------------
1.00% On the first $2,000,000, plus
0.80% Over $2,000,000 to $3,000,000, plus
0.50% Over $3,000,000 to $50,000,000, plus
0.25% Over $50,000,000
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" in the
Prospectus for further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the
initial sales charge imposed upon purchases of Class A shares and the CDSC
imposed upon redemption of Class A shares is waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have
pursuant to a purchase order placed with the certification, a market
value of $500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulation
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with, any other
entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- ---------------
First ............................................. 4%
Second ............................................ 4%
Third ............................................. 3%
Fourth ............................................ 3%
Fifth ............................................. 2%
Sixth ............................................. 1%
Seventh and following ............................. 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption
of Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with, any other entity.
CONVERSION OF CLASS B SHARES: Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial
investment is $1,000 per account and the minimum additional investment is $50
per account. Accounts being established for monthly automatic investments and
under payroll savings programs and tax-deferred retirement programs (other than
IRAs) involving the submission of investments by means of group remittal
statements are subject to a $50 minimum on initial and additional investments
per account. The minimum initial investment for IRAs is $250 per account and the
minimum additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. The Fund and MFD each reserve the
right to reject or restrict any specific purchase or exchange request. In the
event that the Fund or MFD rejects an exchange request, neither the redemption
nor the purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individudals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect
to sales of Class A 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 shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand- held calculator, or (ii) make a nominal
charitable contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds 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.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
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 a letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally means
that the stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
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 liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES
THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE
AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
REDEMPTION BY CHECK -- Only Class A shares may be redeemed by check. A
shareholder owning Class A shares of the Fund may elect to have a special
account with State Street Bank and Trust Company (the "Bank") for the purpose of
redeeming Class A shares from his or her account by check. The Bank will provide
each Class A shareholder, upon request, with forms of checks drawn on the Bank.
Only shareholders having accounts in which no share certificates have been
issued will be permitted to redeem shares by check. Checks may be made payable
in any amount not less than $500. Shareholders wishing to avail themselves of
this redemption by check privilege should so request on their Account
Application, must execute signature cards (for additional information, see the
Account Application) with signature guaranteed in the manner set forth under the
caption "Signature Guarantee" below and must return any Class A share
certificates issued to them. Additional documentation will be required from
corporations, partnerships, fiduciaries or other such institutional investors.
All checks must be signed by the shareholder(s) of record exactly as the account
is registered before the Bank will honor them. The shareholders of joint
accounts may authorize each shareholder to redeem by check. The check may not
draw on monthly dividends which have been declared but not distributed.
SHAREHOLDERS WHO PURCHASE CLASS A SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR
CASHIER'S CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY HAVE
BEEN ON THE FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK
FOR PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED
TO COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY
INCOME TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK, PLUS ANY
APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD IS
GREATER THAN THE VALUE OF THE CLASS A SHARES HELD IN THE SHAREHOLDER'S ACCOUNT,
THE CHECK WILL BE RETURNED UNPAID, AND THE SHAREHOLDER MAY BE SUBJECT TO EXTRA
CHARGES. TO AVOID DISHONOR OF CHECKS DUE TO FLUCTUATION IN ACCOUNT VALUE,
SHAREHOLDERS ARE ADVISED AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY
CHECK. CHECKS SHOULD NOT BE USED TO CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK
IS WRITTEN, THE SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT
ON THE DAY THE CHECK CLEARS. There is presently no charge to the shareholder for
the maintenance of this special account or for the clearance of any checks, but
the Fund and the bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE -- Investments in Class A or B shares ("Direct
Purchases") will be subject to a CDSC for a period of (i) with respect to Class
A 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 shares purchased
on or after January 1, 1993 will be aggregated on a calendar month basis all
transactions made during a calendar month, regardless of when during the month
they have occurred, will age one year at the close of business on the last day
of such month in the following calendar year and each subsequent year. For Class
B shares of the Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $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 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 will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within twelve months of the initial purchase for
certain Class A share purchases, a CDSC will be imposed upon redemption. Such
purchases under the Reinstatement Privilege are subject to all limitations in
the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities in such a distribution would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class B
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD
a distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged
to, and therefore reduce, income allocated to shares of the Designated Class.
The provisions of the Distribution Plan relating to operating policies as well
as initial approval, renewal, amendment and termination are substantially
identical as they relate to each class of shares covered by the Distribution
Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commissions to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). See "Purchases -- Class A Shares" above. In addition,
to the extent that the aggregate service and distribution fees paid under the
Distribution Plan do not exceed 0.25% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses. Payment of
the 0.10% per annum Class A distribution fee has been suspended indefinitely and
will only be implemented on such date or dates as the Trustees of the Trust may
determine (see "Information Concerning Shares of the Fund -- Distribution Plan"
in the Prospectus).
CLASS B SHARES. Class B shares are offered at net asset value without an
initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A and Class
B distribution and service fees for its current fiscal year are 0.25% and 1.00%
per annum, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income as
dividends on a monthly basis. In determining the net investment income available
for distributions, the Fund may rely on projections of its anticipated net
investment income over a longer term, rather than its actual net investment
income for the period. If the Fund earns less than projected, or otherwise
distributes more than its earnings for the year, a portion of the distributions
may constitute a return of capital. The Fund may make one or more distributions
during the calendar year to its shareholders from any long-term capital gains,
and may also make one or more distributions during the calendar year to its
shareholders from short-term capital gains. Shareholders may elect to receive
dividends and capital gain distributions in either cash or additional shares of
the class with respect to which the distribution is made. See "Tax Status" and
"Shareholder Services Distribution Options" below. Distributions paid by the
Fund with respect to Class A shares will generally be greater than those paid
with respect to Class B shares because expenses attributable to Class B shares
will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes.
Shareholders of the Fund normally will have to pay federal income taxes on the
dividends and capital gain distributions they receive from the Fund, whether the
distribution is paid in cash or reinvested in additional shares. The Fund
expects that none of its distributions will be eligible for the dividends
received deduction for corporations. Shareholders may not have to pay state or
local taxes on dividends derived from interest on U.S. Government obligations.
Investors should consult with their tax advisers in this regard. Shortly after
the end of each calendar year, each shareholder will be sent a statement setting
forth the federal income tax status of all dividends and distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion, if any, representing a return of capital
(which is free of current taxes but which results in a basis reduction), the
portion representing interest on U.S. Government obligations, and the amount, if
any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% (or any
lower rate permitted under an applicable treaty) on dividends and other payments
that are subject to such withholding and that are made to persons who are
neither citizens nor residents of the U.S. The Fund is also required in certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a
shareholder who is neither a citizen nor a resident of the U.S.) who does not
furnish to the Fund certain information and certifications, or who is otherwise
subject to backup withholding. Backup withholding will not, however, be applied
to payments that have been subject to 30% withholding. Prospective investors
should read the Fund's Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
during each day as of the close of regular trading on the Exchange by deducting
the amount of the Fund's liabilities attributable to the class from the value of
the Fund's assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market or other fair value, as described in the
SAI. The net asset value of each class of shares is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has two classes of shares which it offers to the general public,
entitled Class A and Class B Shares of Beneficial Interest (without par value).
The Fund also has a class of shares which it offers exclusively to certain
institutional investors, entitled Class I shares. The Fund has reserved the
right to create and issue additional classes and series of shares, in which case
each class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of shares of that particular
series. Shareholders are entitled to one vote for each share held and shares of
each series would be entitled to vote separately to approve investment advisory
agreements or changes in investment restrictions, but shares of all series would
vote together in the election of Trustees and selection of accountants.
Additionally, each class of shares of a series will vote separately on any
material increases in the fees under the Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Fund does not intend to hold annual shareholder meetings. The Declaration of
Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as
described above in "Information Concerning Shares of the Fund -- Purchases --
Conversion of Class B Shares"). Shares are fully paid and non- assessable.
Should the Fund be liquidated, shareholders of each class are entitled to share
pro rata in the net assets of the Fund attributable to that class available for
distribution to shareholders. Shares will remain on deposit with the Shareholder
Servicing Agent and certificates will not be issued except in connection with
pledges and assignments and in certain other limited circumstances.
The Fund is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and omission insurance) and the Fund
itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Securities Corporation and Weisenberger Investment Companies Service.
Yield quotations will be based on the annualized net investment income per share
of a class of the Fund over a 30 day period stated as a percent of the maximum
public offering price of shares of that class on the last day of that period.
The current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past twelve months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B shares assume no CDSC
is paid. The current distribution rate differs from the yield calculation
because it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing, short-term
capital gains, and return of invested capital, and is calculated over a
different period of time. Total rate of return quotations will reflect the
average annual percentage change over stated periods in the value of an
investment in a class of the Fund made at the maximum public offering price of
shares of that class with all distributions reinvested and which will give
effect to the imposition of any applicable CDSC assessed upon redemption of the
Fund's Class B shares. Such total rate of return quotations may be accompanied
by quotations which do not reflect the reduction in the value of the initial
investment due to the sales charge or the deduction of a CDSC, and which will
thus be higher. The Fund offers multiple classes of shares which were initially
offered for sale to, and purchased by, the public on different dates (the "class
inception date"). The calculation of total rate of return for a class of shares
which has a later class inception date than another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from its
inception date and (ii) the performance of the Fund's oldest class from its
inception date up to the class inception date of the newer class. See the SAI
for further information on the calculation of total rate of return for share
classes with different class inception dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated time and current distribution rate reflects only the rate
of distributions paid by the Fund over a stated period of time, while total rate
of return reflects all components of investment return over a stated period of
time. The Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which the Fund will calculate its yield, current distribution rate
and total rate of return, see the SAI. For further information about the Fund's
performance for the fiscal year ended July 31, 1997, please refer to the Fund's
Annual Report. A copy of the Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and phone
number). In addition to information provided in shareholder reports, the Fund
may, in its discretion, from time to time, make a list of all or a portion of
its holdings available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions (except as provided
below) reinvested in additional shares;
-- Dividends and capital gain distributions in cash.
With respect to the second option, the Fund may from time to time make
distributions from short-term capital gains on a monthly basis, and to the
extent such gains are distributed monthly, they shall be paid in cash; any
remaining short-term capital gains not so distributed shall be reinvested in
additional shares.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares at the net asset value in effect at the close of business on
the record date. Checks for dividends and capital gain distributions in amounts
less than $10 will automatically be reinvested in additional shares of the Fund.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, or the shareholder does
not respond to mailings from the Shareholder Servicing Agent with regard to
uncashed distribution checks, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by the record date for a
dividend or distribution in order to be effective for that dividend or
distribution. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as described in
the SAI) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of any class of other MFS Funds or the MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period for purchases of $1 million or more), the shareholder may obtain
such shares of the Fund at the same reduced sales charge as though the total
quantity were invested in one lump sum, subject to escrow agreements and the
appointment of an attorney for redemptions from the escrow amount, if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts
on purchases of Class A shares when his new investment, together with the
current offering price value of all holdings of Class A, B and C shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund may be
sold at net asset value (and without any applicable CDSC) through the automatic
reinvestment of dividend and capital gain distributions from the same class of
another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan must
be at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B shares in any year pursuant to a SWP will not be subject
to a CDSC and are generally limited to 10% of the value of the account at the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made through a
shareholder's checking account on any day of the month. If the Shareholder does
not specify a date, the investment will automatically occur on the first
business day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares in other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to six different funds. A shareholder should consider the objectives and
policies of a fund and review its prospectus before electing to exchange money
into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund and Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax 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 or
falling price levels. Maintaining a dollar cost averaging program concurrently
with a withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
--------------------
The Fund's SAI, dated December 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) investment objectives, policies and
restrictions, (ii) its Trustees, officers and investment adviser, (iii)
portfolio transactions and brokerage commissions, (iv) the method used to
calculate yield, distribution rate and total rate of return quotations of the
Fund, (v) the Distribution Plan, and (vi) various services and privileges
provided by the Fund for the benefit of its shareholders, including additional
information with respect to the exchange privilege.
<PAGE>
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III). As used in this Appendix,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement with MFS Fund Distributor,
Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on
purchases of Class A shares and the CDSC imposed on certain redemptions of Class
A shares and on redemptions of Class B shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
o Shares acquired through dividend or capital gain reinvestment; and
o Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
o Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
o Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun
Life Assurance Company of Canada ("Sun Life") or any of their
subsidiary companies;
o Trustees and retired trustees of any investment company for which MFD
serves as distributor;
o Employees, directors, partners, officers and trustees of any
sub-adviser to any MFS Fund;
o Employees or registered representatives of dealers;
o Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit- sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
o Institutional Clients of MFS or MFS Institutional Advisors, Inc.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
o Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/ Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). SHARES REDEEMED ON ACCOUNT OF
DISTRIBUTIONS MADE UNDER THE FOLLOWING CIRCUMSTANCES:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
o Death or disability of the IRA Owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER
SPONSORED PLANS ("ESP PLANS")
o Death, disability or retirement of 401(a) or ESP Plan participant;
o Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
o Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
o Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
o Tax-free return of excess 401(a) or ESP Plan contributions;
o To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. (the "Shareholder Servicing
Agent"); and
o Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50%
or more of the total value of the 401(a) or ESP Plan's assets in the
MFS Funds, in which case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
o Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). SHARES
TRANSFERRED:
o To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been
redeemed; and
o From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
o Shares acquired pursuant to repayments by retirement plan participants
of loans from 401(a) or ESP Plans with respect to which such Plan or
its sponsoring organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not the MFS
Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
o Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
o Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
o Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum
size requirements specified from time to time by MFD or one or more of
its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
o Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
o Distributions made on or after the IRA owner has attained the age of 59
1/2 years old; and
o Tax-free returns of excess IRA contributions.
401(a) PLANS
o Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
o Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
o Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
o Shares acquired of Eligible Funds (as defined below) if the
shareholder's investment equals or exceeds $5 million in one or more
Eligible Funds (the "Initial Purchase") (this waiver applies to the
shares acquired from the Initial Purchase and all shares of Eligible
Funds subsequently acquired by the shareholder); provided that the
dealer through which the Initial Purchase is made enters into an
agreement with MFD to accept delayed payment of commissions with
respect to the Initial Purchase and all subsequent investments by the
shareholder in the Eligible Funds subject to such requirements as may
be established from time to time by MFD (for a schedule of the amount
of commissions paid by MFD to the dealer on such investments, see
"Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS
Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B 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 is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
o Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (or 15% per year, in the case of accounts registered as IRAs where
the redemption is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account value at the time of
establishment.
2. DEATH OF OWNER
o Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
o Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual
(in which case a disability certification form is required to be
submitted to the Shareholder Servicing Agent).
4. RETIREMENT PLANS. SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER
THE FOLLOWING CIRCUMSTANCES:
IRAS, 401(a) PLANS, ESP PLANS AND SRO PLANS
o Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
o Distributions made on or after the SAR-SEP Plan participant has
attained the age of 70 1/2 old, but only with respect to the minimum
distribution under applicable Code rules; and
o Death or disability of a SAR-SEP Plan participant.
<PAGE>
APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
GNMA CERTIFICATES -- are mortgage-backed securities which represent a partial
ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
The Fund will purchase only GNMA Certificates of the "modified pass-through"
type, which entitle the holder to receive its proportionate share of all
interest and principal payments owed on the mortgage pool, net of fees paid to
the issuer and GNMA. Payment of principal of and interest on GNMA Certificates
of the "modified pass-through" type is guaranteed by GNMA.
The average life of a GNMA Certificate is likely to be substantially less than
the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested far in advance of
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee.
As the prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the average
life of a single-family dwelling mortgage with a 25- 30-year maturity, the type
of mortgage which backs the vast majority of GNMA Certificates, is approximately
12 years. It is therefore customary practice to treat GNMA Certificates as
30-year mortgage-backed securities which prepay fully in the twelfth year.
As a consequence of the fees paid to GNMA and the issuer of GNMA Certificates,
the coupon rate of interest of GNMA Certificates is lower than the interest paid
on the VA-guaranteed or FHA-insured mortgages underlying the GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par; (ii) Certificates may trade in the secondary
market at a premium or discount after issuance; (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates and the rate at which principal so prepaid is reinvested. In
addition, prepayment of mortgages included in the mortgage pool underlying a
GNMA Certificate purchased at a premium may result in a loss to the Fund.
Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors, GNMA
Certificates are highly liquid instruments. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things, the
level of market rates, the Certificate's coupon rate and the prepayment
experience of the pool of mortgages backing each Certificate.
FNMA BONDS -- are bonds issued and guaranteed by the Federal National Mortgage
Association and are not guaranteed by the U.S. Government.
FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation and are not guaranteed by the U.S. Government.
EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial interest and
participation certificates issued and guaranteed by the Export-Import Bank of
the United States.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION CERTIFICATES -- are certificates of
beneficial interest guaranteed by the Federal Agricultural Mortgage Corporation.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION BONDS AND NOTES -- are bonds and notes
guaranteed by the Federal Agricultural Mortgage Corporation.
FEDERAL FARM CREDIT BANKS CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds
issued and guaranteed by a cooperatively owned nationwide system of banks and
associations supervised by the Farm Credit Administration.
FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued by the
Federal Home Loan Bank System.
FEDERAL HOME LOAN BANK CERTIFICATES -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Federal Home Loan
Bank System.
FHA DEBENTURES -- are debentures issued by the Federal Housing Authority of
the U.S. Government.
FICO BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Financing Corporation.
GSA PARTICIPATION CERTIFICATES -- are participation certificates issued by the
General Services Administration of the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
REFCORP BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Resolution Funding Corporation.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and interest
by the Small Business Administration of the U.S. Government.
SLMA DEBENTURES -- are debentures backed by the Student Loan Marketing
Association.
TITLE XI BONDS -- are bonds issued in accordance with the provisions of Title XI
of the Merchant Marine Act of 1936, as amended, the payment of which is
guaranteed by the U.S. Government.
TVA BONDS AND NOTES -- are bonds and notes issued and guaranteed by the
Tennessee Valley Authority.
U.S. DEPARTMENT OF VETERAN AFFAIRS CERTIFICATES -- are certificates of
beneficial interest guaranteed by the U.S. Department of Veteran Affairs.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds issued by the
Washington Metropolitan Area Transit Authority and guaranteed by the Secretary
of Transportation of the U.S. Government.
Although this list includes the primary types of Government Securities in which
the Fund invests (other than U.S. Treasury obligations), the Fund may also
invest in Government Securities other than those listed above.
<PAGE>
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) GOVERNMENT MORTGAGE FUND
500 Boylston Street
Boston, MA 02116
MGM-1-12/97/136M 31/231
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) GOVERNMENT MORTGAGE FUND
Prospectus
December 1, 1997
<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
MFS(R) GOVERNMENT STATEMENT OF
MORTAGE FUND ADDITIONAL INFORMATION
(A Member of the MFS Family of Funds(R)) December 1, 1997
- ------------------------------------------------------------------------------
Page
----
1. Definitions ....................................................... 2
2. Investment Objective, Policies and Restrictions ................... 2
3. Management of the Fund ............................................ 9
Trustees ........................................................ 10
Officers ........................................................ 10
Trustee Compensation Table ...................................... 10
Investment Adviser .............................................. 11
Administrator ................................................... 12
Custodian ....................................................... 12
Shareholder Servicing Agent ..................................... 12
Distributor ..................................................... 12
4. Portfolio Transactions and Brokerage Commissions .................. 13
5. Shareholder Services .............................................. 13
Investment and Withdrawal Programs .............................. 13
Exchange Privilege .............................................. 15
Tax-deferred Retirement Plans ................................... 16
6. Tax Status ........................................................ 16
7. Determination of Net Asset Value and Performance .................. 17
8. Distribution Plan ................................................. 19
9. Description of Shares, Voting Rights and Liabilities .............. 20
10. Independent Auditors and Financial Statements ..................... 21
Appendix A -- Performance Information ............................. A-1
MFS GOVERNMENT MORTGAGE FUND
A Series of MFS Series Trust X
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
December 1, 1997. This SAI should be read in conjunction with the Prospectus, a
copy of which may be obtained without charge by contacting the Shareholder
Servicing Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
1. DEFINITIONS
"Fund" -- MFS Government Mortgage Fund, a diversified series
of MFS Series Trust X (the "Trust"), a Massachusetts
business trust. The Trust was known as MFS
Government Mortgage Fund prior to June 2, 1995, MFS
Government Income Plus Fund prior to March 1, 1993
and MFS Government Income Plus Trust prior to August
3, 1992.
"MFS" or the "Adviser" -- Massachusetts Financial Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc., a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund, dated December 1, 1997,
as amended or supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES. The Fund's primary investment objective is to provide a
high level of current income. The secondary objective of the Fund is to protect
shareholders' capital. Any investment involves risk and there can be no
assurance that the Fund will achieve its objectives.
INVESTMENT POLICIES. The investment policies of the Fund are described in the
Prospectus. In addition, certain of the Fund's investment policies are
described in greater detail below.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of the New York Stock
Exchange (the "Exchange") or members of the Federal Reserve System, recognized
primary U.S. Government securities dealers or institutions which the Adviser has
determined to be of comparable creditworthiness. The securities that the Fund
purchases and holds through its agent are U.S. Government securities, the values
of which are equal to or greater than the repurchase price agreed to be paid by
the seller. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a standard rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
MORTGAGE PASS-THROUGH SECURITIES. The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage pass-though securities. GNMA
securities are often purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates which represent
interests in conventional mortgages (i.e., not federally insured or guaranteed)
from FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis. When the Fund commits to purchase U.S. Government
securities on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with policies promulgated by the Securities and Exchange
Commission (the "SEC"). Since those policies currently recommend that an amount
of the Fund's assets equal to the amount of the purchase be held aside or
segregated to be used to pay for the commitment, the Fund will always have
liquid assets sufficient to cover any commitments or to limit any potential
risk. The Fund does not intend to make such purchases for speculative purposes.
The Fund will only make commitments to purchase securities on a when-issued or
forward delivery basis with the intention of actually acquiring the securities.
However, the Fund may sell these securities before the settlement date if it is
deemed advisable as a matter of investment strategy. When the time comes to pay
for when-issued or forward delivery securities, the Fund will meet its
obligations from then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the
"when-issued" or forward delivery securities themselves (which may have a value
greater or less than the Fund's payment obligation).
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. During the roll period, the Fund foregoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated for the lost interest by the difference between the current sales
price and the lower price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. The Fund may also be compensated by receipt of a commitment fee.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
("CMOs") which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Collateral underlying CMOs purchased by the Fund must
be issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Typically, CMOs are collateralized by certificates issued by
the GNMA, FNMA or FHLMC (such collateral collectively hereinafter referred to as
"Mortgage Assets"). The Fund may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. These Mortgage Assets must be issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities.
In a CMO, a series of bonds or certificates is usually issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates resulting in a loss of all or part of the premium if any has
been paid. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a series of a CMO in
innumerable ways. In a common structure, payments of principal, including any
principal prepayments, on the Mortgage Assets are applied to the classes of the
series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of Mortgage Assets. The
Fund will only invest in SMBS whose Mortgage Assets are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities. A common
type of SMBS will have one class receiving some of the interest and most of the
principal from the Mortgage Assets, while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or "IO" class) while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying Mortgage
Assets, and a rapid rate of principal payments may have a material adverse
effect on such security's yield to maturity. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities. The market value of
the class consisting primarily or entirely of principal payments generally is
unusually volatile in response to changes in interest rates. Because SMBS were
only recently introduced, established trading markets for these securities have
not yet developed, although the securities are traded among institutional
investors and investment banking firms.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps and
other types of available swap agreements. Swaps involve the exchange by the Fund
with another party of cash payments based upon different interest rate indexes
and other prices or rates, such as the value of mortgage prepayment rates. For
example, in the typical interest rate swap, the Fund might exchange a sequence
of cash payments based on a floating rate index for cash payments based on a
fixed rate. Payments made by both parties to a swap transaction are based on a
notional principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
The Fund will maintain liquid assets with its custodian to cover its current
obligations under swap transactions and cap, floor and collar arrangements. If
the Fund enters into a swap agreement on a net basis (i.e., the two payment
streams are netted out, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments), the Fund will maintain cash or liquid
assets with its Custodian with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If the Fund enters
into a swap agreement on other than a net basis, it will maintain cash or liquid
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate or other factor that
determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If the counterparty defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. The Fund anticipates that it will be able to
eliminate or reduce its exposure under these arrangements by assignment or other
disposition or by entering into an offsetting agreement with the same or another
counterparty.
OPTIONS ON FIXED INCOME SECURITIES: The Fund may write (sell) covered call and
put options on fixed income securities and purchase call and put options. An
option provides the purchaser, or "holder," with the right, but not the
obligation, to purchase, in the case of a "call" option, or sell, in the case of
a "put" option, the fixed income security or securities in connection with which
the option was written, for a fixed exercise price up to a stated expiration
date or, in the case of certain options, on such date. The holder pays a
non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although this entire amount may be lost.
The risk of the seller, or "writer," however, is potentially unlimited, unless
the option is "covered." A call option written by the Fund is "covered" if the
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund holds a call on the same fixed income
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in liquid assets in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets in a segregated account with its custodian, or else
holds a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is (a) equal to or greater than
the exercise price of the put written or (b) is less than the exercise price of
the put written if the difference is maintained by the Fund in liquid assets in
a segregated account with its custodian. Put and call options written by the
Fund may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counterparty with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
The Fund may write options for hedging purposes. In particular, if the Fund
writes an option which expires unexercised or is closed out by the Fund at a
profit, the Fund retains the premium paid for the option less related
transaction costs, which increases its gross income and offsets in part the
reduced value of the portfolio security in connection with which the option is
written, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the security underlying the option moves
adversely to the Fund's position, the option may be exercised and the Fund will
then be required to purchase or sell the security at a disadvantageous price,
which might only partially be offset by the amount of the premium.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put options may be used by the
Fund in the same market environments in which call options are used in
equivalent buy-and-write transactions.
In certain instances, the Fund may enter into Options on Treasury securities
which provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of each such Option.
Like other types of Options, these transactions, which may be referred to as
"reset" Options or "adjustable strike" Options, grant the purchaser the right to
purchase (in the case of a "call") or sell (in the case of a "put"), a specified
type and series of U.S. Treasury security at any time up to a stated expiration
date (or, in certain instances, on such date). In contrast to other types of
Options, however, the price at which the underlying security may be purchased or
sold under a "reset" Option is determined at various intervals during the term
of the Option, and such price fluctuates from interval to interval based on
changes in the market value of the underlying security. As a result, the strike
price of a "reset" Option, at the time of exercise, may be less advantageous to
the Fund than if the strike price had been fixed at the initiation of the
Option. In addition, the premium paid for the purchase of the Option may be
determined at the termination, rather than the initiation, of the Option. If the
premium is paid at termination, the Fund assumes the risk that (i) the premium
may be less than the premium which would otherwise have been received at the
initiation of the Option because of such factors as the volatility in yield of
the underlying Treasury security over the term of the Option and adjustments
made to the strike price of the Option, and (ii) the Option purchaser may
default on its obligation to pay the premium at the termination of the Option.
The Fund may also write combinations of put and call options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option. By writing a put option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
options will not be undertaken by the Fund for speculative purposes, but rather
for hedging purposes. Where options are written for hedging purposes, such
transactions will constitute only a partial hedge against declines in the value
of portfolio securities or against increases in the value of securities to be
acquired, up to the amount of the premium.
The Fund may also purchase put and call options on securities. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the Fund
to sell the securities underlying such options at the exercise price, or to
close out the options at a profit. The Fund will purchase call options to hedge
against an increase in the price of securities that the Fund anticipates
purchasing in the future. If such an increase occurs, the call option will
permit the Fund to purchase the securities underlying such option at the
exercise price or to close out the option at a profit. The premium paid for a
call or put option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises or declines sufficiently, the option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the option and
related transaction costs.
The staff of the SEC has taken the position that purchased over- the-counter
options and assets used to cover written over-the- counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of- the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers and will treat
the assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
YIELD CURVE OPTIONS: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The trading of yield curve options
is subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present risk of loss even if the
yield of one of the underlying securities remains constant, if the spread moves
in a direction or to an extent which was not anticipated. Yield curve options
written by the Fund will be "covered." A call (or put) option is covered if the
Fund holds another call (or put) option on the spread between the same two
securities and maintains in a segregated account with its custodian sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling. See "Options
on Fixed Income Securities" above for a discussion of the policies the Adviser
intends to follow to limit the Fund's investment in these securities.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, commodities, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity (i.e., principal value) or coupon
rate is determined by reference to a specific instrument or statistic.
The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. At the same time,
indexed securities are subject to the credit risks associated with the issuer of
the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations, and certain U.S. government agencies.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities ("Futures Contracts"). Such
transactions will be used to hedge (i.e., protect) against anticipated changes
in interest rates which otherwise might either adversely affect the value of the
Fund's portfolio securities or adversely affect the prices of long-term U.S.
Government securities which the Fund intends to purchase at a later date. The
Fund may also enter into such transactions for non-hedging purposes to the
extent permitted by applicable law.
When a Futures Contract is sold, the Fund incurs a contractual obligation to
deliver the securities underlying the contract at a specified price on a
specified date during a specified future month or, in the case of Futures
Contracts on an index of securities, to make or receive a cash settlement. A
"purchase" of a Futures Contract means a contractual obligation by the Fund to
receive delivery of the securities called for by the contract at a specified
price during a specific future month or, in the case of Futures Contracts on an
index of securities, to make or receive cash settlements.
Futures Contracts have been designed by exchanges which have been designated
"contract markets" by the Commodity Futures Trading Commission ("CFTC"), and
must be executed through a futures commission merchant, or brokerage firm, which
is a member of the relevant contract market. Futures Contracts trade on these
markets, and the exchanges, through their clearing organizations, guarantee that
the contracts will be performed as between the clearing members of the exchange.
The Fund will only enter into Futures Contracts which are based on U.S.
Government securities, including any index of U.S. Government securities.
While Futures Contracts based on debt securities provide for the delivery of
securities, deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the same time
such a purchase or sale is made, the Fund must provide cash or securities as a
deposit ("initial deposit") known as "margin." The initial deposit varies but
may be as low as 5% or less of the value of the contract. Daily thereafter, the
Futures Contract is valued on a marked-to-market basis and the Fund may be
required to pay or receive additional "variation margin", based on the decline
or increase in the value of the contract. At the time of delivery of securities
pursuant to such a contract, adjustments are made to recognize differences in
value arising from the delivery of securities with a different interest rate
than the specific security that provides the standard for the contract. In some
(but not many) cases, securities called for by a Futures Contract may not have
been issued when the contract was written. A Futures Contract on an index of
U.S. Government securities provides for the payment and receipt of a cash
settlement based on changes in the value of the index. The index underlying such
a Contract is comprised of a broad based portfolio of U.S. Government securities
designed to reflect movements in the market as a whole.
One purpose of the purchase or sale of a Futures Contract for hedging purposes,
in the case of a portfolio such as the Fund's portfolio, which holds or intends
to acquire long-term debt securities, is to protect the Fund against the adverse
effects of fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, since the Fund owns long-term bonds, if
interest rates were expected to increase the Fund might enter into Futures
Contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Fund's Futures Contracts would increase at approximately the same rate
thereby keeping the net asset value of the Fund from declining, or declining as
much as it otherwise would have.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of Futures
Contracts should be similar to that of long-term bonds, the Fund could protect
itself against the effects of the anticipated rise in the value of long-term
bonds without actually buying them until the necessary cash became available or
the market had stabilized. At that time, the Futures Contracts could be
liquidated and the Fund could buy long-term bonds on the cash market. Due to
changing market conditions, however, and interest rate forecasts, a futures
position may be terminated without a corresponding purchase of securities. To
the extent the Fund purchases a Futures Contract, it will maintain a segregated
asset account consisting of liquid assets in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial deposit and variation margin payments made by the Fund with
respect to such Futures Contracts, thereby assuring that the position is
unleveraged.
The liquidity of a market in a futures contract may be adversely affected by
"daily price fluctuation limits" established by commodity exchanges, which limit
the amount of fluctuation in a futures contract price during a single trading
day. Once the daily limit has been reached in the contract, no trades may be
entered into at a price beyond the limit, thus preventing the liquidation of
open futures positions. Prices have in the past exceeded the daily limit on a
number of consecutive trading days. On any day or days when the price
fluctuation limits have been reached, the Fund may be unable to liquidate
existing futures positions or to implement a hedging strategy through the
purchase or sale of particular futures.
Further, the CFTC and the various contract markets have established limits
referred to as "speculative position limits" on the maximum net long or net
short position which any person may hold or control in a particular futures or
option contract. An exchange may order the liquidation of positions found to be
in violation of these limits and it may impose other sanctions or restrictions.
The Adviser does not believe that these trading and position limits will have
any adverse impact on the strategies for hedging the portfolio of the Fund. The
trading of Futures Contracts is also subject to the illiquidity risks described
above with respect to options on securities.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the fixed income security underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract may constitute a partial hedge against increasing prices of the
security underlying the Futures Contract. If the futures price at expiration of
the option is higher than the exercise price, the Fund will retain the full
amount of the option premium, less related transaction costs, which provides a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing Options on Futures Contracts may to some extent be
reduced or increased by changes in the value of portfolio securities. The Fund
may also enter into such transactions for non-hedging purposes, to the extent
permitted by applicable law, which involves greater risk.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline or a rise in interest rates, the
Fund may, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease in portfolio value occurs, it may be offset, in
whole or part, by a profit on the option. Conversely, where it is projected that
the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or a decline in interest rates, the Fund
may purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts. As in the case of Options, the writing of Options
on Futures Contracts may require the Fund to forego all or a portion of the
benefits of favorable movements in the price of portfolio securities, and the
purchase of Options on Futures Contracts may require the Fund to forego all or a
portion of such benefits up to the amount of the premium paid and related
transaction costs. The Fund may also enter into transactions in Options on
Futures Contracts for non-hedging purposes to the extent permitted by applicable
law.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
liquid assets in an amount equal to the value of the security or index
underlying the Futures Contract, or (c) through the holding of a put on the same
Futures Contract and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written, or is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call Option on a Futures Contract written by the Fund, the
Fund will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position. An
Option on a Futures Contract is traded on the same contract market as the
underlying Futures Contract, subject to regulation by the CFTC and the
performance guarantee of the exchange clearing house.
RISK FACTORS: Imperfect Correlation of Hedging Instruments with the Fund's
Portfolio -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options and Futures Contracts will depend on
the degree to which price movements in the underlying instruments correlate with
price movements in the relevant portion of the Fund's portfolio. If the values
of fixed income portfolio securities being hedged do not move in the same amount
or direction as the instruments underlying options or Futures Contracts, the
Fund's hedging strategy may not be successful and the Fund could sustain losses
on its hedging strategy which would not be offset by gains on its portfolio. It
is also possible that there may be a negative correlation between the instrument
underlying an option or Futures Contract and the portfolio securities being
hedged, which could result in losses both on the hedging transaction and the
portfolio securities. In such instances, the Fund's overall return could be less
than if the hedging transaction had not been undertaken. In the case of Futures
and options on fixed income securities, the portfolio securities which are being
hedged may not be the same type of obligation underlying such contract. As a
result, the correlation probably will not be exact. Consequently, the Fund bears
the risk that the price of the fixed income portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
The correlation between prices of fixed income securities and prices of options
or Futures Contracts may be distorted due to differences in the nature of the
markets, such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the option and Futures Contract
markets. Due to the possibility of distortion, a correct forecast of general
interest rate trends by the Adviser may still not result in a successful
transaction. The trading of Options on Futures Contracts also entails the risk
that changes in the value of the underlying Futures Contract will not be fully
reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity or termination date of the
option or Futures Contract approaches.
The trading of options and Futures Contracts also entails the risk that, if the
Adviser's judgment as to the general direction of interest or exchange rates is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates, and rates instead decline, the
Fund will lose part or all of the benefit of the increased value of the fixed
income securities being hedged, and may be required to meet ongoing daily
variation margin payments.
It should be noted that the Fund may purchase and write Options, Futures
Contracts and Options on Futures Contracts not only for hedging purposes, but
also for non-hedging purposes to the extent permitted by applicable law. As a
result, the Fund will incur the risk that losses on such transactions will not
be offset by corresponding increases in the value of fixed income portfolio
securities or decreases in the cost of fixed income securities to be acquired.
RISK FACTORS: Potential Lack of a Liquid Secondary Market -- Prior to exercise
or expiration, a position in an exchange-traded option, Futures Contract or
Option on a Futures Contract can only be terminated by entering into a closing
purchase or sale transaction, which requires a secondary market for such
instruments on the exchange on which the initial transaction was entered. If no
such market exists, it may not be possible to close out a position, and the Fund
could be required to purchase or sell the underlying instrument or meet ongoing
variation margin requirements. The inability to close out option or futures
positions also could have an adverse effect on the Fund's ability effectively to
hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
RISK FACTORS: Options on Futures Contracts -- In order to profit from the
purchase of an Option on a Futures Contract, it may be necessary to exercise the
option and liquidate the underlying Futures Contract, subject to all of the
risks of futures trading. The writer of an Option on a Futures Contract is
subject to the risks of futures trading, including the requirement of initial
and variation margin deposits.
ADDITIONAL POLICIES ON THE USE OF OPTIONS AND FUTURES: In order to assure that
the Fund will not be deemed to be a "commodity pool" for purposes of the
Commodity Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options if, as a result, more than 5% of its total assets would be invested in
such Options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the leveraging effect of such Futures
Contract is minimized.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made to member banks of
the Federal Reserve System and to member firms of the Exchange (and subsidiaries
thereof), and would be required to be secured continuously by collateral in
cash, U.S. Government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would have the right to call a loan and obtain the
securities loaned at any time on customary industry settlement notice (which
will not usually exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest paid by the issuer on
the securities loaned and would also receive compensation based on investment of
cash collateral. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Adviser to be of good standing, and when, in the judgment of the
Adviser, the consideration which could be earned currently from securities loans
of this type justifies the attendant risk. If the Adviser determines to make
securities loans, it is not intended that the value of the securities loaned
would exceed 30% of the value of the Fund's total assets.
PORTFOLIO TRADING: The Fund intends to fully manage its portfolio by buying and
selling U.S. Government obligations, as well as holding selected obligations to
maturity, and by engaging in transactions involving related options, futures and
options on futures. In managing its portfolio the Fund seeks to maximize the
return on its portfolio by taking advantage of market developments and yield
disparities, which may include use of the following strategies:
(1) selling one type of U.S. Government security (e.g., Treasury bonds) and
buying another (e.g., GNMA direct pass-through certificates) when disparities
arise in the relative values of each; and
(2) changing from one U.S. Government obligation to an essentially similar
U.S. Government obligation when their respective yields are distorted due to
market factors.
The Fund will also use the techniques described above under "Repurchase
Agreements," "'When-Issued" Securities," "Options" and "Futures Contracts" to
manage its portfolio.
These strategies may result in increases or decreases in the Fund's current
income available for distribution to the Fund's shareholders and in the holding
by the Fund of obligations which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the Fund's expectations of changes in
interest rates or its evaluation of the normal yield relationship between two
obligations proves to be incorrect, the Fund's income, net asset value per share
and potential capital gain may be decreased or its potential capital loss may be
increased.
The Fund will engage in portfolio trading if it believes a transaction net of
costs will help in attaining its investment objectives. See "Portfolio
Transactions and Brokerage Commissions."
The objectives and the policies described above and the policies with respect to
portfolio trading described above may be changed without shareholder approval.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of its
shares (which, as used in this SAI, means the lesser of (i) more than 50% of the
outstanding shares of the Fund or of a class, as applicable, or (ii) 67% or more
of the outstanding shares of the Fund or of a class, as applicable, present at a
meeting at which holders of more than 50% of the outstanding shares of the Fund
or of a class, as applicable, are represented at such meeting in person or by
proxy):
The Fund may not:
(1) borrow money or pledge its assets except as a temporary measure for
extraordinary or emergency purposes (the Fund intends to borrow money only
from banks and only to accommodate requests for the repurchase of shares of
the Fund while effecting an orderly liquidation of portfolio securities) (for
the purpose of this restriction, collateral arrangements with respect to
options, Futures Contracts, options on futures contracts and collateral
arrangements with respect to initial and variation margins are not considered
a pledge of assets); for additional related restrictions, see paragraphs (i)
and (ii) under the caption "State and Federal Restrictions";
(2) purchase any security or evidence of interest therein on margin, except
that the Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the Fund may
make deposits on margin in connection with Futures Contracts and related
options;
(3) write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the writing, purchasing and
selling of puts, calls or combinations thereof with respect to Government
securities and with respect to Futures Contracts or the purchase, ownership,
holding or sale of contracts for the future delivery of fixed income
securities;
(4) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(5) purchase or sell commodities or commodity contracts, except that the
Fund may purchase and sell Futures Contracts and related options;
(6) make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 10% of the
Fund's net assets (taken at market value) is held as collateral for such sales
at any one time (it is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss for Federal
income tax purposes; such sales would not be made of securities subject to
outstanding options);
(7) make loans to other persons except through the lending of its portfolio
securities not in excess of 30% of its total assets (taken at market value)
and except through the use of repurchase agreements and provided that not more
than 10% of the Fund's assets will be invested in repurchase agreements
maturing in more than seven days (for these purposes the purchase of all or a
portion of an issue of debt securities in accordance with the Fund's
investment objectives and policies shall not be considered the making of a
loan);
(8) knowingly invest in securities which are restricted securities under the
Securities Act of 1933 if, as a result thereof, more than 10% of the Fund's
total assets (taken at market value) would be so invested;
(9) purchase securities of any issuer if such purchase at the time thereof
would cause more than 10% of the voting securities of such issuer to be held
by the Fund;
(10) purchase securities of any issuer if such purchase at the time thereof
would cause more than 5% of the Fund's assets (taken at market value) to be
invested in the securities of such issuer (other than securities or
obligations issued or guaranteed by the United States, any state or political
subdivision thereof, or any political subdivision of any such state, or any
agency or instrumentality of the United States or of any state or of any
political subdivision of any state or the United States); or
(11) issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder (for the purpose of this restriction,
collateral arrangements with respect to options, Futures Contracts and options
on futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be the issuance of a senior security).
The Fund has also adopted a policy which is fundamental and which provides that
the Fund's assets will be invested in Government securities and related options,
futures, options on futures and repurchase agreements.
STATE AND FEDERAL RESTRICTIONS: In order to comply with certain state and
federal statutes and policies, the Fund will not, as a matter of operating
policy, (i) borrow money for any purpose in excess of 10% of its assets (taken
at market value) moreover, the Fund will not purchase any securities for its
portfolio at any time at which borrowings exceed 5% of its assets (taken at
market value), (ii) pledge for any purpose in excess of 15% of its assets (taken
at market value) (for the purpose of this restriction, collateral arrangements
with respect to the writing of options, Futures Contracts, Options on Futures
Contracts and collateral arrangements with respect to initial and variation
margins are not considered a pledge of assets), (iii) invest more than 5% of its
total assets at the time of investment in companies which, including
predecessors, have a record of less than three years' continuous operation, (iv)
purchase or retain in its portfolio any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is an officer or Director of the Adviser if, after the purchase
of the securities of such issuer by the Fund one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, of such
issuer and such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or both,
(v) invest for the purpose of exercising control or management, (vi) purchase
securities issued by any registered investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
such purchase other than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan of merger or
consolidation; provided, however, that the Fund shall not purchase the
securities of any registered investment company if such purchase at the time
thereof would cause more than 10% of the net assets of the Fund (taken at market
value) to be invested in the securities of such issuers or would cause more than
3% of the outstanding voting securities of any such issuer to be held by the
Fund and, provided further, that the Fund shall not purchase securities issued
by any open-end investment company, or (vii) invest more than 10% of its assets
(taken at market value) in securities (including repurchase agreements maturing
in more than seven days) for which there are no readily available market
quotations. These policies are not fundamental and may be changed by the Fund
without shareholder approval in response to changes in the various state and
federal requirements.
PERCENTAGE RESTRICTION: Except with respect to the Fund's policy on borrowing
and investing in illiquid securities, these investment restrictions are adhered
to at the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets, and
the officers of the Fund are responsible for its operations. The Trustees and
officers are listed below, together with their principal occupations during the
past five years. (Their titles may have varied during that period.)
TRUSTEES
A. KEITH BRODKIN, Chairman and President* (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
PETER G. HARWOOD (born 4/3/26)
Private Investor
Address: 211 Lindsay Pond Road, Concord, Massachusetts
J. ATWOOD IVES (born 5/1/36)
Eastern Enterprises (diversified services company), Chairman and Chief
Executive Officer
Address: 9 Riverside Road, Weston, Massachusetts
LAWRENCE T. PERERA (born 6/23/35)
Hemenway & Barnes (attorneys), Partner
Address: 60 State Street, Boston, Massachusetts
WILLIAM J. POORVU (born 4/10/35)
Harvard University Graduate School of Business Administration, Adjunct
Professor; CBL & Associates Properties, Inc. (a real estate investment trust),
Director; The Baupost Fund (a registered investment company), Vice Chairman
(since November 1993), Chairman and Trustee (prior to November 1993)
Address: Harvard Business School, Soldiers Field Road, Cambridge,
Massachusetts
CHARLES W. SCHMIDT (born 3/18/28)
Private Investor; OHM Corporation, Director; Mohawk Paper Company, Director
Address: 30 Colpitts Road, Weston, Massachusetts
ARNOLD D. SCOTT* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
ELAINE R. SMITH (born 4/25/46)
Independent Consultant; Brigham and Women's Hospital, Executive Vice President
and Chief Operating Officer (prior to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, Trustee
Address: Ten Post Office Square, Suite 300, Boston, Massachusetts
OFFICERS
W. THOMAS LONDON,* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
MARK E. BRADLEY*, Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994).
ELLEN M. MOYNIHAN*, Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September
1996); Deloitte & Touche LLP, Senior Manager (until September 1996).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, Assistant
Secretary and General Counsel
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Messrs. Brodkin, Scott and Cavan are the
Chairman, a Director and the Secretary, respectively, of MFD and hold similar
positions with certain other MFS affiliates. Mr. Bailey is a director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $3,250 per year plus $165 per meeting and $130 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 73 and if the Trustee
has completed at least 5 years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 73 and receive reduced
payments if he has completed at least 5 years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Fund for Messrs. Brodkin, Scott and Shames. The
Fund will accrue compensation expenses each year to cover current years service
and amortize past service cost.
Set forth below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable under the
retirement plan.
TRUSTEE COMPENSATION TABLE
RETIREMENT
BENEFIT ESTIMATED TOTAL TRUSTEE
ACCRUED AS CREDITED FEES FROM
TRUSTEE FEES PART OF FUND YEARS OF FUND AND FUND
TRUSTEE FROM FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ------------------------------------------------------------------------------
Richard B. Bailey $5,655 $1,767 8 $247,168
A. Keith Brodkin --0-- --0-- N/A --0--
Peter G. Harwood 5,915 1,289 5 105,995
J. Atwood Ives 5,655 1,833 17 98,750
Lawrence T. Perera 6,175 2,988 22 98,310
William J. Poorvu 5,750 3,196 22 102,840
Charles W. Schmidt 5,915 3,114 15 105,995
Arnold D. Scott --0-- --0-- N/A --0--
Jeffrey L. Shames --0-- --0-- N/A --0--
Elaine R. Smith 6,400 1,868 27 105,995
David B. Stone 6,045 2,614 11 108,710
(1) For fiscal year ended July 31, 1997.
(2) Based on normal retirement age of 73. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 23 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $21.2 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY
FUND UPON RETIREMENT(4)
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------
$5,089 $ 763 $1,272 $1,781 $2,545
5,480 822 1,370 1,918 2,740
5,870 880 1,467 2,054 2,935
6,260 939 1,565 2,191 3,130
6,650 997 1,662 2,327 3,325
7,040 1,056 1,760 2,464 3,520
(4) Other funds in the MFS complex provide similar retirement benefits to the
Trustees.
As of October 31, 1997, all Trustees and officers as a group owned less than 1%
of the outstanding shares of the Fund. As of October 31, 1997, Merrill Lynch,
Pierce, Fenner & Smith, Inc. for the sole benefit of its customers, Attn: Fund
Administration, 4800 Deer Lake Drive E FL3, Jacksonville, FL., 32246-6484, was
the record owner of approximately 8.70% of the outstanding Class A shares of the
Fund. Merrill Lynch, Pierce, Fenner & Smith, Inc. for the sole benefit of its
customers, Attn: Fund Administration, 4800 Deer Lake Drive E FL3, Jacksonville,
FL., 32246-6484, was the record owner of approximately 7.60% of the outstanding
Class B shares of the Fund. As of October 31, 1997, Trustees of the MFS Defined
Contribution Plan, c/o Mark Leary, Massachusetts Financial Services, 500
Boylston Street, Boston, MA was the record owner of approximately 99.86% of the
outstanding shares of Class I shares of the Fund.
The Fund's Declaration of Trust provides that it will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund, unless, as
to liabilities to the Fund or its shareholders, it is finally adjudicated that
they engaged in willful misfeasance, ban faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Fund. In
the case of settlement, such indemnification will not be provided unless it has
been determined by a court or other body approving the settlement or other
disposition or by reasonable determination by non- interested Trustees or in a
written opinion of independent counsel based upon a review of readily available
facts, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is an
indirect wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
December 19, 1985, as amended (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For its services and facilities, the
Adviser receives a management fee, computed and paid monthly, equal to, 0.45% of
the Fund's average daily net asset value.
For the Fund's fiscal year ended July 31, 1997, MFS received management fees of
$4,551,885, equivalent, on an annualized basis, to 0.45% of the Fund's average
daily net assets. For the Fund's fiscal year ended July 31, 1996, MFS received
management fees of $6,612,086, equivalent, on an annualized basis, to 0.54% of
the Fund's average daily net assets. For the Fund's fiscal year ended July 31,
1995, MFS received management fees of $9,450,684, equivalent, on an annualized
basis, to 0.65% of the Fund's average daily net assets.
The Fund pays all of its expenses (other than those assumed by MFS or MFD),
including: Trustees fees discussed above; governmental fees; interest charges;
taxes; membership dues in the Investment Company Institute allocable to the
Fund; fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar and dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing share certificates, shareholder reports,
notices, proxy statements to shareholders and reports to governmental officers
and commissions; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of State Street Bank and Trust Company, the Fund's custodian,
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses for such purposes are
borne by the Fund except that the Fund's Distribution Agreement with MFD
requires MFD to pay for prospectuses that are to be used for sales purposes. For
a list of the Fund's expenses, including the compensation paid to the Trustees
who are not officers of the Adviser, during its fiscal year ended July 31, 1997,
see "Financial Statements -- Statement of Operations" in the Annual Report to
shareholders incorporated by reference into this SAI. Payment by the Fund of
brokerage commissions for brokerage and research services of value to the
Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions" below.
The Adviser pays the compensation of the Fund's officers and of any Trustee who
is an officer of MFS. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting the Fund's
portfolio transactions and, in general, administering the Fund's affairs.
The Advisory Agreement will remain in effect until August 1, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's outstanding voting securities and, in either case, by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party. The Advisory Agreement terminates automatically if it is
assigned and may be terminated without penalty by vote of a majority of the
Fund's outstanding voting securities or by either party on not more than 60
days' nor less than 30 days' written notice. The Advisory Agreement provides
that if MFS ceases to serve as the Adviser to the Fund, the Fund will change its
name so as to delete the initials "MFS". The Advisory Agreement further provides
that MFS may render services to others and may permit fund clients in addition
to the Fund to use the initials "MFS" in their names. The Advisory Agreement
also provides that neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution and management of the
Fund. Except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997. Under this Agreement, the
Fund pays MFS an administrative fee up to 0.015% per annum of the Fund's average
daily net assets. This fee reimburses MFS for a portion of the costs it incurs
to provide such services. For the period from March 1, 1997 through July 31,
1997, MFS received fees under the Administrative Services Agreement of $60,480.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities, including
repurchase agreements, issued by the Custodian and may deal with the Custodian
as principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of the Fund. The Custodian has contracted with the Adviser for
the Adviser to perform certain accounting functions related to options
transactions for which the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement, dated September 1, 1995 as amended (the
"Agency Agreement") with the Fund. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent is reimbursed by the
Fund for certain expenses incurred by the Shareholder Servicing Agent on behalf
of the Fund. State Street Bank and Trust Company, the dividend and distribution
disbursing agent of the Fund has contracted with the Shareholder Servicing Agent
to administer and perform certain dividend and distribution disbursing functions
for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement,
dated September 1, 1995 (the "Distribution Agreement"), with the Fund. Prior to
January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other Funds (as noted under Right of Accumulation). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal Programs"
in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases"). The commission paid to the
underwriter is the difference between the total amount invested and the sum of
(a) the net proceeds to the Fund and (b) the dealer commission. Because of
rounding in the computation of offering price, the portion of the sales charge
paid to the underwriter may vary and the total sales charge may be more or less
than the sales charge calculated using the sales charge expressed as a
percentage of offering price or as a percentage of the net amount invested as
listed in the Prospectus. In the case of the maximum sales charge, the dealer
retains 4% and MFD retains approximately 3/4 of 1% of the public offering price.
In addition, MFD pays a commission to dealers who initiate and are responsible
for purchases of $1 million or more as described in the Prospectus.
CLASS B SHARES AND CLASS I SHARES: MFD acts as agent in selling Class B and
Class I shares of the Fund. The public offering price of Class B and Class I
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus) and the Prospectus Supplement pursuant to which Class I shares
are offered.
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the fiscal year ended July 31, 1997, MFD and certain other financial
institutions received net commissions on Class A shares of $22,649 and $114,631,
respectively (as their concession on gross commissions of $137,280). The Fund
received $26,136,507, representing the aggregate net asset value of such shares.
During the Fund's fiscal year ended July 31, 1996, MFD and certain other
financial institutions received net commissions on Class A shares of $32,084 and
$150,948, respectively (as their concession on gross commissions of $183,032).
The Fund received $21,904,099, representing the aggregate net asset value of
such shares. During the Fund's fiscal year ended July 31, 1995, MFD and certain
other financial institutions received net commissions on Class A shares of
$28,014 and $135,524, respectively (as their concession on gross commissions of
$163,538). The Fund received $21,705,476, representing the aggregate net asset
value of such shares.
For the fiscal years ended July 31, 1995, 1996 and 1997, the contingent deferred
sales charges ("CDSC") imposed on redemption of Class A shares were $0, $27 and
$127, respectively. For the years ended July 31, 1995, 1996 and 1997, the CDSC
imposed on redemption of Class B shares were $1,386,715, $487,099 and $301,436,
respectively.
The Distribution Agreement will remain in effect until September 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Restrictions") and, in either case,
by a majority of the Trustees who are not parties to the Distribution Agreement
or interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by a
portfolio manager who is an employee of the Adviser and who is appointed and
supervised by its senior officers. Changes in the Fund's investments are
reviewed by the Board of Trustees. The Fund's portfolio manager may serve other
clients of the Adviser or any subsidiary of the Adviser in a similar capacity.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. U.S.
Government securities are traded principally in the over-the-counter market on a
net basis through dealers acting for their own account and not as brokers. The
cost of securities purchased from underwriters includes an underwriter's
commission or concession, and the prices at which securities are purchased and
sold from and to dealers include a dealer's mark-up or mark-down. The Adviser
attempts to negotiate with underwriters to decrease the commission or concession
for the benefit of the Fund. The Adviser normally seeks to deal directly with
the primary market makers unless, in its opinion, better prices are available
elsewhere. Subject to the requirement of seeking execution at the most favorable
price, securities may, as authorized by the Advisory Agreement, be bought from
or sold to dealers who have furnished statistical, research and other
information or services to the Adviser. At present no arrangements for the
recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers and such other policies as the
Trustees may determine, the Adviser may consider sales of shares of the Fund and
of the other investment company clients of MFD as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
During the fiscal year ended July 31, 1997, the Fund acquired and owned
securities issued by Goldman Sachs in the amount of $24,268,000 as of July 31,
1997. In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of one or more of the other clients of the
Adviser or any subsidiary of the Adviser. Investment decisions for the Fund and
for such other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed by the Adviser
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Fund is concerned. In some cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Fund's Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with the current offering price value of all holdings of
all classes of shares of other MFS Funds or the MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period, in the
case of purchases of $1 million or more), the shareholder may obtain Class A
shares of the Fund at the same reduced sales charge as though the total quantity
were invested in one lump sum by completing the Letter of Intent section of the
Fund's Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36-months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when the shareholder's new
investment, together with the current offering price value of all holdings of
Class A, B and C shares of that shareholder in the MFS Funds or the MFS Fixed
Fund (a bank collective investment fund) reaches a discount level. See
"Purchases" in the Prospectus for the sales charges on quantity discounts. For
example, if a shareholder owns shares valued at $75,000 and purchases an
additional $25,000 of Class A shares of the Fund, the sales charge for the
$25,000 purchase would be at the rate of 4% (the rate applicable to single
transactions of $100,000). A shareholder must provide the Shareholder Servicing
Agent (or his investment dealer must provide MFD) with information to verify
that the quantity sales charge discount is applicable at the time the investment
is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS Funds
if shares of the fund are available for sale. Such investments will be subject
to additional purchase minimums. Distributions invested in shares of one of the
other MFS Funds will be invested at net asset value (exclusive of any sales
charge) and will not be subject to any contingent deferred sales charge.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP are drawn from the proceeds of the redemption of shares held in
the shareholder's account (which would be a return of principal and, if
reflecting a gain, would be taxable). Redemptions of Class B shares will be made
in the following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B shares pursuant to a SWP but will not be waived in the
case of SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be reinvested in
additional full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. With respect to Class A shares,
maintaining a withdrawal plan concurrently with an investment program would be
disadvantageous because of the sales charges included in share purchases and the
imposition of a CDSC on certain redemptions. The shareholder may deposit into
the account additional shares of the Fund, change the payee or change the dollar
amount of each payment. The Shareholder Servicing Agent may charge the account
for services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of other MFS
Funds (if available for sale) under the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder. Under the Automatic Exchange Plan, exchanges
of at least $50 each may be made to up to six different funds effective on the
seventh day of each month or of every third month, depending whether monthly or
quarterly exchanges are elected by the shareholder. If the seventh day of the
month is not a business day, the transaction will be processed on the next
business day. Generally, the initial exchange will occur after receipt and
processing by the Shareholder Servicing Agent of an application in good order.
Exchanges will continue to be made from a shareholder's account from any MFS
Fund as long as the balance of the account is sufficient to complete the
exchanges. Additional payments made to a shareholder's account will extend the
period that exchanges will continue to be made under the Automatic Exchange
Plan. However, if additional payments are added to an account subject to the
Automatic Exchange Plan shortly before an exchange is scheduled, such funds may
not be available for exchanges until the following month; therefore, care should
be used to avoid inadvertently terminating the Automatic Exchange Plan through
exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing-- signed by the
record owner(s) exactly as shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record).
Each Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of a month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of MFS Cash Reserve Fund in the case where such shares of the
money market funds are acquired through direct purchase or reinvested dividends)
who have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within (90)
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of a loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account with the Fund for which payment has been received by
the Fund (i.e., an established account) may be exchanged for shares of the same
class of any of the other MFS Funds (if available for sale and if the purchaser
is eligible to purchase such shares) at their net asset value. Exchanges will be
made only after instructions in writing or by telephone (an "Exchange Request")
are received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 or all the shares in the account (except that the minimum is $50
for accounts of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent). Each
exchange involves the redemption of the shares of the Fund to be exchanged and
the purchase at net asset value (i.e., without a sales charge) of the shares of
the other MFS Fund. Any gain or loss on the redemption of the shares exchanged
is reportable on the shareholder's federal income tax return, unless such shares
were and the shares received in the exchange are held in a tax-deferred
retirement plan. If the Exchange Request is received by the Shareholder
Servicing Agent prior to the close of regular trading on the Exchange, the
exchange usually will occur on that day if all the requirements set forth above
have been complied with at that time. However, payment of the redemption
proceeds by the Fund, and thus the purchase of shares of the other MFS Fund, may
be delayed for up to seven days if the Fund determines that such a delay would
be in the best interest of all its shareholders. Investment dealers which have
satisfied criteria established by MFD may also communicate a shareholder's
Exchange Request to MFD by facsimile subject to the requirements set forth
above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the MFS Funds, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unit holders of
the MFS Fixed Fund have the right to exchange their units (except units acquired
through direct purchases) for shares of the Fund, subject to the conditions, if
any, imposed upon such unit holders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state- specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRA) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans; Retirement Plans Qualified
under Section 401(k) of the Internal Revenue Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition of the Fund's
portfolio assets. Because the Fund intends to distribute all of its net
investment income and net realized capital gains to shareholders in accordance
with the timing requirements imposed by the Code, it is not expected that the
Fund will be required to pay any federal income or excise taxes. If the Fund
should fail to qualify as a "regulated investment company" in any year, the Fund
would incur a regular corporate federal income tax upon its taxable income and
Fund distributions would generally be taxable as ordinary dividend income to the
shareholders.
Shareholders of the Fund normally will have to pay federal income taxes on the
dividends and capital gain distributions they receive from the Fund. Dividends
from ordinary income and any distributions from net short-term capital gains are
taxable to the Fund's shareholders as ordinary income for federal income tax
purposes whether the distributions are paid in cash or reinvested in additional
shares. Because the Fund expects to earn primarily interest income, it is
expected that no Fund dividends will qualify for the dividends received
deduction for corporations. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses), whether paid
in cash or reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. It is uncertain at this
time whether all or any part of such capital gains will be eligible to be taxed
at a maximum rate below 28%. Any Fund dividend that is declared in October,
November, or December of any calendar year, that is payable to shareholders of
record in such a month, and that is paid the following January, will be treated
as if received by the shareholders on December 31 of the year in which the
dividend is declared. The Fund will notify shareholders regarding the federal
tax status of its distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares were
held for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a disposition of shares may also
be disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of the Fund within ninety days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) without payment of an additional sales charge of Class A
shares of the Fund or of another MFS Fund (or any other shares of an MFS Fund
generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon bonds, certain stripped securities and certain
securities purchased at a market discount will cause the Fund to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund. An investment in residual interests of a CMO that has elected to be
treated as a real estate mortgage investment conduit, or "REMIC", can create
complex tax problems, especially if the Fund has state or local governments or
other tax-exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts, short sales "against the
box," and swaps and related transactions will be subject to special tax rules
that may affect the amount, timing and character of Fund income and
distributions to shareholders. For example, certain positions held by the Fund
on the last business day of each taxable year will be marked to market (i.e.,
treated as if closed out) on that day, and any gain or loss associated with the
positions will be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by the Fund that substantially diminish its risk of
loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, and swaps and related
transactions to the extent necessary to meet the requirements of Subchapter M of
the Code.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold tax payments at the rate of 30% (or any lower rate permitted under an
applicable treaty) on taxable dividends and other payments to Non-U.S. Persons
that are subject to such withholding. Any amounts overwithheld may be recovered
by such persons by filing a claim for refund with the U.S. Internal Revenue
Service within the time period appropriate to such claims. Distributions
received from the Fund by Non-U.S. Persons also may be subject to tax under the
laws of their own jurisdiction. The Fund is also required in certain
circumstances to apply backup withholding at the rate of 31% on taxable
dividends and redemption proceeds paid to any shareholder (including a Non-U.S.
Person) who does not furnish to the Fund certain information and certifications
or who is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE -- The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. This
determination is made once during each such day as of the close of regular
trading on the Exchange by deducting the amount of the liabilities attributable
to the class from the value of the Fund's assets attributable to the class and
dividing the difference by the number of shares of the class outstanding. Debt
securities (other than short-term obligations) in the Fund's portfolio are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer- supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional- size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon exchange or over-the-counter prices, since such valuations are believed to
reflect the fair value of such securities. Use of the pricing service has been
approved by the Board of Trustees. Positions in listed options, Future Contracts
and Options on Futures Contracts will normally be valued at the settlement price
on the exchange on which they are primarily traded. Positions in
over-the-counter options will be valued using dealer supplied valuations.
Short-term obligations with a remaining maturity in excess of 60 days will be
valued based upon dealer supplied valuations. Other short-term obligations in
the Fund's portfolio are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Portfolio securities and other assets
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees. A
share's net asset value is effective for orders received by the dealer prior to
its calculation and received by MFD, the Fund's principal underwriter or its
agent, the Shareholder Servicing Agent, prior to the close of that business day.
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) with respect to Class A shares, a total rate of
return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge (4.75% maximum), and/or (iii) total rates of return which
represent aggregate performance over a period or year-by-year performance, and
which may or may not reflect the effect of the maximum or other sales charge or
CDSC. Effective March 1, 1993, the Fund revised its investment policy of
investing in securities issued or guaranteed by the U.S. Government and its
agencies, authorities and instrumentalities and engaging in transactions
involving related options, to its current policy of investing at least 65% of
its assets, under normal circumstances, in GNMA securities and obligations fully
collateralized by GNMAs.
The Fund offers multiple classes of shares which were initially offered for sale
to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest shares (e.g., Rule 12b-1 fees). Therefore, the total
rate of return quoted for a newer class of shares will differ from the return
that would be quoted had the newer class of shares been outstanding for the
entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A attached hereto under the heading "Performance Results", assume an
initial investment of $10,000, cover the period from January 1, 1987 to December
31, 1996. It has been assumed that capital gain distributions and income
dividends were reinvested in additional shares. These performance results, as
well as any yield or total rate of return quotation provided by the Fund, should
not be considered as representative of the performance of the Fund in the future
since the net asset value and public offering price of shares of the Fund will
vary based not only on the type, quality and maturities of the securities held
in the Fund's portfolio, but also on changes in the current value of such
securities and on changes in the expenses of the Fund. These factors and
possible differences in the methods used to calculate yields and total rates of
return should be considered when comparing the yield and total rate of return of
the Fund to yields and total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current net asset value and account
balance information may be obtained by calling 1-800-MFS-TALK (637-8255).
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class over a 30-day period.
The yield is calculated by dividing the net investment income per share
allocated to a particular class of the Fund earned during the period by the
maximum offering price per share of such class on the last day of that period.
The resulting figure is then annualized. Net investment income per share of a
class is determined by dividing (i) the dividends and interest earned by the
Fund allocated to the class during the period, minus accrued expenses of such
class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B shares. The yield
calculations assume no CDSC is paid. Yield quotations for each class of shares
are presented in Appendix A attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 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%. Current distribution
rate quotations for each class of shares are presented in Appendix A attached
hereto under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by
Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding the following: retirement planning; tax management
strategies; estate planning; general investment techniques (e.g., asset
allocation and disciplined saving and investing); business succession; ideas and
information provided through the MFS Heritage Planningsm program, an
inter-generational financial planning assistance program; issues with respect to
insurance (e.g., disability and life insurance and Medicare supplemental
insurance); issues regarding financial and health care management for elderly
family members; and other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established
as the first open-end mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund
to make full public disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research departments is
established to provide in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund
to register under the Securities Act of 1933 ("Truth in
Securities Act" or "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund
to allow shareholders to take capital gain distributions either
in additional shares or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal
bond funds established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable
annuity with no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as
America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end
mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual
fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end,
high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York
Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging
markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard
Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
(the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule
12b-1 thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders. The provisions of the Distribution Plan are severable
with respect to each class of shares offered by the Fund. The Distribution Plan
is designed to promote sales, thereby increasing the net assets of the Fund.
Such an increase may reduce the Fund's expense ratio to the extent that the
Fund's fixed costs are spread over a larger net asset base. Also, an increase in
net assets may lessen the adverse effect that could result were the Fund
required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is 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 Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time if the dealer satisfies
certain criteria); or (ii) to any insurance company which has entered into an
agreement with the Fund and MFD that permits such insurance company to purchase
Class A shares from the Fund at their net asset value in connection with annuity
agreements issued in connection with the insurance company's separate accounts.
Dealers may from time to time be required to meet certain other criteria in
order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time if the dealer satisfies certain criteria. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended July 31, 1997, the Fund paid the following Distribution
Plan expenses:
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- --------------- ------- ------ ----------
Class A Shares $2,039,924 $ 740,074 $1,299,850
Class B Shares $4,111,938 $3,351,087 $ 760,851
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties of
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any series
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Declaration of Trust
further authorizes the Trustees to classify or reclassify the shares of the Fund
into one or more classes. Pursuant thereto, the Trustees of the Trust have
authorized the issuance of three classes of shares of the Fund and three of the
Trust's other series, Class A shares, Class B shares and Class I shares as well
as Class C shares for three of the Trust's other series. Each share of a class
of the Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund allocable to
such class available for distribution to shareholders. The Fund has reserved the
right to create and issue series and additional classes of shares, in which case
the shares of each class would participate equally in the earnings, dividends
and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Fund. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Fund. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Objectives, Policies and Restrictions --
Investment Restrictions"). Shares have no pre-emptive or conversion rights
(except as described in "Purchases -- Conversion of Class B Shares" in the
Prospectus). Shares when issued are fully paid and non-assessable. The Trust may
enter into a merger or consolidation, or sell all or substantially all of its
assets (or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the holders of two-thirds of its outstanding
shares, or (ii) by the Trustees by written notice to the shareholders of the
Trust or the affected series. If not so terminated the Trust will continue
indefinitely.
The 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 Fund and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Fund. The Declaration of Trust also
provides that it shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Trust. Its
shareholders, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for errors of judgment or mistakes of
fact or law, but nothing in the Declaration of Trust protects a Trustee against
any liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors providing audit
services, tax preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolio of Investments at July 31, 1997, the Statement of Assets and
Liabilities at July 31, 1997, the Statement of Operations for the year ended
July 31, 1997, the Statement of Changes in Net Assets for each of the two years
in the period ended July 31, 1997, the Notes to Financial Statements and the
Independent Auditors' Report, each of which is included in the Annual Report to
shareholders of the Fund, are incorporated by reference into this SAI and have
been so incorporated in reliance upon the report of Deloitte & Touche LLP,
independent auditors, as experts in accounting and auditing. A copy of the
Annual Report accompanies this SAI.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
<TABLE>
PERFORMANCE RESULTS -- CLASS A SHARES
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------- ------------- --------- -----
<S> <C> <C> <C> <C>
December 31, 1987 $8,068 $0 $ 1,210 $ 9,278
December 31, 1988 7,580 0 2,393 9,973
December 31, 1989 7,609 0 3,692 11,301
December 31, 1990 6,887 0 4,814 11,701
December 31, 1991 6,975 0 6,279 13,254
December 31, 1992 6,712 0 7,339 14,051
December 31, 1993 6,692 0 8,356 15,048
December 31, 1994 6,087 0 8,632 14,719
December 31, 1995 6,673 0 10,460 17,133
December 31, 1996 6,448 0 11,225 17,673
- ----------
Explanatory Notes: The results in the table assume that income dividends and capital gain distributions were invested in
additional shares. The results also assume that the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of July 31, 1997.
<CAPTION>
ACTUAL
AVERAGE ANNUAL TOTAL RETURNS 30-DAY 30-DAY
--------------------------- YIELD YIELD
(INCLUDING (WITHOUT CURRENT
ANY ANY DISTRIBUTION
1 YEAR 5 YEAR 10 YEARS WAIVERS) WAIVERS) RATE
------ ------ -------- -------- -------- ----
<S> <C> <C> <C> <C> <C>
Class A Shares with sales charge ......... 4.62% 5.37% 6.83% N/A 5.93% 6.12%
Class A Shares without sales charge ...... 9.90% 6.40% 7.35% N/A N/A N/A
Class B Shares with CDSC ................. 5.09% 5.50%(1) 7.05%(1) N/A N/A N/A
Class B Shares without CDSC .............. 9.09% 5.81%(1) 7.05%(1) N/A 5.49% 5.70%
Class I Shares ........................... 10.13%(2) 6.45%(2) 7.37%(2) N/A 6.49% 6.77%(3)
(1) Class B share performance includes the performance of the Fund's Class A shares for periods prior to the inception of
Class B shares on September 7, 1993. Sales charges, expenses and expense ratios, and therefore performance, for Class A
and Class B shares differ. Class B shares performance has been adjusted to reflect that Class B shares generally are
subject to a CDSC (unless the performance quotation does not give effect to the CDSC) whereas Class A shares generally
are subject to an initial sales charge. Class B share performance has not, however, been adjusted to reflect differences
in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for Class A shares.
(2) Class I share performance includes the performance of the Fund's Class A shares for the periods prior to the inception of
Class I shares on January 2, 1997. Sales charges, expenses and expense ratios, and therefore performance for Class I and
A shares differ. Class I share performance has been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial sales charge. Class I share performance has not,
however, been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1 fees), which generally are lower
for Class I shares.
(3) The current distribution rate for Class I shares is calculated by annualizing the last dividend.
</TABLE>
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company 225
Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) GOVERNMENT MORTGAGE FUND
500 Boylston Street
Boston, MA 02116
MGM-13-12/97/500 31/231
<PAGE>
<PAGE>
[Logo] Annual Report
INVESTMENT MANAGEMENT for Year Ended
July 31, 1997
MFS(R) GOVERNMENT MORTGAGE FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 4
Fund Facts ................................................................. 5
Performance Summary ........................................................ 5
Tax Form Summary ........................................................... 7
Portfolio of Investments ................................................... 8
Financial Statements .......................................................10
Notes to Financial Statements ..............................................17
Independent Auditors' Report ...............................................23
The MFS Family of Funds(R) .................................................24
Trustees and Officers ......................................................25
- ------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED JULY 31, 1997, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 9.90%, CLASS B SHARES 9.09%, AND CLASS I
SHARES 10.13%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE PAST YEAR HAS BEEN FAVORABLE FOR THE MORTGAGE MARKET, AS CONTINUED DEMAND
FROM GOVERNMENT-SPONSORED MORTGAGE CORPORATIONS AND FROM OVERSEAS HELPED
MORTGAGES OUTPERFORM U.S. TREASURIES.
o THE FUND'S CURRENT DURATION IS A RELATIVELY NEUTRAL 3.6 YEARS, REFLECTING BOTH
OUR CONCERN THAT INTEREST RATES COULD GO UP DUE TO STRONG GROWTH AND LOW
UNEMPLOYMENT AND AN ACKNOWLEDGMENT THAT RATES COULD FALL IN RESPONSE TO LOWER
INFLATION AND FALLING BUDGET DEFICITS.
o THE FUND SLIGHTLY UNDERPERFORMED THE LEHMAN BROTHERS GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION INDEX DURING THE PERIOD, PRIMARILY BECAUSE IT WAS NOT AS
SENSITIVE AS THE INDEX TO CHANGES IN INTEREST RATES DURING THE BOND MARKET
RALLY LATE IN 1996.
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. Because of
this, plus changes in other indicators, such as a slight decline in average
hourly wages and only small gains in consumer spending on some big-ticket items,
the rapid pace of growth seen in the first quarter of 1997 slowed to an annual
rate of approximately 2.2% in the second quarter, which we consider a
more-sustainable, less-inflationary pace. While growth in the second quarter
slowed dramatically, we expect it to pick up once again in the second half of
the year, with real (inflation-adjusted) growth centering around 2 1/2%.
In the fixed-income markets, we have been encouraged by the Federal Reserve
Board's decision to not raise short-term interest rates at its July meeting. But
we cannot rule out the possibility of future monetary tightening in the second
half of the year if, as we now expect, the economy strengthens during the
balance of 1997. Therefore, our risk/reward outlook for the fixed-income markets
is neutral, and we believe that fixed-income investors should think in terms of
earning the coupon income from their investments rather than seeking possible
gains from price appreciation.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
August 12, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of James J. Calmas]
JAMES J. CALMAS
For the 12 months ended July 31, 1997, Class A shares of the Fund provided a
total return of 9.90%, Class B shares 9.09%, and Class I shares 10.13%. These
returns, which assume the reinvestment of distributions but exclude the effects
of any sales charges, compare to a 10.93% return for the Lehman Brothers
Government National Mortgage Association (GNMA) Index (the Lehman Index), an
unmanaged index of GNMA issues with more than $50 million outstanding.
Q. COULD YOU TALK ABOUT SOME OF THE REASONS FOR THE FUND'S PERFORMANCE RELATIVE
TO ITS BENCHMARK INDEX?
A. Although the Fund's performance was very similar to that of the Lehman Index
during much of the past year, it did slightly underperform the index for the
entire period. One reason for this was that from September 1996 to the beginning
of December 1996 the bond market rallied and the Fund was not as sensitive to
changes in interest rates as was the Lehman Index.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE
PAST YEAR?
A. The bond market could best be described as skittish. Although the
30-year U.S. Treasury bond ended the year yielding 67 basis points (0.67%)
less than it did at the beginning of the year, the downward move in yields was
not smooth. The bond market went through three phases: a drop in yields
between July 1996 and December 1996; a retracing of yields from December 1996
to April 1997, to over 7.15% on the 30-year Treasury; then another decline,
this time to a new low, with the 30-year Treasury yielding 6.30% by the end of
July. Although inflation was low and steady during this time, the market
vacillated over concerns about higher inflation due to steady growth and low
unemployment.
Q. MORE SPECIFICALLY, WHAT ABOUT THE MORTGAGE MARKET? HOW WOULD YOU DESCRIBE
THAT ENVIRONMENT?
A. The past year has been great for the mortgage market. Continued demand from
both the Federal National Mortgage Corporation and the Federal Home Loan
Mortgage Corporation to add mortgages to their own portfolios, as well as
overseas buying, has caused mortgages to outperform Treasuries -- even during a
period of falling interest rates. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.) The yield
differential between current-coupon GNMA securities and the 10-year Treasury
started the year at approximately 110 basis points (1.10%) and ended the year at
about 95 basis points (0.95%).
Q. WHAT ABOUT THE MORTGAGE PREPAYMENT PICTURE? IS THERE STILL SOME RISK THERE,
AND HOW IS THE FUND DEALING WITH IT?
A. There haven't been any surprises in mortgage prepayments. That's because the
30-year Treasury bond has traded within a range of 87 basis points (0.87%). This
is not enough of a change in rates to spark any major refinancing wave,
particularly since almost 70% of mortgage securities outstanding have a coupon
of 7.5% or below. The only area of the market that has experienced extremely
fast prepayment has been adjustable-rate mortgages, which the Fund does not own.
Q. WHAT IMPACT HAVE THE FEDERAL RESERVE BOARD'S (THE FED'S) ACTIONS HAD ON THE
MORTGAGE MARKET AND THE FUND THIS YEAR?
A. The Fed made one change in short-term interest rates during the past 12
months, on March 25, 1997, when it raised the targeted federal funds rate from
5.25% to 5.50%. While many economists predicted the Fed would need to be more
aggressive, in hindsight the Fed appears to have walked a fine line between a
desire to contain inflation and a desire not to stall economic growth. As a
result, the Fed helped create a relatively stable economic environment that has
helped fuel interest in fixed-income products, such as mortgages, which can
provide additional yield over U.S. Treasuries.
Q. LOOKING AHEAD, HOW IS YOUR OUTLOOK FOR THE FIXED-INCOME MARKETS REFLECTED
IN THE FUND'S CURRENT DURATION, OR INTEREST-RATE SENSITIVITY?
A. Currently, the Fund's duration is 3.6 years, which is similar to that of the
Lehman Index. This neutral positioning reflects our concern that interest rates
could go up due to strong growth, low unemployment, and a Fed policy that still
appears somewhat biased toward raising rates, as well as an acknowledgment that
rates could fall in response to lower inflation and falling budget deficits.
Q. HAVE YOU CHANGED THE FUND'S DURATION SIGNIFICANTLY THIS YEAR?
A. We have not moved the duration very much, since we felt that the
countervailing forces discussed above would prevent any long-term trends in
rates from developing, thus making any major duration moves not worth the
risk.
Q. WE'VE TALKED ABOUT SOME THINGS THAT CONTRIBUTED TO PERFORMANCE; NOW, ARE
THERE ANY PARTS OF THE MORTGAGE MARKET, AND PERHAPS POSITIONS FOR THE FUND,
THAT DID NOT PERFORM AS WELL AS YOU HOPED?
A. In general, our holdings have performed as expected. However, the Fund does
have significant holdings in mortgages issued in 1993 or before that trade at
prices above those for newer securities, and we believe these older mortgages
should command higher premiums than the market is currently paying.
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
- ------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
JAMES J. CALMAS JOINED THE MFS FIXED INCOME DEPARTMENT IN 1988. A GRADUATE OF
DARTMOUTH COLLEGE AND THE AMOS TUCK SCHOOL OF BUSINESS ADMINISTRATION OF
DARTMOUTH COLLEGE, HE WAS NAMED ASSISTANT VICE PRESIDENT - INVESTMENTS IN 1991.
IN 1993, HE WAS NAMED VICE PRESIDENT - INVESTMENTS AND PORTFOLIO MANAGER OF
MFS(R) GOVERNMENT MORTGAGE FUND.
- ------------------------------------------------------------------------------
<PAGE>
FUND FACTS
OBJECTIVE: THE FUND'S PRIMARY INVESTMENT OBJECTIVE IS TO PROVIDE
A HIGH LEVEL OF CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: JANUARY 9, 1986
CLASS B: SEPTEMBER 7, 1993
CLASS I: JANUARY 2, 1997
SIZE: $939.7 MILLION NET ASSETS AS OF JULY 31, 1997
- ------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Government Mortgage Fund - Class A shares in comparison to
various market indicators. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are
unmanaged and do not reflect any fees or expenses. The performance of other
share classes will be greater than or less than the line shown, based on
differences in loads and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended July 31, 1997)
CONSUMER PRICE MFS GOVERNMENT
INDEX MORTGAGE FUND LEHMAN BROTHERS
-- U.S. (CLASS A) GNMA INDEX
--------------- -------------- ---------------
7/92 10,000.00 9,521.00 10,000.00
7/93 10,278.00 10,359.00 10,861.00
7/94 10,562.00 10,290.00 10,885.00
7/95 10,854.00 11,278.00 12,037.00
7/96 11,171.00 11,816.00 12,782.00
7/97 11,423.00 12,986.00 14,179.00
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended July 31, 1997)
CONSUMER PRICE MFS GOVERNMENT
INDEX MORTGAGE FUND LEHMAN BROTHERS
-- U.S. (CLASS A) GNMA INDEX
--------------- -------------- ---------------
7/87 10,000.00 9,522.00 10,000.00
7/89 10,932.00 11,304.00 12,529.00
7/91 11,969.00 12,596.00 15,332.00
7/93 12,689.00 15,442.00 18,812.00
7/95 13,401.00 16,812.00 20,848.00
7/97 14,104.00 19,358.00 24,559.00
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF JULY 31, 1997
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Government Mortgage Fund (Class A)
including 4.75% sales charge (SEC results) + 4.62% +6.35% +5.37% +6.83%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class A)
at net asset value + 9.90% +8.06% +6.40% +7.35%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B)
with CDSC (SEC results) + 5.09% +6.39% +5.50% +7.05%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B)
at net asset value + 9.09% +7.27% +5.81% +7.05%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class I)
at net asset value +10.13% +8.14% +6.45% +7.37%
- ------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers GNMA Index+ +10.93% +9.21% +7.23% +9.40%
- ------------------------------------------------------------------------------------------------------------------------------
Average GNMA fund+ +10.15% +8.14% +6.36% +8.31%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*++ + 2.26% +2.65% +2.70% +3.50%
- ------------------------------------------------------------------------------------------------------------------------------
+ Source: Lipper Analytical Services.
++ Source: CDA/Wiesenberger.
* The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class I
shares, which became available on January 2, 1997, have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
Class B share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class A shares are lower than those of Class B shares, Class B
share performance generally would have been lower than Class A share
performance. The Class A share performance included within the Class B share SEC
performance has been adjusted to reflect the CDSC generally applicable to Class
B shares rather than the initial sales charge generally applicable to Class A
shares.
Class I share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class I
share performance generally would have been higher than Class A share
performance. The Class A share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
- -------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - July 31, 1997
Bonds - 99.8%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 4.7%
FHLMC, 8.5s, 2009 - 2017 $ 46 $ 48,631
FHLMC, 9s, 2001 - 2025 41,394 43,879,833
FHLMC, 9.5s, 2013 - 2021 278 299,312
------------
$ 44,227,776
- -------------------------------------------------------------------------------
Federal Housing Authority - 2.8%
FHA, Centennial, "A", 8.25s, 2028+ $ 23,602 $ 26,404,099
- -------------------------------------------------------------------------------
Federal National Mortgage Association - 3.6%
FNMA, 6.695s, 2005 $ 10,000 $ 10,490,625
FNMA, 7.95s, 2005 6,290 6,643,812
FNMA, 8s, 2017 - 2023 1,242 1,280,324
FNMA, 8.5s, 2004 - 2008 299 311,087
FNMA, 9s, 2002 - 2008 14,866 15,599,494
------------
$ 34,325,342
- -------------------------------------------------------------------------------
Financing Corporation - 3.6%
FICO, 10.35s, 2018 $ 23,965 $ 34,022,871
- -------------------------------------------------------------------------------
U.S. Federal Agencies - 0.4%
Federal Agricultural Mortgage Corp., 8.07s, 2006 $ 3,000 $ 3,353,910
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - 84.7%
Government National Mortgage Association - 75.7%
GNMA, 6.5s, 2023 - 2025 $ 33,062 $ 32,538,065
GNMA, 7s, 2022 - 2025 189,477 190,299,801
GNMA, 7.5s, 2008 - 2026 168,852 172,416,634
GNMA, 8s, 2002 - 2026 171,514 177,284,792
GNMA, 8.5s, 2022 - 2023 9,991 10,434,076
GNMA, 9s, 2008 - 2022 70,054 75,716,314
GNMA, 9.5s, 2009 - 2019 11,608 12,466,271
GNMA, 10s, 2009 - 2019 18,681 20,701,102
GNMA, 11s, 2021 16,645 18,960,220
GNMA, 12.5s, 2011 409 480,887
------------
$711,298,162
- -------------------------------------------------------------------------------
Small Business Administration - 4.4%
SBA, 8.75s, 2006 $ 102 $ 108,540
SBA, 10s, 2009 3,034 3,391,661
SBA, 10.1s, 2009 3,600 4,028,714
SBA, 9.3s, 2010 3,292 3,637,739
SBA, 9.45s, 2010 8,000 8,855,366
SBA, 9.7s, 2010 2,629 2,924,477
SBA, 8.8s, 2011 2,886 3,153,214
SBA, 8.85s, 2011 11,172 12,227,030
SBA, 8.05s, 2012 2,451 2,620,863
------------
$ 40,947,604
- -------------------------------------------------------------------------------
U.S. Treasury Obligations - 4.6%
U.S. Treasury Bonds, 13.125s, 2001 $ 22,550 $ 28,057,161
U.S. Treasury Bonds, 10.375s, 2012 11,800 15,504,138
------------
$ 43,561,299
- -------------------------------------------------------------------------------
Total U.S. Government Guaranteed $795,807,065
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $923,500,554) $938,141,063
- -------------------------------------------------------------------------------
Repurchase Agreement - 2.6%
- -------------------------------------------------------------------------------
Investments in repurchase agreements with Goldman
Sachs, in a joint trading account ($134,589,000),
dated 7/31/97, due 8/01/97, total to be
received $134,610,459 collateralized by
various U.S. Treasury and Federal Agency
Obligations (with $120,767,000 par and valued
at $134,589,595), at cost $ 24,268 $ 24,268,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $947,768,554) $962,409,063
Other Assets, Less Liabilities - (2.4)% (22,717,003)
- -------------------------------------------------------------------------------
Net Assets - 100.0% $939,692,060
- -------------------------------------------------------------------------------
+Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------
July 31, 1997
- ---------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $947,768,554) $ 962,409,063
Cash 176,253
Receivable for Fund shares sold 27,184
Interest receivable 8,524,361
Other assets 9,102
--------------
Total assets $ 971,145,963
--------------
Liabilities:
Payable for investments purchased $ 29,756,250
Payable for Fund shares reacquired 966,251
Payable for daily variation margin on open and closed
futures contracts 69,407
Payable to affiliates -
Management fee 11,590
Shareholder servicing agent fee 3,350
Distribution and service fee 225,057
Administrative fee 386
Distribution payable 455
Accrued expenses and other liabilities 421,157
--------------
Total liabilities $ 31,453,903
--------------
Net assets $ 939,692,060
==============
Net assets consist of:
Paid-in capital $1,050,772,395
Unrealized appreciation on investments 14,021,564
Accumulated net realized loss on investments (124,937,835)
Distributions in excess of net investment income (164,064)
--------------
Total $ 939,692,060
==============
Shares of beneficial interest outstanding 139,917,960
===========
Class A shares:
Net asset value per share
(net assets of $653,144,250 / 97,254,938 shares of
beneficial interest outstanding) $6.72
=====
Offering price per share (100 / 95.25 of net asset
value per share) $7.06
=====
Class B shares:
Net asset value and offering price per share
(net assets of $286,434,350 / 42,646,140 shares of
beneficial interest outstanding) $6.72
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $113,460 / 16,882 shares of beneficial
interest outstanding) $6.72
=====
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
Statement of Operations
- -----------------------------------------------------------------------
Year Ended July 31, 1997
- -----------------------------------------------------------------------
Net investment income:
Interest income $78,784,471
-----------
Expenses -
Management fee $ 4,551,885
Trustees' compensation 78,137
Shareholder servicing agent fee (Class A) 331,398
Shareholder servicing agent fee (Class B) 486,155
Shareholder servicing agent fee 733,527
Distribution and service fee (Class A) 2,039,924
Distribution and service fee (Class B) 4,111,938
Administrative fee 60,480
Custodian fee 398,208
Postage 204,908
Printing 102,086
Auditing fee 43,154
Legal fee 8,879
Miscellaneous 682,359
-----------
Total expenses $13,833,038
Fees paid indirectly (357,961)
-----------
Net expenses $13,475,077
-----------
Net investment income $65,309,394
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(1,578,852)
Futures contracts (5,183,443)
-----------
Net realized loss on investments $(6,762,295)
-----------
Change in unrealized appreciation -
Investments $32,107,282
Futures contracts 689,688
-----------
Net unrealized gain on investments $32,796,970
-----------
Net realized and unrealized gain on investments $26,034,675
-----------
Increase in net assets from operations $91,344,069
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended July 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 65,309,394 $ 78,380,863
Net realized loss on investments (6,762,295) (2,426,844)
Net unrealized gain (loss) on investments 32,796,970 (20,890,441)
-------------- --------------
Increase in net assets from operations $ 91,344,069 $ 55,063,578
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (38,530,720) $ (35,352,327)
From net investment income (Class B) (23,909,098) (37,804,675)
From net investment income (Class I) (5,224) --
Tax return of capital (1,201,681) (2,132,709)
-------------- --------------
Total distributions declared to shareholders $ (63,646,723) $ (75,289,711)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 335,526,636 $ 225,940,176
Net asset value of shares issued to shareholders in
reinvestment of distributions 30,190,696 34,824,383
Cost of shares reacquired (547,691,540) (492,622,301)
-------------- --------------
Decrease in net assets from Fund share transactions $ (181,974,208) $ (231,857,742)
-------------- --------------
Total decrease in net assets $ (154,276,862) $ (252,083,875)
Net assets:
At beginning of period 1,093,968,922 1,346,052,797
-------------- --------------
At end of period (including distributions in excess of
net investment income of $164,064 and $142,549,
respectively) $ 939,692,060 $1,093,968,922
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
Eight Months
Ended Year Ended
Year Ended July 31, July 31, November 30,
--------------------------------------- ------------ -----------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.44 $ 0.45 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain
(loss) on investments 0.18 (0.14) 0.14 (0.36) 0.20 0.09
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.62 $ 0.31 $ 0.59 $(0.07) $ 0.54 $ 0.55
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.42) $(0.42) $(0.20) $(0.47) $(0.42)
In excess of net realized gain on
investments -- -- -- -- (0.04) --
From paid-in capital -- -- -- (0.09) -- (0.26)
Tax return of capital (0.01) (0.01) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.43) $(0.43) $(0.29) $(0.51) $(0.68)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
====== ====== ====== ====== ====== ======
Total return(+) 9.90% 4.76% 9.60% (1.51)%++ 8.11% 8.25%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.09% 1.16% 1.25% 1.27%+ 1.38% 1.42%
Net investment income 6.75% 6.75% 6.99% 6.46%+ 6.30% 6.57%
Portfolio turnover 33% 25% 87% 37% 167% 484%
Net assets at end of period (000,000
omitted) $653 $541 $534 $424 $522 $715
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- -- -- $ 0.29 $ 0.34 --
Ratios (to average net assets):
Expenses -- -- -- 1.28%+ 1.46% --
Net investment income -- -- -- 6.45%+ 6.22% --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75
Net realized and unrealized gain (loss) on
investments 0.25 (0.40) 0.48 (0.06) (1.08)
------ ------ ------ ------ ------
Total from investment operations $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.49) $(0.58) $(0.64) $(0.82)
In excess of net realized gain on investments -- -- -- -- (0.01)
From paid in capital (0.35) (0.49) (0.45) (0.46) (0.32)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.79) $(0.98) $(1.03) $(1.10) $(1.15)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
====== ====== ====== ====== ======
Total return(+) 11.00% 2.05% 14.72% 7.39% (3.37)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.44% 1.40% 1.37% 1.38% 1.34%
Net investment income 6.91% 7.29% 7.57% 7.88% 8.34%
Portfolio turnover 731% 507% 489% 285% 212%
Net assets at end of period (000,000 omitted) $886 $1,068 $1,380 $1,295 $1,129
(+) Total returns for Class A shares do not include the applicable sales charge (except for reinvested dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
Eight Months
Ended Period Ended
Year Ended July 31, July 31, November 30,
--------------------------------------- ----------------- -----------------
1997 1996 1995 1994 1993**
- -----------------------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.40 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain (loss) on
investments 0.17 (0.13) 0.14 (0.35) (0.44)
------ ------ ------ ------ ------
Total from investment operations $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From paid-in capital -- -- -- (0.08) --
Tax return of capital (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ======
Total return 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 6.02% 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 33% 25% 87% 37% 167%
Net assets at end of period (000,000 omitted) $286 $553 $812 $1,229 $1,628
** For the period from the commencement of the Fund's offering of Class B shares, September 7, 1993, through November 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income -- -- -- $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses -- -- -- 1.94%+ 1.94%+
Net investment income -- -- -- 5.80%+ 5.85%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------
Year Ended
July 31, 1997***
- -------------------------------------------------------------------------------------------
Class I
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $ 6.59
------
Income from investment operations# -
Net investment income $ 0.31
Net realized and unrealized gain on investments 0.09
------
Total from investment operations $ 0.40
------
Less distributions paid to shareholders -
From net investment income $(0.26)
From tax return of capital (.01)
------
Total distributions paid to shareholders (0.27)
------
Net asset value - end of period $ 6.72
======
Total return 6.19%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.73%+
Net investment income 7.06%+
Portfolio turnover 33%
Net assets at end of period (000 omitted) $113
*** For the period from the commencement of the Fund's offering of Class I shares, January 2,
1997, through July 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Government Mortgage Fund (the Fund) is 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.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Futures
contracts, options, and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency, or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Should interest rates or securities prices
move unexpectedly, the Fund may not achieve the anticipated benefits of the
futures contracts and may realize a loss.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premiums and
original issue discounts are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex- interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percent of the
Fund's average daily net assets. The fee is reduced according to an arrangement
which measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended July 31, 1997, $1,684,186 and $1,201,681 were
reclassified from distributions in excess of net investment income and paid in
capital, respectively, and $2,885,867 was reclassified from accumulated net
realized loss on investments, due to differences between book and tax accounting
for mortgage-backed securities.
At July 31, 1997, the Fund, for federal income tax purposes, had a capital loss
carryforward of ($124,022,705) which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on July 31, 1998, ($81,836,532), July 31, 2002, ($5,628,534), July
31, 2003, ($4,604,728), July 31, 2004, ($30,095,607), and July 31, 2005,
($1,857,304).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class I shares. The three classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on the average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate of 0.45% of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive renumeration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $30,627 for the year ended
July 31, 1997.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$22,649 for the year ended July, 31 1997, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. MFD retains the service fee for accounts not attributable
to a securities dealer, which amounted to $200,615 for the year ended July 31,
1997. Fees incurred under the distribution plan during the year ended July 31,
1997, were 0.35% of average daily net assets attributable to Class A shares on
an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B 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 $267,073 for Class B shares, for the year
ended July 31, 1997. Fees incurred under the distribution plan during the year
ended July 31, 1997, were 1.00% of average daily net assets attributable to
Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended July 31, 1997, were $127 and $301,436 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ---------------------------------------------------------------------------
U.S. government securities $327,226,917 $485,019,548
============ ============
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $947,771,892
============
Gross unrealized appreciation $ 23,910,874
Gross unrealized depreciation (9,273,703)
------------
Net unrealized appreciation $ 14,637,171
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended July 31, 1997 Year Ended July 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 33,238,157 $ 218,654,931 17,258,809 $ 115,389,414
Shares issued to shareholders
in reinvestment of distributions 2,705,877 17,720,451 2,410,533 16,042,351
Shares transferred to Class I (24,043) (157,482)
Shares reacquired (21,505,030) (141,474,917) (17,105,744) (113,835,287)
---------- ------------- --------- -------------
Net increase 14,414,961 $ 94,742,983 2,563,598 $ 17,596,478
========== ============= =========== =============
<CAPTION>
Class B Shares
Year Ended July 31, 1997 Year Ended July 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 17,769,251 $ 116,849,711 16,626,636 $ 110,550,762
Shares issued to shareholders
in reinvestment of distributions 1,901,265 12,464,920 2,820,005 18,782,032
Shares reacquired (61,776,157) (406,143,501) (56,843,019) (378,787,014)
---------- ------------- --------- -------------
Net decrease (42,105,641) $(276,828,870) (37,396,378) $(249,454,220)
========== ============= =========== =============
</TABLE>
Class I Shares
Year Ended July 31, 1997*
-------------------------------
Shares Amount
- -------------------------------------------------------------------
Shares sold 3,187 $ 21,994
Shares issued to shareholders
in reinvestment of distributions 812 5,325
Shares transferred from Class A 24,043 157,482
Shares reacquired (11,160) (73,122)
------ --------
Net increase 16,882 $111,679
====== ========
* For the period from the commencement of the Fund's offering of Class I
shares, January 2, 1997, through July 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended July 31, 1997, was $10,667.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates. These financial instruments include futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
<PAGE>
<TABLE>
<CAPTION>
Futures Contracts
UNREALIZED
EXPIRATION CONTRACTS POSITION DEPRECIATION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bonds September 1997 100 Short $618,945
========
</TABLE>
At July 31, 1997, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At July 31, 1997,
the Fund owned the following restricted securities (constituting 2.8% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of Principal Amount
Description Acquisition (000 Omitted) Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHA, Centennial, "A", 8.25s, 2028 3/23/93 $23,602 $24,309,690 $26,404,099
===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Series Trust X and Shareholders of
MFS Government Mortgage Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Mortgage Fund (one of the series
constituting MFS Series Trust X) as of July 31, 1997, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended July 31, 1997 and 1996 and the financial highlights for each of
the years in the three-year period ended July 31, 1997, the eight months ended
July 31, 1994, and for each of the years in the seven-year period ended November
30, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at July
31, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Mortgage Fund at July 31, 1997, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 5, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) GOVERNMENT MORTGAGE FUND
<S> <C>
Trustees Custodian
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; Former Auditors
Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Investor Information
Cambridge Trust Company For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
Peter G. Harwood -Private Investor touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds, call your
Officer, Eastern Enterprises financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Lawrence T. Perera - Partner, Hemenway & Barnes from 9 a.m. to 5 p.m. Eastern time (or leave a
message anytime).
William J. Poorvu - Adjunct Professor, Harvard
University Graduate School of Business Investor Service
Administration MFS Service Center, Inc.
P.O. Box 2281
Charles W. Schmidt - Private Investor Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. (To use
Elaine R. Smith - Independent Consultant this service, your phone must be equipped with
a Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American
Management Corp. (investment advisers) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Investment Adviser (1-800-637-8255) anytime from a touch-tone
Massachusetts Financial Services Company telephone.
500 Boylston Street
Boston, MA 02116-3741 World Wide Web
www.mfs.com
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street -------------------------------------------------
Boston, MA 02116-3741 [DALBAR Logo] For the fourth year in a row, MFS
earned a #1 ranking in the DALBAR,
Portfolio Manager Inc. Broker/Dealer Survey, Main
James J. Calmas* Office Operations Service Quality Category. The
firm achieved a 3.42 overall score on a scale
Treasurer of 1 to 4 in the 1997 survey. A total of 111
W. Thomas London* firms responded, offering input on the quality
of service they received from 29 mutual fund
Assistant Treasurers companies nationwide. The survey contained
Mark E. Bradley* questions about service quality in 11
Ellen Moynihan* categories, including "knowledge of operations
James O. Yost* contact, " "keeping you informed," and "ease of
doing business" with the firm.
Secretary -------------------------------------------------
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
------------
MFS(R) GOVERNMENT [DALBAR Logo] BULK RATE
MORTGAGE FUND U.S. POSTAGE
P A I D
500 Boylston Street MFS
Boston, MA 02116-3741 ------------
[MFS Logo]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MGM-2 9/97 88M 31/231/831
<PAGE>
PART C
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS INCLUDED IN PART A:
MFS GOVERNMENT MORTGAGE FUND
For the seven years ended November 30, 1993, for the period from
November 30, 1993 to July 31, 1994 and for the three years ended
July 31, 1997: Financial Highlights
FINANCIAL STATEMENTS INCLUDED IN PART B:
At July 31, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the year ended July 31, 1997:
Statement of Operations*
For the two years ended July 31, 1997:
Statement of Changes in Net Assets*
- ---------------
* Incorporated herein by reference to the Fund's Annual Report to
Shareholders dated July 31, 1997, filed with the SEC via EDGAR on October
8, 1997.
(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. (8)
(d) Amendment to the Declaration of Trust - Designation of
Class P shares, dated June 20, 1996. (10)
(e) Amendment to Declaration of Trust, dated December 19,
1996 to redesignate Class P shares as Class I shares.
(15)
(f) Amendment to Declaration of Trust - Redesignation of
Series dated September 19, 1997; filed herewith.
2 Amended and Restated By-Laws, dated December
21, 1994. (3)
3 Not Applicable.
4 Form of Share Certificate for Classes of Shares. (9)
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)
(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
Emerging Markets Equity Fund, dated September 1, 1995.
(7)
(h) 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)
(i) 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, as
amended on April 11, 1997. (14)
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)
(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
amend Fee Schedule dated January 1, 1997. (15)
(c) Exchange Privilege Agreement, dated July 30, 1997. (16)
(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) Third Amendment dated February 14, 1997 to Loan Agreement
dated February 21, 1995 by and among the Banks named
therein and The First National Bank of Boston. (11)
(f) Dividend Disbursing Agency Agreement, dated February 1,
1986. (5)
(g) Master Administrative Services Agreement, dated March 1,
1997. (12)
10 Opinion and Consent of Counsel dated November 24, 1997;
filed herewith.
11 (a) Consent of Ernst & Young, LLP on behalf of MFS/Foreign
and Colonial International Emerging Markets Equity
Fund, MFS International Growth Fund and MFS International
Growth and Income Fund. (15)
(b) Consent of Deloitte & Touche, LLP on behalf of MFS
Government Mortgage Fund; 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)
(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) Master Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, effective January
1, 1997. (13)
(b) Exhibits as revised October 15, 1997 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those exhibits
to the Master Distribution Plan contained in Exhibit
15(a) above. (16)
16 Schedule for Computation of Performance Quotations -
Average Annual Total Rate of Return, Aggregate Total Rate
of Return, Standardized Yield and Distribution Rate. (1)
17 Financial Data Schedules for each class of MFS Government
Mortgage Fund; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (9)
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 Registrant's Post-Effective Amendment No. 15
filed with the SEC via EDGAR on May 28, 1996.
(9) 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.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No. 16
filed with the SEC via EDGAR on August 29, 1996.
(11) Incorporated by reference to MFS Series Trust I (File Nos. 33-7638 and
811-4777) Post-Effective Amendment No. 28 filed with the SEC via EDGAR on
June 26, 1997.
(12) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.
(13) Incorporated by reference to MFS Series Trust IV (File Nos. 33-7638 and
811-2594) Post-Effective Amendment No. 30 filed with the SEC via EDGAR on
December 29, 1996.
(14) Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(15) Incorporated by reference to Registrant's Post-Effective Amendment No. 20
filed with the SEC via EDGAR on July 29, 1997.
(16) Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC on October 29, 1997.
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 41,515
(without par value) (as of October 31, 1997)
CLASS B SHARES
Shares of Beneficial Interest 17,527
(without par value) (as of October 31, 1997)
CLASS I SHARES
Shares of Beneficial Interest 3
(without par value) (as of October 31, 1997)
<PAGE>
MFS INTERNATIONAL GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
CLASS A SHARES
Shares of Beneficial Interest 6,503
(without par value) (as of October 31, 1997)
CLASS B SHARES
Shares of Beneficial Interest 8,012
(without par value) (as of October 31, 1997)
CLASS C SHARES
Shares of Beneficial Interest 381
(without par value) (as of October 31, 1997)
CLASS I SHARES
Shares of Beneficial Interest
(without par value) (as of October 31, 1997)
MFS INTERNATIONAL GROWTH AND INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
CLASS A SHARES
Shares of Beneficial Interest 1,246
(without par value) (as of October 31, 1997)
CLASS B SHARES
Shares of Beneficial Interest 2,000
(without par value) (as of October 31, 1997)
CLASS C SHARES
Shares of Beneficial Interest 56
(without par value) (as of October 31, 1997)
CLASS I SHARES
Shares of Beneficial Interest 3
(without par value) (as of October 31, 1997)
<PAGE>
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
CLASS A SHARES
Shares of Beneficial Interest 5,306
(without par value) (as of October 31, 1997)
CLASS B SHARES
Shares of Beneficial Interest 7,033
(without par value) (as of October 31, 1997)
CLASS C SHARES
Shares of Beneficial Interest 584
(without par value) (as of October 31, 1997)
CLASS I SHARES
Shares of Beneficial Interest 3
(without par value) (as of October 31, 1997)
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.
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 thirteen series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund,
MFS New Discovery Fund, MFS Science and Technology Fund and MFS Research
International Fund), MFS Series Trust II (which has three series: MFS Emerging
Growth Fund, MFS Large Cap Growth Fund and MFS Intermediate Income 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 Mid Cap
Growth Fund), MFS Series Trust V (which has two series: MFS Total Return Fund
and MFS Research Fund), MFS Series Trust VI (which has three series: MFS World
Total Return Fund, MFS Utilities Fund and MFS World Equity Fund), MFS Series
Trust VII (which has two series: MFS World Governments Fund and MFS Value Fund),
MFS Series Trust VIII (which has two series: MFS Strategic Income Fund and MFS
World Growth Fund), MFS Series Trust IX (which has three series: MFS Bond Fund,
MFS Limited Maturity Fund and MFS Municipal Limited Maturity Fund), MFS Series
Trust X (which has four series: MFS Government Mortgage Fund, MFS/Foreign &
Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial International
Growth Fund and MFS/Foreign & Colonial International Growth and Income Fund),
and MFS Municipal Series Trust (which has 16 series: MFS Alabama Municipal Bond
Fund, MFS Arkansas Municipal Bond Fund, MFS California Municipal Bond Fund, MFS
Florida Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS Maryland
Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS Mississippi
Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North Carolina
Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Virginia Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund)
(the "MFS Funds"). The principal business address of each of the MFS Funds is
500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST"). The principal business address of each of the
aforementioned funds is 500 Boylston Street, Boston, Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the MFS Closed-End Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Money Market Variable Account, High Yield Variable
Account, Capital Appreciation Variable Account, Government Securities Variable
Account, World Governments Variable Account, Total Return Variable Account and
Managed Sectors Variable Account. The principal business address of each of the
aforementioned funds is One Sun Life Executive Park, Wellesley Hills,
Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research Fund) (the "MIL Funds"). The MIL Funds are
organized in Luxembourg and qualify as an undertaking for collective investments
in transferable securities (UCITS). The principal business address of the MIL
Funds is 47, Boulevard Royal, L-2449 Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
Meridian U.S. High Yield Fund and MFS Emerging Markets Debt Fund (collectively
the "MFS Meridian Funds"). Each of the MFS Meridian Funds is organized as an
exempt company under the laws of the Cayman Islands. The principal business
address of each of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman
Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFSI"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W. Dello
Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Robert T.
Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Treasurer of
MFS.
<PAGE>
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the Assistant
Treasurers, James R. Bordewick, Jr., Senior Vice President and Associate General
Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Vice President of MFS, is an Assistant Vice President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen
M. Moynihan and Mark E. Bradley are the Assistant Treasurers and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is
the Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance
Company of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley
are the Assistant Treasurers and James R. Bordewick, Jr., is the Assistant
Secretary.
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the
Secretary, and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive
Vice President of MFS, is a Senior Vice President, Stephen E. Cavan is a
Director, Senior Vice President and the Clerk, James R. Bordewick, Jr. is a
Director, Vice President and an Assistant Clerk, Robert T. Burns is an Assistant
Clerk, Joseph W. Dello Russo, Executive Vice President and Chief Financial
Officer of MFS, is the Treasurer and Thomas B. Hastings is the Assistant
Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, James E. Russell is the Treasurer, and
Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters
are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R. Bordewick, Jr., is the
Assistant Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are
the Assistant Treasurers.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSI
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke (who is an Executive Vice President of
MFS) are Senior Vice Presidents and Managing Directors, Joseph W. Dello Russo is
the Treasurer, Thomas B. Hastings is the Assistant Treasurer and Robert T. Burns
is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company
of Canada (U.S.), One Sun Life
Executive Park, Wellesley Hills,
Massachusetts
Director, Sun Life Insurance and
Annuity Company of New York, 67
Broad Street, New York, New York
Donald A. Stewart President and a Director, Sun Life
Assurance Company of Canada, Sun
Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr.
Stewart is also an officer and/or
Director of various subsidiaries
and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company
of Canada, Sun Life Centre, 150
King Street West, Toronto, Ontario,
Canada (Mr. McNeil is also an
officer and/or Director of various
subsidiaries and affiliates of Sun
Life)
Joseph W. Dello Russo Director of Mutual Fund Operations,
The Boston Company, Exchange Place,
Boston, Massachusetts (until
August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant 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>
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 24th day of November, 1997.
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 November 24, 1997.
SIGNATURE TITLE
--------- -----
Chairman, President (Principal
A. KEITH BRODKIN* Executive Officer) and Trustee
- --------------------------------
A. Keith Brodkin
Treasurer (Principal Financial Officer
W. THOMAS LONDON* and Principal Accounting Officer)
- --------------------------------
W. Thomas London
RICHARD B. BAILEY* Trustee
- --------------------------------
Richard B. Bailey
PETER G. HARWOOD* Trustee
- --------------------------------
Peter G. Harwood
<PAGE>
J. ATWOOD IVES* Trustee
- --------------------------------
J. Atwood Ives
LAWRENCE T. PERERA* Trustee
- --------------------------------
Lawrence T. Perera
WILLIAM J. POORVU* Trustee
- --------------------------------
William J. Poorvu
CHARLES W. SCHMIDT* Trustee
- --------------------------------
Charles W. Schmidt
ARNOLD D. SCOTT* Trustee
- --------------------------------
Arnold D. Scott
JEFFREY L. SHAMES* Trustee
- --------------------------------
Jeffrey L. Shames
ELAINE R. SMITH* Trustee
- --------------------------------
Elaine R. Smith
DAVID B. STONE* Trustee
- --------------------------------
David B. Stone
*By: JAMES R. BORDEWICK, JR.
--------------------------------
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated
pursuant to a Power of Attorney
dated September 21, 1994,
incorporated by reference to the
Registrant's Post-Effective
Amendment No. 11 filed with
the Securities and Exchange
Commission via EDGAR on
March 30, 1995.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
1 (f) Amendment to Declaration of Trust - Redesignation of
Series dated September 19, 1997.
10 Opinion and Consent of Counsel dated November 24, 1997.
11 (b) Consent of Deloitte & Touche, LLP on behalf of MFS
Government Mortgage Fund.
17 Financial Data Schedules for each class of MFS Government
Mortgage Fund.
<PAGE>
EXHIBIT NO. 99.1(f)
MFS SERIES TRUST X
CERTIFICATION OF AMENDMENT
TO DECLARATION OF TRUST
REDESIGNATON OF SERIES
The undersigned, being a majority of the Trustees of MFS Series Trust X
(the "Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Amended and Restated Declaration of Trust dated
December 21, 1994, as amended (the "Declaration"), acting pursuant to Section
6.9 of the Declaration, do hereby redesignate an existing series of Shares (as
defined in the Declaration) as follows:
1. The series designated as MFS/Foreign and Colonial International
Growth Fund shall be redesignated as MFS International Growth
Fund; and
2. The series designated as MFS/Foreign and Colonial International
Growth and Income Fund shall be redesignated as MFS International
Growth and Income Fund.
Pursuant to Section 6.9(h) of the Declaration, this redesignation of
series of Shares shall be effective upon the execution by a majority of the
Trustees of the Trust.
IN WITNESS WHEREOF, a majority of the Trustees of the Trust have executed
this amendment, in one or more counterparts, all constituting a single
instrument, as an instrument under seal in The Commonwealth of Massachusetts, as
of this 19th day of September, 1997.
A. KEITH BRODKIN CHARLES W. SCHMIDT
- ------------------------------ ------------------------------
A. Keith Brodkin Charles W. Schmidt
76 Farm Road 63 Claypit Hill Road
Sherborn, MA 01770 Wayland, MA 01778
- ------------------------------ ------------------------------
Richard B. Bailey Arnold D. Scott
63 Atlantic Avenue 20 Rowes Wharf
Boston, MA 02110 Boston, MA 02110
JEFFREY L. SHAMES
- ------------------------------ ------------------------------
Peter G. Harwood Jeffrey L. Shames
211 Lindsay Pond Road 38 Lake Avenue
Concord, MA 01742 Newton, MA 02159
J. ATWOOD IVES ELAINE R. SMITH
- ------------------------------ ------------------------------
J. Atwood Ives Elaine R. Smith
1 Bennington Road 75 Scotch Pine Road
Lexington, MA 02173 Weston, MA 02193
DAVID B. STONE
- ------------------------------ ------------------------------
Lawrence T. Perera David B. Stone
18 Marlborough Street 282 Beacon Street
Boston, MA 02116 Boston, MA 02116
WILLIAM J. POORVU
- ------------------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
<PAGE>
EXHIBIT NO. 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116-3741
(617) 954-5000
November 24, 1997
MFS Series Trust X
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Series Trust X (the "Trust") and the Assistant Secretary of the Trust. I am
admitted to practice law in The Commonwealth of Massachusetts. The Trust was
created under a written Declaration of Trust dated January 19, 1995, as amended
and restated, executed and delivered in Boston, Massachusetts (the "Declaration
of Trust"). The beneficial interest thereunder is represented by transferable
shares without par value. The Trustees have the powers set forth in the
Declaration of Trust, subject to the terms, provisions and conditions therein
provided.
I am of the opinion that the legal requirements have been complied with
in the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By vote adopted on January 18, 1995, the Trustees of the Trust
determined to sell to the public the authorized but unissued shares of
beneficial interest of the Trust for cash at a price which will net the Trust
(before taxes) not less than the net asset value thereof, as defined in the
Trust's By-Laws, determined next after the sale is made or at some later time
after such sale.
<PAGE>
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933.
I am of the opinion that all necessary Trust action precedent to the
issue of all the authorized but unissued shares of beneficial interest of the
Trust, including the Shares, has been duly taken, and that all the Shares were
legally and validly issued, and when sold, will be fully paid and
non-assessable, assuming the receipt by the Trust of the cash consideration
therefor in accordance with the terms of the January 18, 1995 vote of the
Trustees, described above, except as described below. I express no opinion as to
compliance with the Securities Act of 1933, the Investment Company Act of 1940,
or applicable state "Blue Sky" or securities laws in connection with the sale of
the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Declaration of Trust provides for indemnification out of
the Trust property for all loss and expense of any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
<PAGE>
EXHIBIT NO. 99.11(b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 20 to Registration Statement No. 33-1657 of MFS Series Trust X of
our report dated September 5, 1997 appearing in the annual report to
shareholders for the year ended July 31, 1997 of MFS Government Mortgage Fund, a
series of MFS Series Trust X, and to the references to us under the headings
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information, both of
which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 24, 1997
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