<PAGE> 1
MFS INTERNATIONAL GROWTH FUND
SUPPLEMENT TO THE OCTOBER 1, 1997 PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION (AS REVISED NOVEMBER 1, 1997)
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED OCTOBER 1,
1997 (AS REVISED NOVEMBER 1, 1997), AND CONTAINS A DESCRIPTION OF CLASS I
SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I SHARES
--------------
<S> <C>
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 (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)(1):
Management Fees.............................................................. 0.975%
Rule 12b-1 Fees.............................................................. None
Other Expenses (1)(2)........................................................ 0.51%
-----
Total Operating Expenses .................................................... 1.49%
</TABLE>
- ------------------
(1) All expenses, other than "Management Fees," are rounded to two decimal
places.
(2) "Other Expenses" is based on Class A expenses incurred during the period
ended May 31, 1997.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, 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:
<TABLE>
<CAPTION>
PERIOD CLASS I SHARES
------ --------------
<S> <C>
1 year................................... $15
3 years.................................. 48
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are Ernst
& Young LLP.
-1-
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997*
-------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.90
-------
Income from investment operations# -
Net investment loss $ 0.11
Net realized and unrealized gain
on investments and foreign currency transactions 0.93
-------
Total from investment operations $ 1.04
-------
Less distributions declared to shareholders -
From net realized gain (loss) on investments $ --
-------
Total distributions declared to shareholders $ --
-------
Net asset value - end of period $ 16.94
-------
Total return 6.54%####
Ratios (to average net assets)/Supplemental data:
Expenses## 1.52%###
Net investment loss 1.40%###
Portfolio turnover 53%
Average commission rate $0.0069
Net assets at end of period (000 omitted) $ 84
</TABLE>
- --------------------------
* For the period from the commencement of offering of Class I shares,
January 2, 1997 to May 31, 1997.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### Annualized.
#### Not annualized.
ELIGIBLE PURCHASERS
Class I shares of the Fund are available for purchase only by the following
purchasers ("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
-2-
<PAGE> 3
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS OCTOBER 1, 1997
(AS REVISED NOVEMBER 1, 1997)
-3-
<PAGE> 4
<TABLE>
<S> <C>
PROSPECTUS
October 1, 1997 (as Revised November 1, 1997)
MFS(R)INTERNATIONAL Class A Shares of Beneficial Interest
GROWTH FUND Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary........................................................................... 2
2. Condensed Financial Information........................................................... 4
3. The Fund.................................................................................. 5
4. Investment Objective and Policies......................................................... 5
5. Certain Securities and Investment Techniques.............................................. 6
6. Risk Factors.............................................................................. 13
7. Management of the Fund.................................................................... 16
8. Information Concerning Shares of the Fund................................................. 18
Purchases............................................................................ 18
Exchanges............................................................................ 23
Redemptions and Repurchases.......................................................... 24
Distribution Plan.................................................................... 26
Distributions........................................................................ 28
Tax Status........................................................................... 28
Net Asset Value...................................................................... 29
Description of Shares, Voting Rights and Liabilities................................. 29
Performance Information.............................................................. 29
Expenses............................................................................. 30
9. Shareholder Services...................................................................... 30
Appendix A -- Waivers of Sales Charges.................................................... A-1
Appendix B -- Description of Bond Ratings................................................. B-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS INTERNATIONAL GROWTH FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
MFS International Growth Fund (the "Fund") -- The investment objective of the
International Growth Fund is capital appreciation. The Fund seeks to achieve its
investment objective by investing, under normal market conditions, at least 65%
of its total assets in equity securities of companies whose principal activities
are outside the U.S. growing at rates expected to be well above the growth rate
of the overall U.S. economy.
No assurance can be given that the investment objective of the International
Growth Fund, (hereinafter referred to as the "Fund") will be achieved. The Fund
is a diversified series of MFS Series Trust X (the "Trust"), an open-end
management investment company. The minimum initial investment generally is
$1,000 per account (see "Purchases"). THE FUND IS INTENDED FOR INVESTORS WHO
UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING CAPITAL
APPRECIATION AND IN INVESTING IN FOREIGN SECURITIES.
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. The International Growth Fund also has retained as its
sub-advisers Foreign & Colonial Management Ltd. and Foreign & Colonial Emerging
Markets Limited (collectively, the "Sub-Adviser"), both of which are located at
Exchange House, Primrose Street, London EC2A 2NY, United Kingdom.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated October 1, 1997 (as revised
November 1, 1997), as amended or supplemented from time to time (the "SAI"),
which contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 32 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 the Prospectus and the SAI, and other information
regarding the Fund. This Prospectus is available on the Adviser's Internet World
Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 5
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)..... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)............................ See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
DAILY NET ASSETS)(2):
Management Fees....................................... 0.975% 0.975% 0.975%
Rule 12b-1 Fees(3).................................... 0.50% 1.00% 1.00%
Other Expenses(4)..................................... 0.51% 0.51%(5) 0.51%(5)
Total Operating Expenses.............................. 1.99% 2.49% 2.49%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) All expenses, other than "Management Fees," are rounded to two decimal
places.
(3) The Fund has adopted a Distribution Plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.50% per annum of the average daily net assets attributable to the Fund's
Class A shares. Distribution expenses paid under the Plan with respect to
Class A shares, 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.
(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."
(5) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Fund's Class B and Class C
shares, respectively, under the Distribution Plan (see "Distribution Plan"
below). Distribution expenses paid under the Plan with respect to Class B
and Class C shares, together with any CDSC payable upon redemption of Class
B and Class C shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge.
2
<PAGE> 6
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
----- ------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year............................... $ 67 $ 65 $ 25 $ 35 $ 25
3 years.............................. 107 108 78 78 78
5 years.............................. 150 153 133 133 133
10 years.............................. 268 270(2) 270(2) 284 283
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately 8 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 --
"Management of the Fund"; and (iv) Rule 12b-1 (i.e., distribution plan) fees
- --"Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE> 7
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception 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
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Period Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996* May 31, 1997**
------------ ------------- ------------ ------------- --------------
Class A Class B Class C
---------------------------- ---------------------------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD):
Net asset value -- beginning of period........... $ 16.71 $ 15.00 $ 16.66 $ 15.00 $ 16.83
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income (loss)................... $ 0.02 $ 0.03 $ (0.07) $ (0.03) $ (0.04)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions................................. 0.32 1.69 0.31 1.69 0.15
------- ------- ------- ------- -------
Total from investment operations........... $ 0.34 $ 1.72 $ 0.24 $ 1.66 $ 0.11
------- ------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income..................... $ -- $ (0.01) $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions................ (0.15) -- (0.08) -- (0.18)
------- ------- ------- ------- -------
Total distributions declared to
shareholders............................. $ (0.15) $ (0.01) $ (0.08) $ -- $ (0.18)
------- ------- ------- ------- -------
Net asset value -- end of period................. $ 16.90 $ 16.71 $ 16.82 $ 16.66 $ 16.76
------- ------- ------- ------- -------
Total return++................................... 2.13% 11.43%++ 1.56% 11.07%++ 0.79%++
RATIOS (TO AVERAGE DAILY NET ASSETS)/SUPPLEMENTAL
DATA:
Expenses##....................................... 1.99% 2.24%+ 2.53% 2.85%+ 2.50%+
Net investment income (loss)..................... 0.13% 0.24%+ (0.42)% (0.31)%+ (0.27)%+
PORTFOLIO TURNOVER................................. 53% 11% 53% 11% 53%
AVERAGE COMMISSION RATE............................ $0.0069 $0.0107 $0.0069 $0.0107 $0.0069
NET ASSETS AT END OF PERIOD (000 OMITTED).......... $56,810 $41,483 $62,958 $43,264 $ 2,397
</TABLE>
- ---------------
* For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
** For the period from the commencement of offering of Class C shares,
July 1, 1996, to May 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.
++ Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
4
<PAGE> 8
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. This Prospectus relates to the MFS International Growth Fund.
Shares of the other series of the Trust, MFS International Growth and Income
Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund and MFS Government
Mortgage Fund, are offered and sold pursuant to separate prospectuses and
statements of additional information. Shares of the Fund are sold continuously
to the public and the Fund then uses the proceeds to buy securities for its
portfolio. Three classes of shares of the Fund currently are offered to the
general public. Class A shares are offered at net asset value plus an initial
sales charge up to a maximum of 4.75% of the offering price (or a CDSC of 1.00%
upon redemption during the first year in the case of certain purchases of $1
million or more and certain purchases by retirement plans) and are subject to an
annual distribution fee and service fee up to a maximum of 0.50% per annum.
Class B shares are offered at net asset value without an initial sales charge
but are subject to a CDSC upon redemption (declining from 4.00% during the first
year to 0% after six years) and an annual distribution fee and service fee up to
a maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption of 1.00% during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert to
any other class of shares of the Fund. In addition, the Fund offers an
additional class of shares, Class I shares, exclusively to certain institutional
investors. Class I shares are made available by means of a separate Prospectus
Supplement provided to institutional investors eligible to purchase Class I
shares and are offered at net asset value without an initial sales charge or
CDSC upon redemption and without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets
(including supervision of the Sub-Adviser) and the officers of the Trust are
responsible for the operations of the Fund. The Adviser manages each portfolio
from day to day in accordance with the Fund's investment objective and policies.
A majority of the Trustees are not affiliated with the Adviser or the
Sub-Adviser. The Trust also offers to buy back (redeem) shares of the Fund from
shareholders at any time at net asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through its investment
policies, as described below. The objectives and policies of the Fund can be
expected to affect the market and financial risk to which the Fund is subject
and the performance of the Fund. The investment objective and policies of the
Fund may, unless otherwise specifically stated, be changed by the Trustees of
the Trust without a vote of the shareholders. A change in the Fund's objective
may result in the Fund having an investment objective different from the
objective which the shareholder considered appropriate at the time of investment
in the Fund. Any investment involves risk and there is no assurance that the
investment objective of the Fund will be achieved.
The Fund's investment objective is to seek capital appreciation. The Fund seeks
to achieve its objective by investing, under normal market conditions, at least
65% of its total assets in equity securities of companies whose principal
activities are outside the U.S. growing at rates expected to be well above the
growth rate of the overall U.S. economy. The foreign growth securities in which
the Fund may invest include securities of more established companies which
represent opportunities for long-term growth. See "Certain Securities and
Investment Techniques -- Foreign Growth Securities" below. The selection of
securities is made solely on the basis of potential for capital appreciation.
Dividend and interest income from portfolio securities, if any, is incidental to
the Fund's investment objective of capital appreciation.
The Fund may invest up to 25% of its net assets in securities of issuers whose
principal activities are located in emerging market countries. See "Certain
Securities and Investment Techniques -- Emerging Market Securities" below.
While the Fund intends to invest primarily in equity securities, the Fund may
also invest up to 35% of its net assets (and generally expects to invest not
more than 20% of its net assets) in fixed income securities of government,
government-related,
5
<PAGE> 9
supranational and corporate issuers whose principal activities are outside the
U.S., including up to 10% of its net assets in fixed income securities rated Ba
or lower by Moody's Investors Service, Inc. ("Moody's") or BB or lower by
Standard & Poor's Ratings Services ("S&P"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps") and comparable
unrated securities. See "Risk Factors -- Lower Rated Fixed Income Securities"
below. The Adviser and Sub-Adviser consider a variety of factors in selecting
fixed income securities to achieve capital appreciation, including the
creditworthiness of issuers, interest rates and currency exchange rates.
The Fund does not intend to emphasize any particular country or region in making
its investments, but under normal market conditions, the Fund will be invested
in at least three countries (outside the U.S.) and will not invest more than 50%
of its net assets in issuers whose principal activities are located in a single
country. See "Risk Factors -- Investments in One or a Limited Number of
Countries" below. Currently, the Fund does not expect to invest more than 25% of
its net assets in issuers whose principal activities are located in a single
country, except that the Fund generally expects to invest between 15% to 45% of
its assets in issuers whose principal activities are in Japan. The Fund will
seek to reduce risk by investing its assets in a number of markets and issuers,
performing credit analyses of potential investments and monitoring current
developments and trends in both the international economy and financial markets.
The Adviser and the Sub-Adviser determine where an issuer's principal activities
are located by considering such factors as its country of organization, the
principal trading market for its securities and the source of its revenues and
location of its assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
For temporary defensive reasons, such as during times of international political
or economic uncertainty or turmoil, most or all of the Fund's investments may be
in cash (U.S. dollars, foreign currencies or multinational currency units)
and/or securities that are denominated in U.S. dollars or whose issuers are
domiciled in the U.S. The Fund is not restricted as to the portions of its
assets which may be invested in securities denominated in a particular currency
and up to 100% of the Fund's net assets may be invested in securities
denominated in foreign currencies and multinational currency units.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, EACH FUND MAY
ENGAGE IN THE FOLLOWING SECURITIES TRANSACTIONS AND INVESTMENT TECHNIQUES, MANY
OF WHICH ARE DESCRIBED MORE FULLY IN THE SAI. SEE "INVESTMENT POLICIES AND
RESTRICTIONS" IN THE SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
FOREIGN GROWTH SECURITIES: The Fund may invest in securities of foreign growth
companies, including established foreign companies, whose rates of earnings
growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Risk Factors" below. It is anticipated that these
companies will primarily be in nations with more developed securities markets,
such as Japan, Australia, Canada, New Zealand and most Western European
countries, including Great Britain.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser and the Sub-Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low- to middle-income economy according to the International Bank for
Reconstruction and
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Development, the country's foreign currency debt rating, its political and
economic stability and the development of its financial and capital markets. The
Adviser and the Sub-Adviser determine whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country. See "Risk Factors -- Emerging Markets" below.
FIXED INCOME SECURITIES: Fixed income securities in which the Fund may invest
include all types of long- or short-term debt obligations, such as bonds, notes,
bills, debentures, loans, loan assignments and commercial paper. The Fund may
invest in emerging market fixed income securities, which, in addition to the
securities identified above, may take the form of interests issued by entities
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by emerging market country issuers. Fixed
income securities in which the Fund may invest include securities in the lower
rating categories of recognized rating agencies and comparable unrated
securities. See "Risk Factors" below. The Fund will not invest more than 10% of
its net assets, in fixed income securities rated Ba or lower by Moody's or BB or
lower by S&P or Fitch and comparable unrated securities. See "Risk Factors --
Lower Rated Fixed Income Securities" below. However, because most foreign fixed
income securities are not rated, the Fund will invest in foreign fixed income
securities primarily based on the Adviser's or the Sub-Adviser's credit analysis
without relying on published ratings.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund may invest in other
investment companies to the extent permitted by the 1940 Act and applicable
state securities laws (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase thinly traded securities of emerging market companies, or (iii) when
the Adviser or the Sub-Adviser believes such investments may be more
advantageous to the Fund than a direct market purchase of securities. If the
Fund invests in such investment companies, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser) but also will indirectly bear similar
expenses of the underlying investment companies.
PRIVATIZATIONS: The governments in some countries, including emerging market
countries, have been engaged in programs of selling part or all of their stakes
in government owned or controlled enterprises ("privatizations"). The Fund may
invest in privatizations. In certain countries, the ability of foreign entities
to participate in privatizations may be limited by local law and the terms on
which the foreign entities may be permitted to participate may be less
advantageous than those afforded local investors.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depositary
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of the
Fund in ADRs, GDRs and other types of depositary receipts are deemed to be
investments in the underlying securities.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, the Philippines, Peru, Poland, Slovenia, Uruguay and Venezuela.
Brady
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Bonds have been issued only recently, and for that reason do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady bonds may be viewed as speculative.
STRUCTURED SECURITIES: The Fund may invest a portion of its assets in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with, or purchase by, an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which the Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. The Fund is permitted to invest in a class of Structured
Securities that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated Structured Securities typically have higher
yields and present greater risks than unsubordinated Structured Securities.
Structured Securities are typically sold in private placement transactions, and
there currently is no active trading market for Structured Securities.
REPURCHASE AGREEMENTS: 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. Foreign repurchase agreements may be less well secured than U.S.
repurchase agreements, and may be denominated in foreign currencies. They may
also involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in U.S.
markets.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors 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 under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
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<PAGE> 12
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of the instrument.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate, government or
other borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The Fund may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loans acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
For a further discussion of loans and the risks related to transactions therein,
see the SAI.
RESTRICTED SECURITIES: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is illiquid and thus subject to the Fund's
limitations on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring liquidity of restricted
securities. The Board, however, 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's portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's 15% limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the Fund might
not be able to sell these securities when the Adviser or Sub-Adviser wishes to
do so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. Such loans
will usually be made only to member banks of the Federal Reserve System and
member firms (and subsidiaries thereof) of the New York Stock Exchange, and
would be required to be secured continuously by collateral in cash, irrevocable
letters of credit or U.S. Government securities maintained on a current basis at
an amount at least equal to the market value of the securities loaned. As with
other extensions of credit there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to entities deemed by the Adviser or the
Sub-Adviser to be of good standing, and when, in the judgment of the Adviser or
the Sub-Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk. If the Adviser or the
Sub-Adviser determines to make securities loans, it is intended that the value
of the securities loaned would not exceed 30% of the value of the Fund's total
assets.
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<PAGE> 13
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to 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 to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 10% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. In order to invest its assets immediately,
while awaiting delivery of securities purchased on such basis, the Fund will
hold liquid assets in a segregated account to pay for the commitment. Although
the Fund does not intend to make such purchases for speculative purposes,
purchases of securities on such bases may involve more risk than other types of
purchases. For additional information concerning these securities, see the SAI.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options on securities that are
traded on foreign and U.S. securities exchanges and over the counter. The Fund
will write such Options for the purpose of increasing its return and/or
protecting the value of its portfolio. The Fund may also write combinations of
put and call Options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk. The Fund may purchase put or call Options in anticipation of declines in
the value of portfolio securities or increases in the value of securities to be
acquired. However, the writing of Options constitute only a partial hedge, up to
the amount of the premium, less any transaction costs.
The Fund may purchase and sell options that are traded on foreign and U.S.
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. 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, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options the yield curve option is based on the difference between the yields
of designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the SAI.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put Options
and purchase call and put Options on foreign and domestic stock indices
("Options on Stock Indices"). The Fund may write such options for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In addition, if the value
of an underlying index moves adversely to the Fund's option position, the option
may be exercised, and the Fund will experience a loss which may only be
partially offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
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<PAGE> 14
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of contracts based on indices of securities as such
instruments become available for trading or fixed income securities or foreign
currencies ("Futures Contracts"). Such transactions will be entered into for
hedging purposes, in order to protect the Fund's current or intended investments
from the effects of changes in interest or exchange rates, or for non-hedging
purposes to the extent permitted by applicable law. For example, in the event
that an anticipated decrease in the value of portfolio securities occurs as a
result of a decline in the dollar value of foreign currencies in which portfolio
securities are denominated or a general increase in interest rates, the adverse
effects of such changes may be offset, in whole or in part, by gains on Futures
Contracts sold by the Fund. Conversely, the adverse effects of an increase in
the cost of portfolio securities to be acquired, occurring as a result of a rise
in the dollar value of securities denominated in foreign currencies or a decline
in interest rates, may be offset, in whole or in part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the Fund
believes that use of such contracts will benefit the Fund, if its investment
judgment about the general direction of interest or exchange rates is incorrect,
the Fund's overall performance may be poorer than if it had not entered into any
such contract and the Fund may realize a loss. Transactions entered into for
non-hedging purposes involve greater risk including the risk of losses which are
not offset by gains on other portfolio assets. The Fund will not enter into any
Futures Contract if immediately thereafter the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on futures
contracts ("Options on Futures Contracts") in order to protect against declines
in the values of portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, however, does
not present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, the Fund may suffer a loss on the transaction. Options
on Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted under applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the Option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by the Fund will be traded on foreign and
U.S. exchanges or over-the-counter.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date at a price set at the time of the contract ("Forward Contracts").
The Fund may enter into Forward Contracts for hedging purposes as well as for
the non-hedging purpose of increasing the Fund's current income. By entering
into transactions in Forward Contracts, however, the Fund may be required to
forego the benefits of advantageous changes in exchange rates and, in the case
of Forward Contracts entered into for non-hedging purposes, the Fund may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative. Forward Contracts are traded over-the-counter, and
not on organized commodities or securities exchanges. As a result, such
contracts operate in a manner distinct from exchange-traded instruments, and
their use involves certain risks beyond those associated with transactions in
Futures Contracts or options traded on exchanges. The Fund may also enter into a
Forward Contract on one
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<PAGE> 15
currency in order to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the judgment
of the Adviser or the Sub-Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Fund has
established procedures which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indices, currencies and other prices
or rates, such as the value of mortgage prepayment rates. For example, in the
typical interest rate swap, the Fund might exchange a sequence of cash payments
based on a floating rate index for cash payments based on a fixed rate. Payments
made by both parties to a swap transaction are based on a notional principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for more information on, and the risks involved in,
these activities.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Funds' distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser and the Sub-Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a portion
of 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.
While it is not generally the Fund's policy to invest or trade for short-term
profits, the Fund may dispose of a portfolio security whenever the Adviser or
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate.
Transaction costs incurred by the Fund and realized capital gains and losses of
the Fund may be greater than that of a fund with a lesser portfolio turnover
rate.
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6. RISK FACTORS
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. The Fund may invest up
to 100% of its assets in foreign securities which are not traded on a U.S.
exchange. Special considerations may also include more limited information about
foreign issuers, higher brokerage and custody costs, different or less stringent
accounting standards and thinner trading markets. Foreign securities markets may
also be less liquid, more volatile and less subject to government supervision
than in the U.S. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods.
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities in
emerging markets may be less liquid and more volatile in price than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
repatriation of assets, and may have less protection of property rights than
more developed countries. The economies of countries with emerging markets may
be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by a delay in obtaining a grant of, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund. See the SAI for a further discussion of
emerging markets securities as well as the associated risks.
ALLOCATION AMONG EMERGING MARKETS: The Fund may allocate all or a portion of its
investments in emerging market securities among the emerging markets of Latin
America, Asia, Africa, the Middle East and the developing countries of Europe,
primarily in Eastern Europe. The Fund will allocate its investments among these
emerging markets in accordance with the Adviser's and the Sub-Adviser's
determination as to the allocation most appropriate with respect to the Fund's
investment objective and policies. The Fund may invest its assets allocated to
investment in emerging markets without limitation in any particular region, and,
in
13
<PAGE> 17
accordance with the Adviser's and the Sub-Adviser's investment discretion, at
times may invest all of its assets allocated to investment in emerging markets
in securities of emerging market issuers located in a single region (e.g., Latin
America). To the extent that the Fund's investments are concentrated in one or a
few emerging market regions, the Fund's investment performance correspondingly
will be more dependent upon the economic, political and social conditions and
changes in those regions. The ability of the Fund to allocate its investments
among emerging market regions without restriction may have the effect of
increasing the volatility of the Fund, as compared to a fund which limits such
allocations.
INVESTMENTS IN ONE OR A LIMITED NUMBER OF COUNTRIES: The Fund will seek to
reduce risk by investing its assets in a number of markets and issuers. However,
the Fund may invest up to 50% of its net assets in issuers located in a single
country. To the extent that the Fund invests a significant portion of its assets
in a single or limited number of countries, the Fund's investment performance
correspondingly will be more dependent upon the economic, political and social
conditions and changes in that country or countries, and the risks associated
with investments in such country or countries will be particularly significant.
The ability of the Fund to focus its investments in one or a limited number of
countries may have the effect of increasing the volatility of the Fund.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
companies, including established companies. Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk than would established
growth stocks.
FOREIGN CURRENCIES: Because the Fund may invest up to 100% of its asset in
securities denominated in currencies other than the U.S. dollar, and because the
Fund may hold foreign currencies, the value of the Fund's investments, and the
value of dividends and interest earned by the Fund, may be significantly
affected by changes in currency exchange rates. Some foreign currency values may
be volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Fund. Although the Adviser and Sub-Adviser may attempt to manage
currency exchange rate risks, there is no assurance that the Adviser and
Sub-Adviser will do so at an appropriate time or that the Adviser and
Sub-Adviser will be able to predict exchange rates accurately. For example, if
the Adviser and Sub-Adviser hedge the Fund's exposure to a foreign currency, and
that currency's value rises, the Fund will lose the opportunity to participate
in the currency's appreciation. The Fund may hold foreign currency received in
connection with investments in foreign securities, and enter into Forward
Contracts, Futures Contracts and Options on Foreign Currencies when, in the
judgment of the Adviser or Sub-Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rates. While the holding of foreign currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange rate,
it also exposes the Fund to risk of loss if such rates move in a direction
adverse to the Fund's position. Such losses could also adversely affect the
Fund's hedging strategies. See the SAI for further discussion of the holding of
foreign currencies as well as the associated risks.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund is subject
to no restrictions on the maturities of the fixed income securities it holds.
The Fund's investments in fixed income securities with longer terms to maturity
are subject to greater volatility than the Fund's shorter-term obligations.
LOWER RATED FIXED INCOME SECURITIES: Fixed income securities in which the Fund
may invest may be rated Baa by Moody's or BBB by S&P or Fitch (and comparable
unrated securities). For a description of these and other rating categories, see
Appendix B. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and
14
<PAGE> 18
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than in the case of
higher grade fixed income securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch (and comparable unrated securities). No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater yield than investments in
higher rated securities, will involve greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. These lower rated high yielding fixed income securities
generally tend to be affected by economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's and the Sub-Adviser's judgment
may at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
While the Adviser and the Sub-Adviser may refer to ratings issued by established
credit rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such ratings
with the Adviser's and the Sub-Adviser's own independent and ongoing review of
credit quality. The Fund's achievement of its investment objective may be more
dependent on the Adviser's and the Sub-Adviser's own credit analysis than in the
case of an investment company primarily investing in higher quality fixed income
securities.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of shares of the
Fund will vary as the aggregate value of the portfolio securities of the Fund
increases or decreases. However, changes in the value of securities subsequent
to their acquisition will not affect cash or yield to maturity to the Fund.
TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the
Fund may enter into transactions in Options, Options on Stock Indices, Forward
Contracts, Futures Contracts, Options on Futures Contracts and Options on
Foreign Currencies for hedging purposes, such transactions nevertheless involve
certain risks. For example, a lack of correlation between the instrument
underlying an option or futures contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in Options, Options on Stock Indices, Forward Contracts, Futures
Contracts and Options on Futures Contracts for other than hedging purposes, to
the extent permitted by applicable law, which involves greater risk. In
particular, such transactions may result in losses for 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 a Fund may be required to maintain a position
until exercise or expiration, which could result in losses. The SAI contains a
description
15
<PAGE> 19
of the nature and trading mechanics of Options, Options on Stock Indices,
Futures Contracts, Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies, and includes a discussion of the risks related to
transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Options and Futures Contracts traded by the Fund will include U.S. Government
securities as well as foreign securities.
------------------------
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated. See "Investment Policies and
Restrictions" in the SAI.
Except with respect to the Fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreements, dated September 1, 1995 (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 an annual management fee computed and paid
monthly, in an amount equal to 0.975% of the first $500 million of the average
daily net assets of the Fund and 0.925% thereafter.
For the fiscal year ended May 31, 1997, MFS received a management fee under the
Advisory Agreement of $1,049,705, (equivalent on an annualized basis to 0.975%,
of the Fund's average daily net assets).
This management fee is greater than the fees paid by most funds, but is
comparable to fees paid by funds having similar investment objectives and
policies. MFS also serves as investment adviser to each of the other funds in
the MFS Family of Funds (the "MFS Funds"), and to MFS(R) Municipal Income Trust,
MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Union Standard Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $67.1
billion on behalf of approximately 2.6 million investor accounts as of September
30, 1997. As of such date, the MFS organization managed approximately $43.2
billion of assets in equity securities, approximately $20.4 billion of assets
invested in fixed income funds and fixed income portfolios and approximately
$4.4 billion of assets in foreign securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), which is 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, Donald A. Stewart, Arnold D. Scott and John D. McNeil. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. 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.
16
<PAGE> 20
A. Keith Brodkin, the Chairman of MFS, is also the Chairman and President of the
Trust. W. Thomas London, Stephen E. Cavan, James O. Yost, Ellen M. Moynihan,
Mark E. Bradley and James R. Bordewick, Jr., all of whom are officers of MFS,
are officers of the Trust.
FCM -- The Advisory Agreement permits the Adviser from time to time to engage
one or more sub-advisers to assist in the performance of its services. Pursuant
to the Advisory Agreement, the Adviser has engaged Foreign & Colonial Management
Ltd., a company incorporated under the laws of England and Wales ("FCM"),
located at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, as
sub-adviser to render advisory services to the Fund with respect to the Fund's
investments in emerging markets securities. FCM is a wholly owned subsidiary of
Hypo Foreign & Colonial Management (Holdings) Ltd. ("Hypo F&C"). Sixty-Five
percent of the outstanding voting securities of Hypo F&C is owned by Hypo (U.K.)
Holdings Ltd., which is a wholly owned subsidiary of HYPO-BANK (Bayerische
Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and fifth largest,
commercial bank in Germany, founded in 1835. The remaining 35% of the
outstanding voting securities of Hypo F&C is owned by four closed-end publicly
listed investment Trusts managed by FCM including Foreign & Colonial Investment
Trust PLC. FCM has a history of money management dating from 1868 and the
establishment of the world's oldest closed-end fund, Foreign & Colonial
Investment Trust PLC. As of May 31, 1997, FCM managed approximately U.S. $45.64
billion of assets, including approximately U.S. $35.85 billion of assets in
equity securities and approximately U.S. $9.79 billion of assets in fixed income
securities.
Under a separate Sub-Advisory Agreement between the Adviser and FCM, dated
September 1, 1995 (the "Sub-Advisory Agreement"), the Adviser may delegate to
FCM the authority to make investment decisions for the Fund. For its services,
the Adviser pays FCM a management fee, computed and paid monthly, in an amount
equal to 0.80% of the average daily net assets of the Fund, on an annualized
basis. Effective September 8, 1997, FCM has voluntarily agreed to waive for an
indefinite period of time, a portion of the sub-investment advisory fee it
receives from the Adviser from 0.80% to 0.65% of the average daily net assets
managed by FCM of the Fund on an annualized basis.
FCEM -- The Sub-Advisory Agreement for the Fund permits FCM from time to time to
engage one or more sub-advisers to assist in the performance of its services.
Pursuant to the Sub-Advisory Agreement, FCM has engaged Foreign & Colonial
Emerging Markets Limited, a company incorporated under the laws of England and
Wales ("FCEM"), located at Exchange House, Primrose Street, London EC2A 2NY,
United Kingdom, as sub-adviser to render advisory services to the Funds. FCEM is
a wholly owned subsidiary of FCM. FCEM serves as the investment adviser to
public closed-end and open-end funds and segregated accounts specializing in
emerging markets. As of May 31, 1997, FCEM managed approximately U.S. $4.92
billion of assets invested in emerging markets.
Under a separate Sub-Advisory Agreement between FCM and FCEM dated September 1,
1995, FCM may delegate to FCEM the authority to make investment decisions for
the Fund. It is presently intended that FCEM will provide portfolio management
services for the portion of the assets of the Fund invested in emerging markets
securities. For its services, FCM pays FCEM a management fee, computed and paid
monthly, in an amount equal to 0.80% of the average daily net assets of the Fund
managed by FCEM, on an annualized basis. Effective September 8, 1997 with
respect to the Fund, FCEM has voluntarily agreed to waive for an indefinite
period of time, a portion of the sub-investment advisory fee it receives from
the Adviser from 0.80% to 0.65% of the average daily net assets managed by FCEM
of the Fund on an annualized basis.
For the fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser fees
under the Sub-Advisory Agreement of $857,738 in connection with its services for
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 or clients of FCM.
Some simultaneous transactions are inevitable when several clients receive
investment advice from MFS and FCM, particularly when the same security is
suitable for more than one client. While in some cases this arrangement could
have a detrimental effect on the price or availability of the security as far as
the Fund is concerned, in other cases it may produce increased investment
opportunities for the Fund.
17
<PAGE> 21
PORTFOLIO MANAGER -- David R. Mannheim, a Senior Vice President of MFS, has been
a portfolio manager of the Fund since September, 1988. Mr. Mannheim has been
employed by MFS as a portfolio manager since 1992.
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 May 31, 1997, MFS received fees under the Administrative
Services Agreement of $4,467, (equivalent on an annualized basis to 0.0042%, of
the Fund's average daily net assets) for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer. As used in the Prospectus and any appendices thereto the term "dealer"
includes any broker, dealer, bank (including bank trust departments), registered
investment adviser, financial planner and any other financial institutions
having a selling agreement or other similar agreement with MFD. Dealers may also
charge their customers fees relating to investments in the Fund.
This prospectus offers three classes of shares to the general public (Class A,
Class B and Class C shares) which bear sales charges and distribution fees in
different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares of the Fund are
offered at net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF: DEALER
------------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED 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**
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above (see the SAI).
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of 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.
18
<PAGE> 22
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the Funds in the MFS Funds would be in an
aggregate amount of at least $250,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER
THIS CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c)
the sponsoring organization demonstrates to the satisfaction of MFD that,
at the time of purchase, the employer has at least 200 eligible employees
and the plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------- --------------------------
<S> <C>
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
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
19
<PAGE> 23
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(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 or partially terminated under ERISA or
is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
CLASS B SHARES: Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC upon redemption as
follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First.......................................... 4%
Second......................................... 4%
Third.......................................... 3%
Fourth......................................... 3%
Fifth.......................................... 2%
Sixth.......................................... 1%
Seventh and following.......................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under 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
20
<PAGE> 24
are eligible to purchase Class A shares of the Fund at net asset value without
an initial sales charge but subject to a 1% CDSC if the plan has, at the time of
purchase, a market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds. IN THIS EVENT, THE PLAN OR ITS SPONSORING ORGANIZATION
SHOULD INFORM THE SHAREHOLDER SERVICING AGENT THAT THE PLAN IS ELIGIBLE TO
PURCHASE CLASS A SHARES UNDER THIS CATEGORY; THE SHAREHOLDER SERVICING AGENT HAS
NO OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER
THIS CATEGORY FOR THE PURCHASE OF CLASS A SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
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<PAGE> 25
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of each class of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS / MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, 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. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B and/or Class C shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of
22
<PAGE> 26
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
23
<PAGE> 27
shareholder initially purchases Units and then exchanges into Class A shares
subject to a CDSC of an MFS Fund, the CDSC period will commence upon such
exchange, and the applicability of the CDSC with respect to subsequent exchanges
shall be governed by the rules set forth in this paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally means
that the stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
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<PAGE> 28
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be responsible for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares
through his dealer (a repurchase), the shareholder can place a repurchase order
with his dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES
THE SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE
AND COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares of any MFS Fund purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all transactions
made during a calendar month, regardless of when during the month they have
occurred, will age one year at the close of business on the last day of such
month in the following calendar year and each subsequent year. For Class B
shares of any MFS Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
each class of the Fund's shares.
25
<PAGE> 29
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 each Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
Any distribution in-kind of portfolio securities may include foreign securities,
including securities of issuers in emerging markets. Such securities may be
subject to risks not typically associated with the risks of U.S. securities. See
"Risk Factors -- Foreign Securities" and " -- Emerging Markets."
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares of the Fund pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plan"), after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of Shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no
26
<PAGE> 30
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. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expenses incurred
by MFD under its distribution agreement with the Funds, the Fund is not liable
to MFD for any losses MFD may incur in performing services under its
distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of Shares covered by the Distribution Plan.
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 of the Fund are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.25% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund (e.g., MFD pays commissions to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). Distribution fee payments under the Distribution Plan
may be used by MFD to pay securities dealers a distribution fee in an amount
equal on an annual basis to 0.25% per annum of the Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors for whom that securities
dealer is the holder or dealer of record. See "Purchases -- Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Distribution Plan does not exceed 0.50% per annum of the
average daily net assets of a Fund attributable to Class A shares, the Fund is
permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES. Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C
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<PAGE> 31
shares purchased through dealers at the time of purchase. In compensation for
this 1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per
annum Class C distribution and service fees paid by the Fund with respect to
such shares for the first year after purchase, and dealers will become eligible
to receive from MFD the ongoing 1.00% per annum distribution and service fees
paid by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's distribution/service
fee for its current fiscal year is equal to 0.50%, 1.00% and 1.00% per annum of
the average daily net assets attributable to the Fund's Class A shares, Class B
shares and Class C shares, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income as
dividends on an annual basis. In determining the net investment income available
for distributions, 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 same class with respect to which a distribution is made. See "Tax Status"
and "Shareholder Services -- Distribution Options" below. Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the 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 federal income or excise taxes, although
the Fund's foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. Shortly after
the end of each calendar year, each shareholder will be sent a statement setting
forth the federal income tax status of all dividends and distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion, if any, representing a return of capital
(which is free of current taxes but results in a basis reduction) and the
amount, if any, of federal income tax withheld. In certain circumstances, the
Fund may also elect to "pass through" to shareholders foreign income taxes paid
by the Fund. Under those circumstances, the Fund will notify shareholders of
their pro rata portion of the foreign income taxes paid by the Fund;
shareholders may be eligible for foreign tax credits or deductions with respect
to those taxes, but will be required to treat the amount of the taxes as an
amount distributed to them and thus includible in their gross income for federal
income tax purposes.
The Fund's 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.
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The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on 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
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without par
value). The Fund also has a class of shares which it offers exclusively to
certain institutional investors entitled Class I Shares. The Trust has reserved
the right to create and issue additional classes and series of shares, in which
case each class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series are entitled to vote separately to approve investment advisory agreements
or changes in investment restrictions, but shares of all series vote together in
the election of Trustees and selection of accountants. Additionally, each class
of shares of a series will vote separately on any material increases in the fees
under the Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's Declaration of Trust provides that a
Trustee may be removed from office in certain instances. See "Description of
Shares, Voting Rights and Liabilities" in the SAI.
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation, and Wiesenberger Investment Companies Service. 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 the shares
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<PAGE> 33
of that class with all distributions reinvested and which will give effect to
the imposition of any applicable CDSC assessed upon redemptions of the Fund's
Class B and Class C shares. Such total rate of return quotations may be
accompanied by quotations which do not reflect the reduction in value of the
initial investment due to the sales charge or the deduction of a CDSC, and which
will thus be higher.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as stated. 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 total rate of
return and yield, see the SAI. In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time make a
list of all or a portion of its holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Trust's Custodian, for all services to the Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series of the Trust are allocated among the series in a manner
believed by management of the Trust to be fair and equitable.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares;
this option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
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<PAGE> 34
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of any of the classes of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and not subject to any CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value (and not subject to any CDSC) in
shares of the same class of another MFS Fund, if shares of such MFS Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments, as designated on the account application, and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be
at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP will not
be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to 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
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MFS Money Market Fund, MFS Government Money Market Fund or Class A shares of
MFS Cash Reserve Fund will be subject to any applicable sales charge. For
federal and (generally) state income tax purposes, an exchange is treated as a
sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated October 1, 1997 (as revised November 1, 1997), as amended
or supplemented from time to time, contains more detailed information about the
Fund, including information related to (i) the Fund's investment policies and
restrictions, including the purchase and sale of Options, Options on Stock
Indices, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies; (ii) the Trustees, officers, Investment Adviser
and Sub-Adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions; (vi)
the Distribution Plan; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of America ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and
Repurchases -- General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
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<PAGE> 37
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemption of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
- 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
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
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<PAGE> 38
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- 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 AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(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
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Code rules.
A-3
<PAGE> 39
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules;
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 40
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
B-1
<PAGE> 41
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
STANDARD & POORS RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S & P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-2
<PAGE> 42
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA.' Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where ratings may be
lowered, FitchAlert is relatively short-term, and should be resolved within 12
months.
B-3
<PAGE> 43
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1 +'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics, which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
B-4
<PAGE> 44
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the
types of securities in their portfolios. For free prospectuses containing
more complete information, including the exchange privilege and all charges
and expenses, please contact your financial adviser or call MFS at
1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time. This
material should be read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund(1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund(2)
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity Fund
MFS(R) Value Fund
STOCK AND BOND
- --------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
BOND
- --------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- --------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
WORLD
- --------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/International Growth Fund(3)
MFS(R)/International Growth and Income Fund(4)
MFS(R) World Asset Allocation Fund(sm)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 45
Investment Adviser [MFS LOGO]
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Sub-Adviser MFS(R) INTERNATIONAL GROWTH FUND
Foreign & Colonial Management Ltd. Prospectus
Exchange House October 1, 1997
Primrose Street (As revised November 1, 1997)
London EC2A 2NY
United Kingdom
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO]
MFS(R) INTERNATIONAL GROWTH FUND
500 Boylston Street
Boston, MA 02116
MIF-1-11/97/58M
<PAGE> 46
[MFS INVESTMENT MANAGEMENT LOGO]
<TABLE>
<S> <C>
STATEMENT OF
MFS(R)INTERNATIONAL GROWTH FUND ADDITIONAL INFORMATION
October 1, 1997
(Members of the MFS Family of Funds(R)) (As revised November 1, 1997)
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions..................................................................................... 2
2. Investment Policies and Restrictions............................................................ 2
3. Management of the Fund.......................................................................... 15
Trustees........................................................................................ 15
Officers........................................................................................ 15
Trustee Compensation Table...................................................................... 17
Investment Adviser.............................................................................. 17
Administrator................................................................................... 18
FCM............................................................................................. 18
FCEM............................................................................................ 18
Custodian....................................................................................... 19
Shareholder Servicing Agent..................................................................... 19
Distributor..................................................................................... 19
4. Portfolio Transactions and Brokerage Commissions................................................ 20
5. Shareholder Services............................................................................ 21
Investment and Withdrawal Programs.............................................................. 21
Exchange Privilege.............................................................................. 24
Tax-Deferred Retirement Plans................................................................... 25
6. Tax Status...................................................................................... 25
7. Distribution Plan............................................................................... 26
8. Determination of Net Asset Value and Performance................................................ 27
9. Description of Shares, Voting Rights and Liabilities............................................ 30
10. Independent Auditors and Financial Statements................................................... 31
Appendix A -- Performance Information........................................................... A-1
</TABLE>
MFS(R) INTERNATIONAL GROWTH FUND
A series of MFS Series Trust X
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
October 1, 1997 (as revised November 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> 47
1. DEFINITIONS
"Fund" -- MFS International Growth
Fund, a diversified series
of the Trust. The Fund was
known as MFS/Foreign &
Colonial International
Growth Fund prior to
September 8, 1997.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"Sub-Adviser" -- Foreign & Colonial Manage-
ment Ltd., a company
incorporated under the laws
of England and Wales
("FCM") and Foreign &
Colonial Emerging Markets
Limited, a company
incorporated under the laws
of England and Wales
("FCEM").
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund,
dated October 1, 1997 (as
revised November 1, 1997),
as amended or supplemented
from time to time.
"Trust" -- MFS Series Trust X, a
Massachusetts business
Trust. The Trust has
changed its name several
times during the past five
years. The Trust was
previously known as MFS
Government Mortgage Fund
(prior to June 2, 1995),
MFS Government Income Plus
Fund (prior to March 1,
1993), MFS Government
Income Plus Trust (prior to
August 3, 1992) and MFS
Government Securities Trust
(after December 7, 1990).
2. INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES: The investment policies of the Fund are described in the
Prospectus and below. The following discussion of the Fund's investment policies
and restrictions supplements and should be read in conjunction with the
information set forth in the "Investment Objective and Policies" section of the
Prospectus.
FOREIGN SECURITIES: The Fund may invest up to 100% of its assets in foreign
securities as discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described in the
Prospectus under the caption "Risk Factors" and as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
2
<PAGE> 48
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance of
payments, including export performance, and its access to international credits
and investments. An emerging market whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for any
period during which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Board of Trustees.
DEFAULT; LEGAL RECOURSE -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by the Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging market
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
The Fund's ability to enforce its rights against private issuers may be limited.
The ability to attach assets to enforce a judgment may be limited. Legal
recourse is therefore somewhat diminished. Bankruptcy, moratorium and other
similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt
3
<PAGE> 49
obligations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Adviser and the
Sub-Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
FOREIGN CURRENCIES -- The Fund may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the value
of these currencies against the U.S. dollar may result in corresponding changes
in the U.S. dollar value of the Fund's assets denominated in those currencies.
The Fund may attempt to minimize the impact of these changes to the U.S. dollar
value of the Fund's portfolio by engaging in certain hedging practices, such as
entering into Futures Contracts and Options on Foreign Securities as described
below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act"), and applicable
state securities laws. Such investment may also involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities, and the total return on such investment will be reduced by the
operating expenses and fees of such other investment companies, including
advisory fees.
REPURCHASE AGREEMENTS: 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"), members of the Federal Reserve System, recognized
domestic or foreign securities dealers or institutions which the Adviser or the
Sub-Adviser has determined to be of comparable creditworthiness. The securities
that the Fund purchases and holds have values which are equal to or greater than
the repurchase price agreed to be paid by the seller. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a standard
rate due to the Fund together with the repurchase price on repurchase.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, 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 or the Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or the Sub-Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon margin.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs") which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary
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receipts in the United States can reduce costs and delays as well as potential
currency exchange and other difficulties. The Fund may purchase securities in
local markets and direct delivery of these ordinary shares to the local
depository of an ADR agent bank in the foreign country. Simultaneously, the ADR
agents create a certificate which settles at the Fund's custodian in five days.
The Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to the
same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its own country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject to
exchange rate risks if the underlying foreign securities are denominated in a
foreign currency. The Fund may also invest in Global Depositary Receipts
("GDRs") and other types of depositary receipts. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies and
evidence ownership of underlying securities issued by either a foreign or U.S.
company.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against an issuer of emerging market debt instruments (a
"borrower"). In purchasing a loan, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate, governmental or
other borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account liquid assets in
an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. Direct indebtedness of developing countries involves
the risk that the governmental entities responsible for the repayment of the
note may be unable, or unwilling, to pay interest and repay principal where due.
In selecting the loans and other direct investments which the Fund will
purchase, the Adviser will rely upon its (and not that of the original lending
institution's) own credit analysis of the borrower. As a Fund may be required to
rely upon another lending institution to collect and pass on to the Fund amounts
payable with respect to the loan and to enforce the Fund's rights under the
loan, an insolvency, bankruptcy or reorganization of the lending institution may
delay or prevent the Fund from receiving such amounts. In such cases, the Fund
will evaluate as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer" of the loan
for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged nature
of many such loans may make such loans especially vulnerable to adverse changes
in economic or market conditions. Investments in such loans may involve
additional risks to the Fund.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES:When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities to entities deemed creditworthy by the Adviser or the
Sub-Adviser. Such loans would be required to be secured continuously by
collateral in cash, irrevocable letters of credit or U.S. Government securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of the cash collateral or a fee. The Fund would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an
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important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser and the Sub-Adviser to be of good standing, and when, in the judgment of
the Adviser or the Sub-Adviser, the consideration which could be earned
currently from securities loans of this type justifies the attendant risk. If
the Adviser or the Sub-Adviser determines to make securities loans, it is not
intended that the value of the securities loaned would exceed 30% of the value
of the Fund's total assets.
WARRANTS: The Fund will not invest more than 10% of its net assets, taken at
market value, in warrants not acquired in a unit transaction. Warrants are
securities that give the Fund the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. An Option provides the
purchaser, or "holder", with the right, but not the obligation, to purchase, in
the case of a "call" Option, or sell, in the case of a "put" Option, the
security or securities in connection with which the Option was written, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a non-refundable purchase price for the
Option, known as the "premium." The maximum amount of risk the purchaser of the
Option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer", however, is
potentially unlimited, unless the Option is "covered." A call option written by
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
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in liquid assets in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is (a) equal to or greater than the exercise price of the put
written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counter party with which the option is traded, and
applicable laws and regulations. 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 the purpose of increasing its return and 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.
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
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<PAGE> 52
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 solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. 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 15% of
the Fund's assets. 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 15%
test imposed by the SEC staff. The Fund may also write over-the-counter Options
with non-primary dealers, including foreign dealers, and will treat the assets
used to cover these Options as illiquid for purposes of such 15% test.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, the Fund may write (sell)
covered call and put options and purchase call and put options on stock indices
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser or the
Sub-Adviser, are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a stock
index through ownership of securities, such securities may not match the
composition of the index and, in that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in liquid assets
in a segregated account with its custodian. The Fund may cover put options on
stock indices by maintaining liquid assets in a segregated account with its
custodian, or else by holding a put on the same security and in the same
principal amount as the put written where the exercise price of the put held (a)
is equal to or greater than the exercise price of the put written or (b) is less
than the exercise price of the put written if the difference is maintained by
the Fund in liquid assets in a segregated account with its custodian. Put and
call options on stock indices may also be covered in
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<PAGE> 53
such other manner as may be in accordance with the rules of the exchange on
which, or the counterparty with which, the option is traded and applicable laws
and regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which a
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of long-term bonds or other
securities which the Fund intends to purchase at a later date. Futures Contracts
may also be entered into for non-hedging purposes to the extent permitted by
applicable law. A "sale" of a Futures Contract means a contractual obligation to
deliver the securities or foreign currency called for by the contract at a fixed
price at a specified time in the future. A "purchase" of a Futures Contract
means a contractual obligation to acquire the securities or foreign currency at
a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
One purpose of the purchase or sale of a Futures Contract, for hedging purposes
in the case of a portfolio holding long-term debt securities, is to protect the
Fund from fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, if the Fund owned long-term bonds and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Fund's Futures Contracts should increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase or by buying bonds with long maturities and
selling bonds with short maturities when interest rates are expected to decline.
However, since the futures market is more liquid than the cash market, the use
of Futures Contracts as an investment technique allows the Fund to maintain a
defensive position without having to sell its portfolio securities. Transactions
entered into for non-hedging purposes have greater risk, including the risk of
losses which are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be
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<PAGE> 54
particularly appropriate when the cash flow from the sale of new shares of the
Fund could have the effect of diluting dividend earnings. To the extent a Fund
enters into Futures Contracts for this purpose, the assets in the segregated
asset account maintained to cover the Fund's obligations with respect to such
Futures Contracts will consist of liquid assets from the portfolio of the Fund
in an amount equal to the difference between the fluctuating market value of
such Futures Contracts and the aggregate value of the initial and variation
margin payments made by the Fund with respect to such Futures Contracts, thereby
assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The index underlying a Futures Contract is a broad based index of fixed-
income securities designed to reflect movements in the relevant market as a
whole.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase Options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying securities. As with
the purchase of Futures Contracts, when the Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the 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 constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option 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 purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, or a decline in the dollar value of
foreign currencies in which portfolio securities are denominated, 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 rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, 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 amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
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
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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 Contact, subject to regulation by the CFTC and
the performance guarantee of the exchange clearing house. Options on Futures
Contracts, as noted in the Prospectus, are also traded on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. The
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser or the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to the
value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative.
The Fund has established procedures which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be
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offset by the amount of the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. A put option written 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 (a) is equal
to or greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the difference is maintained by the Fund in
liquid assets in a segregated account with its custodian. Call and put options
on foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded and applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: Unlike transactions entered into by the Fund in
Futures Contracts, Options on Foreign Currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities and on
stock indices may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
A Fund's ability effectively to hedge all or a portion of its portfolio through
transactions in options, Futures Contracts, and Forward Contracts will depend on
the degree to which price movements in the underlying instruments correlate with
price movements in the relevant portion of the Fund's portfolio. If the values
of fixed income portfolio securities being hedged do not move in the same amount
or direction as the instruments underlying options, Futures Contracts or Forward
Contracts traded, 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, Futures Contract or Forward
Contract traded and the portfolio securities being hedged, which could result in
losses both on the hedging transaction and the portfolio securities. In such
instances, 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.
Where the Fund enters into Forward Contracts as a "cross hedge" (i.e., the
purchase or sale of a Forward Contract on one currency to hedge against risk of
loss arising from changes in value of a second currency), the Fund incurs the
risk of imperfect correlation between changes in the values of the two
currencies, which could result in losses.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the Option, Futures
Contract and Forward Contract markets.
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<PAGE> 57
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity or termination date of the Option, Futures
Contract or Forward Contract approaches.
The trading of Options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's or the Sub-Adviser's judgment as to the general
direction of exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of portfolio securities or decreases in the
cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract, Option on
a Futures Contract or Option on a Foreign Currency can only be terminated by
entering into a closing purchase or sale transaction, which requires a secondary
market for such instruments on the exchange on which the initial transaction was
entered into. If no such market exists, it may not be possible to close out a
position, and 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.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES: The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC has jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take
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delivery of such currencies. Under certain circumstances, such as where the
Adviser or the Sub-Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser or the
Sub-Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could reduce
the dollar value of interest or dividend payments received.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options 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 ensuring that the leveraging effect of such Futures
Contract is minimized.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, indices, currencies, or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their value may decline
substantially if the issuer's creditworthiness deteriorates.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount of the Fund
is entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser or the Sub-Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Fund's risk of loss consists of
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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.
------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS: The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or the Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or the Fund or class, as applicable, are
represented in person or by proxy). Except with respect to the Fund's policy on
borrowing and investing in illiquid securities, these investment restrictions
and policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), any type of swap agreement,
Forward Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its assets would be invested in securities of issuers
whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), if more than 15% of the Fund's
net assets (taken at market value) would be invested in such securities.
Repurchase agreements maturing in more than seven days will be deemed to be
illiquid for purposes of the Fund's limitation on investment in illiquid
securities. Securities that are not registered under the Securities Act of
1933, as amended, and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% limitation;
(2) invest more than 10% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such amount may be
warrants which are not listed on the New York or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser or a sub-adviser of
the Fund, if one or more of such persons also owns beneficially more than 0.5%
of the securities of such issuer, and such
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<PAGE> 60
persons owning more than 0.5% of such securities together own beneficially
more than 5% of such securities;
(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts, Options, Options on Stock Indices and Options on Foreign
Currencies), any type of swap agreement, any type of futures contract
(including Futures Contracts) and Forward Contracts;
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(9) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any type of swap
agreement, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(10) borrow, except as a temporary measure for extraordinary or emergency
purposes;
(11) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities, (ii) put or call options or combinations thereof with
respect to securities or indexes of securities or (iii) Options on Foreign
Currencies, any type of swap agreement or any type of futures contract
(including Futures Contracts) or (b) the purchase, ownership, holding or sale
of contracts for the future delivery of securities or currencies; or
(12) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of the
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (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 and
Secretary
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 (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, 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
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
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<PAGE> 61
JAMES O. YOST,* Assistant Treasurer; (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of the non-interested Trustees and Mr. Bailey
(who currently receive a fee per Fund of $250 per year plus $25 per meeting and
$20 per committee meeting attended, together with such Trustee's out-of-pocket
expenses), and have adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 73 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth below is certain information concerning the cash compensation
estimated to be paid by the Fund to the Trustees, and benefits accrued and
estimated benefits payable, under the retirement plan.
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<PAGE> 62
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED
TRUSTEE FEES ACCRUED AS CREDITED TOTAL TRUSTEE FEES
FROM THE PART OF FUND YEARS FROM FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------ ------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey............................... $ 959 $ 56 5 $247,168
A. Keith Brodkin................................ N/A N/A N/A N/A
Peter G. Harwood................................ 1,039 64 5 105,995
J. Atwood Ives.................................. 999 58 13 98,750
Lawrence T. Perera.............................. 1,174 58 12 98,310
William J. Poorvu............................... 1,014 62 12 102,840
Charles W. Schmidt.............................. 1,039 64 5 105,995
Arnold D. Scott................................. N/A N/A N/A N/A
Jeffrey L. Shames............................... N/A N/A N/A N/A
Elaine R. Smith................................. 1,224 64 23 105,995
David B. Stone.................................. 1,089 66 5 108,710
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
------------ ---- ---- ---- ----------
<S> <C> <C> <C> <C>
$ 863 $129 $216 $302 $432
960 144 240 336 480
1,056 158 264 370 528
1,153 173 288 404 577
1,250 187 312 437 625
1,346 202 337 471 673
</TABLE>
- ---------------
(1) For the fiscal year ending May 31, 1997.
(2) Based upon normal retirement age (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) Information provided is 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 $21.1
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).
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of June 30, 1997, the Trustees and officers as a group owned less than 1% of
the Fund's shares outstanding on that date.
As of June 30, 1997, Merrill Lynch Pierce Fenner & Smith Inc., 4800 Deer Lake
Drive, East, 3rd Floor, Jacksonville, Florida 32246-6484 was the record owner of
approximately 8.31%, 16.18% and 9.33%, respectively, of the outstanding Class A,
Class B and Class C shares of the Fund. In addition, Fu Hsin Chen, 921 Fallen
Leaf, Arcadia, CA 91006-1902, Timothy Smith & Elizabeth R. Smith, JTWROS, P.O.
Box 70055, Metairie, Louisiana 70033-0055 and Larry L. Morris, 145 Windmere
Drive, Grenada, MS 38901-8084 were the record owners of approximately 8.21%,
7.57% and 5.54%, respectively, of Class C shares of the Fund. As of June 30,
1997, MFS Defined Contribution Plan, c/o Mark Leary, Massachusetts Financial
Services, 500 Boylston Street, Boston, MA 02116-3740 was the record owner of
approximately 99.88% of Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Trust or its shareholders, it is determined that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER -- MFS and its predecessor organizations have a history of
money management dating from 1924. MFS is a subsidiary of Sun Life of Canada
(U.S.),
17
<PAGE> 63
which in turn is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life").
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 May 31, 1997, MFS received fees under the Administrative
Services Agreement of $4,467 (equivalent on an annualized basis to 0.0042% of
the Fund's average daily net assets).
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated as of September 1, 1995 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, in an amount equal to 0.975% of the first $500 million of the
average daily net assets of the Fund and 0.925% thereafter.
For the period from commencement of investment operation, October 24, 1995, to
May 31, 1996, MFS received management fees under the Advisory Agreement of
$313,570 (equivalent on an annualized basis to 0.975% of the Fund's average
daily net assets). For the fiscal year ended May 31, 1997, MFS received
management fees under the Advisory Agreement of $1,049,705 (equivalent on an
annualized basis to 0.975% of the Fund's average daily net assets).
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 1998
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Policies and Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the Fund's shares (as defined in "Investment Policies
and Restrictions"), or by either party on not more than 60 days' nor less than
30 days' written notice. The Advisory Agreement provides that if MFS ceases to
serve as the Adviser to the Fund, the Fund will change its name so as to delete
the initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management of
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
FCM -- FCM serves as the Fund's sub-adviser pursuant to a separate Sub-Advisory
Agreement, dated September 1, 1995 between the Adviser and FCM (the "FCM
Sub-Advisory Agreement"). The FCM Sub-Advisory Agreement provides that the
Adviser may delegate to FCM the authority to make investment decisions for the
Fund. It is presently intended that FCM will provide portfolio management
services for the Fund. For these services, the Adviser pays FCM an annual fee
computed and paid monthly in an amount equal to 0.80% of the average daily net
assets of the Fund. Effective September 8, 1997 with respect to the Fund, FCM
has voluntarily agreed to waive for an indefinite period of time, a portion of
the sub-investment advisory fee it receives from the Adviser from 0.80% to 0.65%
of the average daily net assets of the Fund managed by FCM, on an annualized
basis.
FCEM -- FCEM serves as the Fund's sub-adviser pursuant to a Sub-Advisory
Agreement, dated September 1, 1995 between FCM and FCEM (the "FCEM Sub-Advisory
Agreement" and together with the FCM Sub-Advisory Agreement, the "Sub-Advisory
Agreements"). The FCEM Sub-Advisory Agreement provides that FCM may delegate to
FCEM the authority to make investment decisions for the Fund. It is presently
intended that FCEM will provide portfolio management services for the portion of
the assets invested in emerging markets securities with respect to the Fund. For
these services, FCM pays FCEM an annual fee computed and paid monthly in an
amount equal to 0.80% of the average daily net assets of the Fund managed by
FCEM. Effective September 8, 1997 with respect to the Fund, FCEM has voluntarily
agreed to waive for an indefinite period of time, a portion of the
sub-investment advisory fee it receives from the Adviser from 0.80% to 0.65% of
the average daily net assets of the Fund managed by FCEM on an annualized basis.
SUB-ADVISORY AGREEMENT -- Each Sub-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 the vote of a majority of the Fund's outstanding shares, and, in either
case, by a majority of the Trustees who are not parties to the Sub-Advisory
Agreement or interested persons of any such party. The FCM Sub-Advi-
18
<PAGE> 64
sory Agreement terminates automatically if it is assigned and may be terminated
without penalty by the Trustees, by vote of a majority of the Fund's outstanding
shares, by the Adviser on not less than 30 days' nor more than 60 days' written
notice or by FCM, on not less than 60 days' nor more than 90 days' written
notice. The FCEM Sub-Advisory Agreement terminates automatically if it is
assigned and may be terminated without penalty by the Trustees, by vote of a
majority of the Fund's outstanding shares, by the Adviser or FCM on not less
than 30 days' nor more than 60 days' written notice or by FCEM on not less than
60 days' nor more than 90 days' written notice.
The FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the Fund, the Fund will change its name so as to delete the words
"Foreign & Colonial" and that FCM may render services to others and may permit
other fund clients to use the words "Foreign & Colonial" in their names. The
Sub-Advisory Agreement specifically provides that neither FCM or FCEM, as the
case may be, nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Sub-Advisory Agreement.
For the period from commencement of investment operations, October 24, 1995, to
May 31, 1996, the Adviser paid the Sub-Adviser fees under the Sub-Advisory
Agreement of $255,468 in connection with its services for the Fund. For the
fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser fees under the
Sub-Advisory Agreement of $857,738 in connection with its services for the Fund.
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 each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated December 19, 1985, as modified, (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement with the
Trust dated as of September 1, 1995.
CLASS A SHARES: MFD acts as agent in selling Class A shares of 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
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
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<PAGE> 65
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B shares,
Class C shares and Class I shares of the Fund. The public offering price of
Class B, Class C and Class I shares is their net asset value next computed after
the sale (see "Purchases" in the Prospectus and the Prospectus Supplement 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 period from the commencement of operations, October 24, 1995, to May
31, 1996 and the fiscal year ended May 31, 1997, for the Fund, MFD and dealers
and certain other financial institutions received sales charges of $66,057 and
$685,593, and $79,525 and $437,735, respectively, (as their concession on gross
sales charges of $751,650 and $517,260, respectively) for selling Class A
shares. The Fund received $24,853,732 and $19,720,949, respectively,
representing the aggregate net asset value of such shares.
During the fiscal year ended May 31, 1997, the CDSC paid on Class A shares for
the Fund was $1,254. During the period from the commencement of operations,
October 24, 1995, to May 31, 1996 and the fiscal year ended May 31, 1997, the
CDSC paid on Class B shares for the Fund was $9,530 and $103,091, respectively.
During the fiscal year ended May 31, 1997, the CDSC paid on Class C shares for
the Fund was $3,733. During the period from the commencement of operations,
October 24, 1995 to May 31, 1996, there were no CDSC paid on Class A shares for
the Fund.
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 Trust's shares (as defined in "Investment Policies and
Restrictions -- Investment Restrictions") and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or interested
persons of any such party. The Distribution Agreement terminates automatically
if it is assigned and may be terminated without penalty by either party on not
more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser or the Sub-Adviser. Any such person may
serve other clients of the Adviser or the Sub-Adviser, or any subsidiary of the
Adviser or the Sub-Adviser in a similar capacity. Changes in the Fund's
investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser or the Sub-Adviser has
complete freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser or the
Sub-Adviser normally seeks to deal directly with the primary market makers or on
major exchanges unless, in its opinion, better prices are available elsewhere.
Subject to the requirement of seeking execution at the best available price,
securities may, as authorized by an Advisory Agreement or a Sub-Advisory
Agreement, be bought from or sold to dealers who have furnished statistical,
research and other information or services to the Adviser or the Sub-Adviser. At
present no arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers (the "NASD") and such other policies
as the Trustees may determine, the Adviser or the Sub-Adviser may consider sales
of shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under an Advisory Agreement or a Sub-Advisory Agreement and as permitted by
Section 28(e) of the Securities Exchange Act of 1934, the Adviser may cause a
Fund to pay a broker-dealer which provides brokerage and research services to
the Adviser or the Sub-Adviser, an amount of commission for effecting a
securities transaction for the Fund in excess of
20
<PAGE> 66
the amount other broker-dealers would have charged for the transaction, if the
Adviser or the Sub-Adviser determines in good faith that the greater commission
is reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of either a particular
transaction or their respective overall responsibilities to the Fund or to their
other clients. Not all of such services are useful or of value in advising the
Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser or the Sub-Adviser, be reasonable in relation to the value of the
brokerage services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's or the Sub-Adviser's other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser or the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers, on behalf of
the Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $39,100 of commission business from
the MFS Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by Lipper
Analytical Securities Corporation (which provides information useful to the
Trustees in reviewing the relationship between the Fund and the Adviser and the
Sub-Adviser).
The Adviser's and the Sub-Adviser's investment management personnel attempt to
evaluate the quality of Research provided by brokers. The Adviser or the
Sub-Adviser sometimes uses evaluations resulting from this effort as a
consideration in the selection of brokers to execute portfolio transactions.
The management fee of the Adviser or the Sub-Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser or the
Sub-Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients would
be useful to the Adviser or the Sub-Adviser in carrying out its obligations to
the Fund. While such services are not expected to reduce the expenses of the
Adviser or the Sub-Adviser, the Adviser or the Sub-Adviser would, through use of
the services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
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, any subsidiary of the Adviser or the Sub-Adviser. Investment decisions
for the Fund and for such other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Adviser to be equitable to each. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, the Fund believes that
its ability to participate in volume transactions will produce better executions
for the Fund.
For the fiscal year ended May 31, 1997, the Fund paid brokerage commissions of
$325,190 on total transactions of $117,499,906.
During the fiscal year ended May 31, 1997, the Fund acquired and owned
securities issued by Deutsche Bank and General Electric Capital Corp.,
broker-dealers of the Fund, in the amount of $618,562 and $204,968, respectively
as of May 31, 1997.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
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<PAGE> 67
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 all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period, in the case of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
the Letter of Intent section of the Account Application or filing a separate
Letter of Intent application (available from the Shareholder Servicing Agent)
within 90 days of the commencement of purchases. Subject to acceptance by MFD
and the conditions mentioned below, each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a Fund, the sales charge for the $25,000
purchase would be at the rate of 4% (the rate applicable to single transactions
of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide MFD) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
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 will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value
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<PAGE> 68
of his account. Each payment under a Systematic Withdrawal Plan ("SWP") must be
at least $100, except certain limited circumstances. The aggregate withdrawals
of Class B and Class C shares in any year pursuant to a SWP generally are
limited to 10% of the value of the account at the time of establishment of the
SWP. SWP payments are drawn from the proceeds of share redemptions (which would
be a return of principal and, if reflecting a gain, would be taxable).
Redemptions of Class B and Class C shares will be made in the following order:
(i) any "Reinvested Shares"; (ii) to the extent necessary, any "Free Amount";
and (iii) to the extent necessary, the "Direct Purchase" subject to the lowest
CDSC (as such terms are defined under "Information Concerning Shares of the Fund
- -- Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived
in the case of redemptions of Class B and Class C shares pursuant to a SWP, but
will not be waived in the case of SWP redemptions of Class A shares which are
subject to a CDSC. To the extent that redemptions for such periodic withdrawals
exceed dividend income reinvested in the account, such redemptions will reduce
and may eventually exhaust the number of shares in the shareholder's account.
All dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of 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 generally having an aggregate value of at least
$5,000 either must be held on deposit by, or certificates for such shares must
be deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of 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 a Fund with respect to the liquidation of shares. No charge
is currently assessed against the account, but one could be instituted by the
Shareholder Servicing Agent on 60 days' notice in writing to the shareholder in
the event that a Fund ceases to assume the cost of these services. 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 the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder if such MFS Fund is available for sale. Under
the Automatic Exchange Plan, transfers of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in 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
Ex-
23
<PAGE> 69
change Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or within 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if the purchaser is eligible to purchase the class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by 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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
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<PAGE> 70
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 (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
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, although the
Fund's foreign-source income may be subject to foreign withholding taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 the
Fund's 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%. The 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 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.
A Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares were
held for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a redemption of shares may also
be disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of the Fund within ninety days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) without payment of an additional sales charge of Class A
shares of the Fund or of another MFS Fund
25
<PAGE> 71
(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. The
Fund's investments in zero coupon bonds, deferred interest bonds, payment in
kind bonds, and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, Forward Contracts and swaps
and related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries is not known. If
the Fund holds more than 50% of its assets in foreign stock and securities at
the close of its taxable year, the Fund may elect to "pass through" to the
Fund's shareholders foreign income taxes paid. If the Fund so elects,
shareholders will be required to treat their pro-rata portion of the foreign
income taxes paid by the Fund as part of the amounts distributed to them by the
Fund and thus includable in their gross income for federal income tax purposes.
Shareholders who itemize deductions would then be allowed to claim a deduction
or credit (but not both) on their federal income tax returns for such amounts,
subject to certain limitations. Shareholders who do not itemize deductions would
be able (subject to such limitations) to claim a credit but not a deduction. No
deductions for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to its shareholders foreign income taxes paid by it, shareholders
will not be able to claim any deduction or credit for any part of the foreign
taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at 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.
The Fund will not be required to pay Massachusetts income or excise taxes as
long as it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares of the Fund (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
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<PAGE> 72
the Fund and each class of shares offered by the Fund. The Distribution Plan is
designed to promote sales, thereby increasing the net assets of the Fund. Such
an increase may reduce the expense ratio to the extent a Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effects that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid 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.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL PERIOD: During
the fiscal year ended May 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $252,648 $ 155,264 $ 97,384
Class B Shares $559,606 $ 424,821 $ 134,785
Class C Shares $ 11,524 $ 8,669 $ 2,855
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide to the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by a vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the 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 or any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the 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 applicable 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.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of each Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.)
This determination is made once each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the Nasdaq system for unlisted national
market issues, or at the last quoted bid price for listed securities in which
there were no sales during the day or for unlisted securities not reported on
the Nasdaq system. Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service which utilizes both
dealer-
27
<PAGE> 73
supplied valuations and electronic data processing techniques which take into
account appropriate factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration market
data from an external pricing source. Use of the pricing services has been
approved by the Board of Trustees. All other securities, futures contracts and
options in the Fund's portfolio (other than short-term obligations) for which
the principal market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at the
settlement price prior to the determination (or if there has been no current
sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the Nasdaq system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD or its
agent, the Shareholder Servicing Agent, prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge applicable to Class A shares (4.75% maximum) and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The Fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the Performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of each 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 share). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
28
<PAGE> 74
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A hereto under the heading "Performance Results" assume an initial
investment of $10,000 in Class A shares of the Fund and cover the period from
October 24, 1995 to December 31, 1996. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield or total rate of return quotation
provided by the 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. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8355).
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by
Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund and MFD may discuss or quote a Fund's current
portfolio manager(s) as well as other investment personnel, including such
persons' views on: various foreign and emerging market economies; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the Fund; the Fund's portfolio holdings; the investment
research and analysis process; the formulation and evaluation of investment
recommendations; the assessment and evaluation of credit, interest rate, market
and economic risks; and similar and related matters. In addition, from time to
time the Fund and MFD may discuss the Fund's current or anticipated allocations
of the Fund's securities by country or region. Any such allocations are subject
to change.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly.
MFS FIRSTS: MFS has a long history of innovations.
<TABLE>
<C> <S>
-- 1924 -- Massachusetts Investors Trust is
established as the first open-end mutual fund
in America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933 (the "Truth in
Securities Act" or the "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the
first mutual fund to allow shareholders to
take capital gain distributions either in
additional shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among
the first municipal bond funds established.
-- 1979 -- Spectrum becomes the first
combination fixed/variable annuity with no
initial sales charge.
</TABLE>
29
<PAGE> 75
<TABLE>
<C> <S>
-- 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(R) Union Standard Trust is the
first mutual fund to invest solely in
companies deemed to be union-friendly by an
advisory board of senior labor officials,
senior managers of companies with signifi-
cant labor contracts, academics and other
national labor leaders or experts.
</TABLE>
FCM AND FCEM ACHIEVEMENTS: FCM & FCEM have a history of achievements and
innovations.
<TABLE>
<C> <S>
-- 1868 -- Established the world's oldest
investment trust.
-- 1882 -- Invested in Japanese bonds.
-- 1884 -- Invested in the Hong Kong bond
market.
-- 1930 -- Invested in the U.S.
-- 1961 -- Invested in the Japanese stock
market.
-- 1972 -- Launched the first European
investment trust when the UK joined the EEC.
-- 1980's -- Invested in the emerging markets of
Thailand and Korea.
-- 1987 -- Launched the first Latin America fund
in the UK.
-- 1994 -- Launched The Foreign & Colonial
Emerging Middle East Fund (a closed-end fund,
shares of which are listed on the New York
Stock Exchange).
</TABLE>
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and three other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each of the four series of the Trust (Class A, Class
B, Class C and Class I shares). Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the Fund's net assets allocable to such class
available for distribution to shareholders. The Trust reserves the right to
create and issue a number of series and additional classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares voting as a
single class, or of the affected series of the Trust, except that if the
Trustees recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares will be sufficient, or (ii) upon liquidation and distribution of the
assets of a Fund, if approved by the vote of the holders of two-thirds of its
outstanding shares of the Trust, or (iii) by the Trustees by written notice to
its shareholders. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall main-
30
<PAGE> 76
tain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust and its shareholders and
the Trustees, officers, employees and agents of the Trust covering possible tort
and other liabilities. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolios of Investments and the Statements of Assets and Liabilities at
May 31, 1997, the Statements of Operations for the period from October 24, 1995
(commencement of investment operations) to May 31, 1997, the Statements of
Changes in Net Assets for the period from October 24, 1995 (commencement of
investment operations) to May 31, 1997, the Notes to Financial Statements and
the Report of Independent Auditors, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
31
<PAGE> 77
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1995............................................ 9,803 0 2 9,805
December 31, 1996............................................ 10,152 0 96 10,248
</TABLE>
EXPLANATORY NOTES: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment on October 24, 1995 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 May 31, 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS CURRENT
------------------------------ 30-DAY DISTRIBUTION
1 YEAR LIFE OF FUND(3) YIELD RATE
------ --------------- ------ ------------
<S> <C> <C> <C> <C>
Class A shares with sales charge......................... -2.70% 5.15% N/A 0.00%
Class A shares without sales charge...................... 2.13% 8.40% N/A N/A
Class B shares with CDSC................................. -2.44% 5.40% N/A N/A
Class B shares without CDSC.............................. 1.56% 7.80% N/A 0.00%
Class C shares with CDSC................................. 0.82%(1) 7.98%(1) N/A N/A
Class C shares without CDSC.............................. 1.82%(1) 7.98%(1) N/A 0.00%
Class I shares........................................... 2.31%(2) 8.52%(2) N/A N/A
</TABLE>
(1) Class C share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class C shares
on July 1, 1996 for The Fund. Sales charges, expenses and expense ratios,
and therefore performance, for Class B and Class C shares differ. Class C
share performance has been adjusted to reflect that Class C shares generally
are subject to a lower CDSC (unless the performance quotation does not give
effect to the CDSC) than Class B shares. Class C share performance has not,
however, been adjusted to reflect differences in operating expenses, which
generally are not significantly different from Class B and Class C shares.
(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the commencement of offering of Class I
shares on January 2, 1997. Sales charges, expenses and expense ratios, and
therefore performance for Class I and A shares differ. Class I share
performance has been adjusted to reflect that Class I shares are not subject
to an initial sales charge, whereas Class A shares generally are subject to
an initial sales charge. Class I share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class I shares.
(3) Start of investment operations was October 24, 1995.
A-1
<PAGE> 78
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SUB-ADVISER
Foreign & Colonial Management Ltd.
Exchange House
Primrose Street
London EC2A 2NY, United Kingdom
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R) INTERNATIONAL GROWTH FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
MIF-13-10/96/500
<PAGE> 79
[MFS logo]
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[photo of Bogota, Colombia]
MFS(R)/ Annual Report
Foreign & Colonial for Year Ended
Emerging Markets May 31, 1997
Equity Fund
MFS(R)/
Foreign & Colonial
International Growth
and Income Fund
MFS(R)/
Foreign & Colonial
International
Growth Fund
<PAGE>
Table of Contents
Letter from the Chairman ....................................... 1
MFS(R)/Foreign & Colonial International Funds Overview .......... 2
Investment Strategies .......................................... 3
Portfolio Managers' Profiles .................................... 4, 6
Fund Facts ...................................................... 9
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
Performance Summary .......................................... 10
Portfolio Concentration ....................................... 12
Tax Form Summary ................................................ 12
Portfolio of Investments ....................................... 13
MFS(R)/Foreign & Colonial International Growth and Income Fund
Performance Summary .......................................... 16
Portfolio Concentration ....................................... 18
Tax Form Summary ................................................ 18
Portfolio of Investments ....................................... 19
MFS(R)/Foreign & Colonial International Growth Fund
Performance Summary .......................................... 22
Portfolio Concentration ....................................... 24
Tax Form Summary ................................................ 24
Portfolio of Investments ....................................... 25
Financial Statements ............................................. 29
Notes to Financial Statements .................................... 35
Report of Independent Auditors ................................. 42
It's Easy to Contact Us .......................................... 43
The MFS Family of Funds(R) ..................................... 44
Trustees and Officers ............................................. 45
Cover Photo: Bogota, Colombia
Highlights
[bullet] Several emerging-country equity markets are outperforming the strong
U.S. stock market, as these countries reap the benefits of both their
own economic growth and that of developed countries.
[bullet] The renewed strength of the U.S. dollar versus the Japanese yen
resulted in a strong performance from Japanese blue-chip stocks, many
of which reached all-time highs.
[bullet] Uncertainty over monetary union continued to be a factor in European
markets, although some European stocks, such as Volkswagen, performed
well as they benefited from restructuring.
[bullet] As of May 31, 1997, assets in the three MFS/F&C funds exceeded $241
million, a 30% increase over the past six months, reflecting a growing
interest in international investing.
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
We are pleased to report that, in their second full year of operation, the
MFS/Foreign & Colonial (F&C) International Funds continue to see a steady growth
of assets thanks to investors' renewed interest in international securities
markets, particularly the increasingly vibrant emerging markets.
In fact, in what may be one of the biggest investment stories of the past
year, some rapidly growing emerging-country equity markets are outperforming the
strong U.S. stock market. Many of these countries are not only reaping the
benefits of their own economic growth, they are also benefiting from demands for
their services and manufactured goods by developed countries. This trend is
reflected in the performance of MFS(R)/Foreign & Colonial Emerging Markets
Equity Fund, whose performance within this category has been quite favorable.
Assets for the three MFS/F&C funds have reached over $241 million -- a 30%
increase since November 1996. This growing interest in international investing
has come in spite of the continuing strength of the U.S. equity market. We
regard this as a sign of investors' understanding of the need for
diversification across a range of global markets as well as their belief that,
in time, the recent trend of underperformance by international markets will
begin to reverse itself. Before the recent upsurge in U.S. equities, many
overseas markets were outperforming the U.S. market, a situation we expect to
see again, particularly as investors continue to seek the world's highest-growth
areas.
We are pleased to report that Arnab Kumar Banerji, chief investment officer
of Foreign & Colonial Emerging Markets Ltd. and portfolio manager of MFS/Foreign
& Colonial Emerging Markets Equity Fund, has accepted the additional
responsibility of chief investment officer of Foreign & Colonial Management Ltd.
Dr. Banerji succeeds Tony Thomson, whom we thank for his contribution in helping
launch the MFS/F&C funds.
Also, we would like to remind investors using annuities for their
long-term, tax-deferred retirement investing that MFS/Foreign & Colonial
Emerging Markets Equity Series, MFS(R)/Foreign & Colonial International Growth
and Income Series, and MFS(R)/Foreign & Colonial International Growth Series are
available as part of the MFS Regatta Gold(R) annuity.
This annual report to shareholders covers all three MFS/F&C funds. Each of
these funds has varying objectives, which are outlined on page 9 of this report.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/A. Keith Brodkin
A. Keith Brodkin
Chairman and President
June 12, 1997
1
<PAGE>
MFS/Foreign & Colonial International Funds Overview
[photo of Arnab Kumar Banerji]
Dear Shareholders:
Liquidity continued to underpin international equity markets over the past
year, while disinflationary forces remained in place despite somewhat stronger
world economic growth. International markets experienced increased volatility
following the interest-rate increase by the U.S. Federal Reserve Board in
February, which also caused a setback for the bond markets.
One of the major events in international markets over this period was the
strength of the U.S. dollar versus the Japanese yen. The yen started the year
at just under 116 to the dollar and fell to a low of 127 on May 2, 1997, a fall
of just under 10%. This weakening resulted in a strong performance from
Japanese blue-chip stocks, many of which reached all-time highs. The story in
the financial services sector was somewhat different. On top of bad-debt
worries, this sector was rocked by the "sokaiya" racketeering scandal at Nomura
Securities.
In continental Europe, uncertainty over European monetary union (EMU)
remained. Slow growth in Germany raised the prospect that this key EMU member
would have to be creative with its accounting policies in order to meet the
Maastricht criteria, allowing weaker members such as Italy to join at the first
stage. However, some European stocks such as Volkswagen performed well as
restructuring gathered pace. Growth in continental Europe remained weak
relative to the United States and the United Kingdom, and there appears to be
little need for interest rates to rise in the near term.
In the United Kingdom, the strength of sterling hit some exporters,
resulting in lower profits. The economy remained robust, and interest rates we
believe are set to continue their upward trend to offset inflation. The market
is likely to experience some volatility following the new Labor Party's first
budget, which is expected to detail the proposed windfall tax on privatized
utilities.
As an asset class, emerging markets performed well over the past 12
months, although Southeast Asia severely underperformed Latin America and
Eastern Europe. Structural imbalances have led to sharp falls in markets such
as Korea and Thailand. On the other hand, markets such as Brazil, Mexico,
Russia, and Egypt, driven by significant shifts in their economic policies and
relative political stability, have moved smartly higher.
Respectfully,
/s/Arnab Kumar Banerji
Arnab Kumar Banerji
Chief Investment Officer
Foreign & Colonial Management Ltd.
2
<PAGE>
Investment Strategies
MFS/Foreign & Colonial Emerging Markets Equity Fund
[photo of Jeff Chowdhry]
Jeff Chowdhry
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 16.43%, Class B shares 15.87%, Class C shares 15.97%, and Class
I shares 16.67%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 10.90% return for the
Lipper Emerging Markets Funds Index (the Lipper Index) and to a 7.76% return
for the Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF)
Index. The Lipper mutual fund indices are unmanaged indices of the largest
qualifying mutual funds within their respective investment objectives, adjusted
for the reinvestment of capital gains distributions and income dividends, while
the MSCI EMF Index is a broad, unmanaged, market-capitalization-weighted index
of equities in emerging markets. It is not possible to invest directly in an
index.
Emerging markets have shown much better performance over the past year
after a generally poor performance in 1994 and 1995. The Fund has outperformed
the MSCI EMF Index by having above-index weightings in most of Latin America,
including Brazil, Mexico, Colombia, and Peru, and below-index weightings in
Korea and South Africa. The Fund has outperformed the Lipper Index primarily
due to its higher weightings in Brazil, Mexico, Colombia, Russia, Egypt, and
Morocco and its lower weightings in Malaysia, Indonesia, Thailand, and the
Philippines.
The Fund remains well diversified at the country level, with major
industry weightings in telecommunications, banking, electric utilities, and
food and beverages. The largest country weightings are Brazil, Mexico, Hong
Kong, and India. Within Asia, we have sold most of our investments in Thailand,
Korea, the Philippines, and Indonesia, preferring instead Hong Kong, which is
being re-rated upward as the handover to China in mid-1997 approaches. We also
remain positive on India due to improving domestic liquidity and falling
interest rates. Elsewhere in Asia, we remain cautious, given our concern that
structural imbalances in that region's economies may continue to have a
negative impact on their stock markets.
We remain, on the whole, positive on other emerging market countries. Our
largest position in Latin America remains in Brazil, where interest rates have
been easing steadily and reforms are continuing while the stock market
continues to rise on the back of strong earnings growth. We are also positive
on the smaller Latin American markets of Colombia and Peru. In Colombia,
political worries have overshadowed what we believe are an improving inflation
environment and very attractive valuations. In Peru, economic growth is among
the best in the region, while valuations remain among the lowest.
In other emerging markets, Russia, Egypt, Portugal, and Greece deserve
special mention. Russia was among the best-performing markets in the world in
1996 and continues to move strongly higher in 1997, primarily due to continued
liberalization at the political and company level. The Egyptian economy is the
strongest in the Middle East as a result of efforts by the current
administration to introduce large-scale privatization of state-run companies.
Portugal has demonstrated over the past 12 months that its management of its
economy is among the best in western Europe. This has been validated by the
MSCI, which recently announced that Portugal's stock market will be in its
developed, rather than emerging market, index series beginning in December
1997. Greece is another country that has decided on an accelerated reform
program following
3
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial Emerging Markets Equity Fund
the landslide victory by Prime Minister Simitis in September last year, which
has led to inflation and interest rates. Having been cautious on the South
African stock market for most of the past year, we are now seeing some value
there following the sharp fall of the rand and the likely peaking in inflation
and interest rates.
Looking forward, we would expect to build up positions in South Africa and
will be monitoring our underweighted position in Asia very closely for signs of
a turn. Our positive stance toward Latin America is likely to be maintained,
although some trimming back of positions may be appropriate later this year.
Respectfully,
/s/Arnab Kumar Banerji /s/Jeff Chowdhry
Arnab Kumar Banerji Jeff Chowdhry
Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
Arnab Kumar Banerji is Chief Investment Officer of Foreign & Colonial
Management Ltd. Dr. Banerji earned degrees in physiology and medicine from
Oxford University before entering the investment management business with J.
Henry Schroder Wagg in London. He left that firm to become a research
analyst and later director of Nomura Securities before moving to Citibank
Global Asset Management to set up their Emerging Markets operation, which he
headed until 1993, when he joined Foreign & Colonial.
Jeff Chowdhry is a Director and Global Funds Manager of Foreign & Colonial
Emerging Markets Ltd. Mr. Chowdhry joined Foreign & Colonial in 1994 from
BZW Investment Management in London, where he was a Director in the Emerging
Markets Division. Mr. Chowdhry is a graduate of Brunel University and has a
Master of Business Administration degree from Kingston Business School.
4
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
[photo of June Scott]
June Scott
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.88%, Class B shares 2.33%, Class C shares 2.61%, and Class I
shares 2.88%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 6.24% return for a blend (70% and
30%) of the unmanaged MSCI EAFE (Europe, Australia, Far East) Index and the
J.P. Morgan Global Bond Index (the Morgan Index). The EAFE Index is an
unmanaged index of international stocks, while the Morgan Index is an unmanaged
index of bonds issued from 13 countries with remaining maturities of at least
one year.
The major feature in international markets over the past year was the
strength of the dollar, particularly against the Japanese yen, the German mark,
and the French franc. In January, half of the yen exposure and three-quarters
of the mark and franc exposures were hedged into dollars. Stronger growth in
the United States, weakness in the Japanese economy, and uncertainties in
Europe concerning EMU supported a stronger dollar, and we expect this dollar
strength to continue.
[photo of Ian K. Wright]
Ian K. Wright
The performance of Japanese equities during this period was a good
illustration of the current three-tier market: the international "nifty fifty"
blue chips such as Canon and TDK, which outperformed the market; the heavily
sold-off cyclicals; and the underperforming financial services sector. Japanese
blue-chip stocks were the main beneficiaries of the weak Japanese currency,
with many reaching all-time highs. The Fund held several of these stocks and
benefited from this upswing. Going forward, we expect the "nifty fifty" stocks
to continue to do well.
The U.K. market performed well, and sterling remained strong despite the
prospect of a left-wing victory in the general election. Economic growth was
strong, and the interest-rate cycle has turned. However, companies with high
overseas earnings are beginning to feel the effects of the strong currency, and
profit warnings are starting to come through. We believe that the portfolio
should benefit from the mini-consumer boom likely to be generated by the
windfalls resulting from the public offerings of several building societies
(savings and loans). However, the market is likely to experience some
uncertainty following Labor's first budget in July.
[photo of Richard O. Hawkins]
Richard O. Hawkins
Economic growth and the equity markets in continental Europe continued to
be affected by fiscal restraint as member states struggled to meet the
Maastricht criteria. In France, an unexpected general election was called for
late May/early June. This was a gamble by the French President, Jacques Chirac,
in the vain hope that a right-wing government would be returned with a
sufficient majority to push through the economic policies necessary for
monetary union. In Germany, a row erupted between the government and the
Bundesbank over revaluation of gold reserves that might be used to reduce the
budget deficit. This led to accusations of financial dishonesty and increased
the chance that some of the weaker European countries, such as Italy, would be
included in the first round of EMU. The outlook for Europe remains uncertain,
with political upheavals, high unemployment, and EMU concerns on the horizon.
Asian markets have shown a mixed performance over the past year. Hong Kong
has performed well due to positive sentiment over the imminent handover to
China. Other markets, however, have not performed as well due to worries over
high valuation levels.
5
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
The fixed-income portion of the Fund reflects a neutral weighting among
Europe, Japan, the United States, and the other dollar-bloc countries. U.S.
interest rates appear increasingly attractive from a global perspective. Hence,
we anticipate increasing the weighting in the dollar bloc relative to Europe
once the pickup in core European growth is confirmed and the U.S. market
adjusts to the Federal Reserve Board's tighter policy. In the meantime, we are
maintaining a defensive posture with respect to duration, or interest-rate
sensitivity, in both the dollar bloc and Europe.
The Fund remains overweighted in Australian bonds because we believe
current yield spreads reflect undue fears of a rate hike. Within Europe,
several potential developments suggest possible opportunities: the return of
the single-currency theme to the market, which would help potential entrants
such as Ireland and Spain; the likelihood of interest-rate cuts in Italy,
Spain, and possibly Sweden; and a more attractive U.K. market following the
election and moderate interest-rate hikes. Despite extremely low absolute
yields, the Japanese bond market should be well supported by accommodative
monetary policy and domestic institutional flows. Although some of the forces
pushing the dollar up are waning, we believe it should remain firm due to
capital inflows induced by favorable interest rates and moderate growth.
Respectfully,
/s/June Scott /s/Ian K. Wright /s/Richard O. Hawkins
June Scott Ian K. Wright Richard O. Hawkins
Portfolio Manager Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
June Scott is a Global Funds Manager of Foreign & Colonial Management Ltd. A
graduate of London Guildhall University, Ms. Scott joined Foreign & Colonial
in 1995 after completing her M.B.A. at the London Business School. Ms. Scott
worked previously as a Quantitative Portfolio Analyst in the Equity Research
Group at J.P. Morgan Investment Management in London.
Ian K. Wright is a Director of Foreign & Colonial Management Ltd. Mr.
Wright joined Foreign & Colonial in 1981. He heads up Foreign & Colonial's
Japanese equity investment team and is the manager of the Foreign & Colonial
Pacific Investment Trust. He is a graduate of the University of Southampton
and is an Associate of the Institute of Actuaries.
Richard O. Hawkins joined MFS in 1988 as Assistant Vice President -
Investments. A graduate of Brown University and the University of
Pennsylvania's Wharton Graduate School of Business Administration, he was
named Vice President - Investments in 1991 and Senior Vice President in
1993. On January 1, 1996, Mr. Hawkins became Director of the International
Fixed Income Department of MFS.
6
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.13%, Class B shares 1.56%, Class C shares 1.82%, and Class I
shares 2.31%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 7.88% return for the unmanaged MSCI
EAFE Index.
The Fund's exposure to smaller companies was reduced over the past 12
months, from 45% of assets to just over 30%. The money raised from this
asset-allocation shift was reinvested into blue-chip stocks. With liquidity
driving equity markets and deregulation and restructuring gathering pace, we
felt that blue chips would benefit more than smaller companies. Investors tend
to focus on larger, more liquid stocks when trying to invest large sums of
money, and restructuring tends to benefit larger companies with more room to
cut costs. During January, half of the Japanese yen exposure and three-quarters
of the German mark and French franc exposures were hedged into U.S. dollars.
Stronger growth in the United States, weakness in the Japanese economy, and
uncertainties in Europe concerning EMU all supported a strong dollar.
The Fund's weighting in Japan is similar to that of other funds in its
Lipper universe. Japanese blue-chip stocks with overseas exposure such as Canon
and TDK, both held in the Fund, continue to set all-time highs due to the yen's
weakness. The Fund's weighting in smaller Japanese companies has been reduced.
These companies continue to suffer from weak investor sentiment and, being
domestically oriented, have failed to benefit from the weak currency.
In the United Kingdom, we believe economic fundamentals remain strong,
although interest rates will almost certainly have to rise in the second or
third quarter in order to head off inflation. This, together with uncertainties
regarding the new government, the impact of a strong sterling on corporate
earnings, and volatility in the European and U.S. markets, may impact equities
in the short term. One of the best-performing sectors in the U.K. market has
been the banking sector. The Fund owns shares in Lloyds Bank, which is a
quality company with the fastest earnings growth in the sector and one of the
most profitable banks in the world. This stock is also benefiting from the
technical squeeze in the banking sector as index funds scramble to increase
their weightings in banks ahead of the public offerings of several building
societies (savings and loans).
Within continental Europe, growth remains weak relative to the United
States and the United Kingdom, and we see little need for interest rates to
rise in the near term. Worries over EMU continue, with the major concern being
whether or not it can proceed on time and in what form. Meanwhile, corporate
restructuring in Germany is beginning to gather pace. Volkswagen, a company
held in the Fund, has re-engineered its manufacturing process and can now
produce its main model, the VW Golf, in 17 hours, compared with the 34 hours it
used to take. All Volkswagen models are now produced from only four platforms,
which has significantly reduced costs.
7
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
The Fund continues to have a sizable exposure to emerging markets, with a
tilt toward Latin America. Brazil is our favored market due to falling
inflation rates and structural changes in the telecommunications sector, in
which Telebras is a core holding. The Fund has also benefited from its exposure
to Eastern Europe, where the Russian economy, in particular, has moved sharply
upwards.
Respectfully,
/s/June Scott /s/Ian K. Wright
June Scott Ian K. Wright
Portfolio Manager Portfolio Manager
8
<PAGE>
Fund Facts
MFS/Foreign & Colonial Emerging Markets Equity Fund
Strategy: The investment objective of Emerging Markets Equity
Fund is capital appreciation. The Fund seeks to achieve
its investment objective by investing, under normal
market conditions, at least 65% of its total assets in
equity securities of issuers whose principal activities
are located in emerging market countries.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: June 27, 1996
Class I: January 2, 1997
Size: $91.5 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Strategy: The investment objective of International Growth and
Income Fund is capital appreciation and current income.
The Fund seeks to achieve its investment objective by
investing, under normal market conditions, at least 65%
of its total assets in equity securities of issuers
whose principal activities are outside the United
States.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $29.4 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Strategy: The investment objective of International Growth Fund
is capital appreciation. The Fund seeks to achieve its
investment objective by investing, under normal market
conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are
outside the United States and which are growing at
rates expected to be well above the growth rate of the
overall U.S. economy.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $122.2 million net assets as of May 31, 1997
9
<PAGE>
Performance Summary
MFS/Foreign & Colonial Emerging Markets Equity Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial Emerging Markets Equity 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C Emerging
Lipper Emerging Markets Equity Fund -- Consumer Price MSCI EMF
Markets Funds Index Class A Index -- U.S. Index
------------------- ---------------------- -------------- ---------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11281 10499 10214 10847
5/31/97 13999 12224 10465 11456
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C Emerging Markets Equity Fund (Class A) including 4.75% sales charge
(SEC results) +10.92% +13.35%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class A) at net asset value +16.43% +16.85%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) with CDSC (SEC results) +11.87% +13.95%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) at net asset value +15.87% +16.24%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) with CDSC (SEC results) +14.96% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) at net asset value +15.97% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class I) at net asset value +16.67% +17.00%
- ------------------------------------------------------------------------------------------------------
MSCI EMF Index+ + 7.76% + 8.87%
- ------------------------------------------------------------------------------------------------------
Lipper Emerging Markets Funds Index++ +10.90% +16.30%
- ------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
10
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
11
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 36.6%
Brazil 14.0%
Mexico 10.0%
Hong Kong 6.9%
India 6.2%
South Africa 5.5%
Portugal 4.6%
Russia 4.5%
Greece 4.0%
Argentina 4.0%
Egypt 3.7%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Communications 18.9%
Banking 14.6%
Electricity, Gas, or Sanitation 11.3%
Food and Kindred Products 7.4%
Petroleum Refining 5.8%
Top 10 Holdings
Telecomunicacoes Brasileiras
Brazilian telecommunications company
Petroleo Brasileiro
Brazilian petroleum and natural
gas company
Taipei Fund
Closed-end Taiwan country fund
Telefonos de Mexico
Mexican telecommunications company
Compania Anonima Nacional Telefonos
de Venezuela
Venezuelan telecommunications company
Cheung Kong
Hong Kong property development
and investment company
Portugal Telecom
Portuguese telecommunications company
Credicorp Ltd.
Peruvian bank holding company
Swire Pacific
Diversif ied Hong Kong trading, property,
and manufacturing company
Hindustan Lever
Indian cosmetics and toiletries company
Portfolio Structure (% of Net Assets)
Stocks 95.1%
Cash 4.9%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 84% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 5.2% of its ordinary income.
12
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Stocks - 95.1%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Argentina - 4.0%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 15,016 $ 394,170
Perez Companc S.A. (Oils) 89,308 683,548
Siderar S.A.I.C., ADR (Steel)*## 11,900 401,625
Telecom Argentina S.A.
(Telecommunications) 7,450 397,644
Telefonica de Argentina, ADR
(Utilities - Telephone) 9,850 357,063
Transportadora de Gas del Sur, S.A.
(Pipelines) 31,300 395,162
YPF Sociedad Anonima, ADR (Oils) 33,200 996,000
------------
$ 3,625,212
- -------------------------------------------------------------------------
Brazil - 15.3%
Ing Baring Financial Products (Finance) 7,530 $ 1,030,047
Aracruz Celulos S.A. (Paper Products) 277,000 564,197
Banco Bradesco S.A., Preferred (Banks and
Credit Cos.) 57,000,000 454,807
Centrais Eletricas Brasileiras, ADR
(Utilities - Electric) 50,050 1,176,175
Centrais Eletricas Brasileiras S.A. -
Eletrobras, Preferred, "B"
(Utilities - Electric) 950,000 467,766
Cia Cervejaria Brahma, Preferred
(Beverages) 965,000 700,556
Cia Vale Rio Doce (Diversified Minerals) 24,000 0
Cia Vale Rio Doce, Preferred (Diversified
Minerals) 24,000 530,319
Companhia Energetica S.A., ADR
(Utilities - Electric) 8,700 386,062
Companhia Paranaense de Energia -
COPEL "B", Preferred (Electrical) 38,800 572,774
Itausa Investimentos Itau S.A.
(Conglomerate) 450,000 374,194
Petroleo Brasileiro S.A., Preferred (Oils) 10,400,000 2,487,527
Telebras (Telecommunications) 7,000,000 965,991
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 29,650 4,062,050
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 16,300 179,300
------------
$13,951,765
- -------------------------------------------------------------------------
Canada - 0.6%
Super Sol Ltd. (Supermarkets) 155,550 $ 515,015
- -------------------------------------------------------------------------
Chile - 0.9%
Compania de Telecom de Chile
(Telecommunications) 24,692 $ 845,701
- -------------------------------------------------------------------------
China - 2.0%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 40,850 $ 980,400
Qingling Motors Co. "H" (Automotive) 938,000 520,573
Yizheng Chemical Fibre Co. Ltd. (Textiles) 1,686,000 330,759
------------
1,831,732
- -------------------------------------------------------------------------
Stocks - continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Colombia - 3.2%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 26,700 $ 1,021,275
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 55,450 977,306
Cementos Diamante S.A., ADR
(Construction)## 59,900 943,425
------------
$ 2,942,006
- -------------------------------------------------------------------------
Egypt - 3.6%
Commercial International Bank (Banks and
Credit Cos.)## 11,765 $ 229,417
Nasar City For Housing (Housing
Development) 8,150 1,124,137
North Cairo Mills (Food) 11,700 557,480
Suez Cement Co., GDR (Construction)*## 64,185 1,177,795
Torah For Cement (Construction) 7,935 201,334
------------
$ 3,290,163
- -------------------------------------------------------------------------
Greece - 4.0%
Attica Enterprises (Transportation) 25,000 $ 224,812
Ergo Bank (Banks and Credit Cos.) 14,800 1,045,696
Hellenic Telecommunication Organization
S.A. (Telecommunications) 37,300 930,960
Intracom (Telecommunications) 15,300 745,766
Titan Cement Co (Building Materials) 7,500 749,037
------------
$ 3,696,271
- -------------------------------------------------------------------------
Hong Kong - 7.2%
Bank of East Asia Ltd. (Banks and Credit
Cos.) 234,400 $ 853,134
Cheung Kong Holdings Ltd. (Real Estate) 141,000 1,442,211
Citic Pacific Ltd. (Conglomerate) 52,000 297,315
Hong Kong & China Gas Ltd. (Oil and
Gas) 414,000 721,347
New World Development Co.
(Real Estate) 147,000 933,454
Swire Pacific Air Ltd., "A"
(Transportation) 150,500 1,262,584
Wharf Holdings Ltd. (Real Estate) 183,000 819,579
Zhenhai Refining and Chemical Co., Ltd.
(Oils) 515,000 212,700
------------
$ 6,542,324
- -------------------------------------------------------------------------
Hungary - 2.1%
Borsodchem Rt (Chemicals) 11,050 $ 404,917
Mol Magyar Olaj Es Gazipari Rt (Oils)## 18,400 340,400
Pannonplast Muanuagipari (Chemicals) 8,330 409,803
Richter Gedeon Veg (Medical) 8,840 734,894
------------
$ 1,890,014
- -------------------------------------------------------------------------
India - 6.2%
Bajaj Auto Ltd. (Automotive) 300 $ 7,240
East India Hotels (Lodging) 25,300 291,991
Eih Ltd. (Consumer Goods and Services) 12,700 146,573
Hindustan Lever Ltd. (Consumer Goods
and Services) 39,000 1,217,112
13
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
India - continued
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 55,000 $ 655,935
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 170,000 436,660
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 114,000 911,170
State Bank of India (Banks and
Credit Cos.) 91,000 781,474
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 270 2,986
Tata Steel (Steel) 100,000 483,622
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 36,120 744,072
------------
$ 5,678,835
- ------------------------------------------------------------------------------
Israel - 2.2%
Israel Chemicals Ltd. (Chemicals) 400,000 $ 490,626
Makhteshim Chemical Works Ltd.
(Chemicals)* 81,442 527,294
NICE Systems Ltd., ADR
(Telecommunications) 8,850 269,925
Tadiran Telecommunications Ltd.
(Telecommunications) 22,250 403,281
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 5,850 351,000
------------
$ 2,042,126
- ------------------------------------------------------------------------------
Malaysia - 3.1%
DCB Holdings Berhad (Finance) 120,000 $ 386,866
Malayan Banking Berhad (Finance) 82,600 871,204
Petronas Gas Berhad (Oil and Gas)*## 150,000 543,283
Resorts World Berhad (Entertainment) 63,000 210,627
Tenaga Nasional Berhad
(Utilities - Electric) 180,000 823,881
------------
$ 2,835,861
- ------------------------------------------------------------------------------
Mauritius - 2.1%
Mauritius Commercial Bank (Banks and
Credit Cos.) 130,000 $ 564,247
New Mauritius Hotels (Lodging) 170,000 302,649
Rogers & Co. Ltd. (Finance) 90,000 434,772
State Bank Mauritius (Banks and Credit
Cos.) 1,150,000 648,602
------------
$ 1,950,270
- ------------------------------------------------------------------------------
Mexico - 10.0%
Apasco S.A. (Building Materials) 56,000 $ 366,018
Cemex S.A., "B" (Construction) 175,000 654,867
Cifra S.A. de C.V. (Consumer Goods and
Services) 400,000 685,714
Corporacion GEO S.A. de C.V.
(Housing)## 22,500 455,625
Desc S.A. de C.V. (Special Products and
Services) 64,000 436,915
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 26,400 382,800
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
Mexico - continued
Fomento Economico Mexicano S.A., "B"
(Beverages) 84,376 $ 448,014
Gruma S.A. (Food Products) 245,493 1,163,842
Grupo Carso, "A1" (Conglomerate) 80,201 455,250
Grupo Financiero Banamex, "B" (Finance) 127,000 274,872
Grupo Financiero Inbursa S.A. de C.V. (Finance) 2,798 9,710
Hylsamex S.A. de C.V. (Steel) 133,000 643,982
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 70,000 242,478
Telefonos de Mexico S.A. (Utilities - Telephone) 1,011,000 2,246,951
Tubos de Acero de Mexico S.A. (Steel)* 38,678 680,655
------------
$ 9,147,693
- ------------------------------------------------------------------------------
Morocco - 2.5%
Banque Marocaine du Commerce (Banks
and Credit Cos.) 12,500 $ 744,901
Brasserica du Maroc (Consumer Goods and
Services) 2,100 366,953
Credit Eqdom (Financial Institutions) 2,182 220,657
ONA S.A. (Conglomerate) 6,600 534,226
Societe Nationale d'Investissement
(Conglomerate) 5,600 416,401
------------
$ 2,283,138
- ------------------------------------------------------------------------------
Pakistan - 1.6%
Hub Power Co. Ltd., GDR
(Utilities - Electric)* 40,200 $ 928,620
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 8,950 554,900
------------
$ 1,483,520
- ------------------------------------------------------------------------------
Peru - 3.7%
Alicorp S.A. (Consumer Goods and Services) 185,000 $ 322,343
Compania de Minas Buenaventura S.A.
(Mining) 66,640 613,098
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 449,870 1,152,127
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 58,584 1,325,463
------------
$ 3,413,031
- ------------------------------------------------------------------------------
Poland - 3.0%
Agros Holding S.A. (Food Products) 9,900 $ 266,063
Bank Slaski S.A. w Katowicach (Banks and
Credit Cos.) 3,800 296,875
Bydgoska Fabryka Kabli S.A.
(Electrical Equipment) 46,375 347,812
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 70,300 628,306
Exbud S.A. (Construction) 20,000 218,125
Stomil Olsztyn S.A. (Tires and Rubber) 26,500 331,250
Wedel S.A. (Food) 7,000 428,750
Zywiec (Brewery) 4,000 224,375
------------
$ 2,741,556
- ------------------------------------------------------------------------------
14
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Portugal - 4.6%
Banco Espirito Santo e Comercial de
Lisboa S.A. (Banks and Credit Cos.) 45,289 $ 938,822
Cimentos de Portugal S.A.
(Building Materials) 31,526 693,499
Jeronimo Martins & Filho S.A. (Retail) 6,200 421,471
Portugal Telecom S.A.
(Utilities - Telephone) 36,042 1,383,871
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 3,000 112,635
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 8,246 633,848
------------
$ 4,184,146
- -----------------------------------------------------------------------
Russia - 3.3%
Lukoil Oil Co., ADR (Oils) 18,100 $ 1,079,212
Mosenergo, ADR (Utilities - Electric)## 14,410 544,698
Rostelecom (Telecommunications)## 20 758,000
Surgutneftegaz (Oil and Gas) 15,400 656,425
------------
$ 3,038,335
- -----------------------------------------------------------------------
South Africa - 5.5%
Anglo American Corp. of South Africa
Ltd. (Mining) 8,000 $ 468,428
De Beers Centenary AG (Diamonds -
Precious Stones) 29,000 1,016,234
Liberty Life Association of Africa Ltd.
(Insurance) 28,000 783,699
Nedcor Ltd. (Financial Services) 38,964 759,039
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
South Africa - continued
Sappi (Paper Products) 30,000 $ 275,414
Sasol Ltd. (Oils) 62,700 768,658
South African Breweries Ltd. (Brewery) 35,000 983,542
------------
$ 5,055,014
- -----------------------------------------------------------------------
Taiwan - 2.5%
Taipei Fund (Finance) 207 $ 2,256,300
- -----------------------------------------------------------------------
Turkey - 0.2%
Adana Cimento (Building Materials) 3,257,000 $ 214,656
- -----------------------------------------------------------------------
Venezuela - 1.7%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 43,000 $ 1,596,375
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $73,539,525) $87,051,059
- -----------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Student Loan Marketing Assn., due
6/24/97 $1,750 $ 1,743,963
General Electric Capital Corp., due
6/02/97 1,060 1,059,835
- -----------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,803,798
- -----------------------------------------------------------------------
Total Investments (Identified Cost, $76,343,323) $89,854,857
Other Assets, Less Liabilities - 1.8% 1,662,782
- -----------------------------------------------------------------------
Net Assets - 100.0% $91,517,639
- -----------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
15
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth and Income Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth and Income 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 the
differences in loads and fees paid by shareholders investing in the different
classes. It is not possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International 70% MSCI EAFE/30%
Lipper International Growth and Income Consumer Price J.P. Morgan Global
Funds Index Fund -- Class A Index -- U.S. Bond Index
-------------------- -------------------- -------------- ------------------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10162 10214 10794
5/31/97 12940 10455 10465 11468
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth and Income Fund (Class A) including 4.75% sales
charge (SEC results) - 2.02% +2.82%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class A) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) with CDSC (SEC results) - 1.67% +3.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) at net asset value + 2.33% +5.43%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) with CDSC (SEC results) + 1.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) at net asset value + 2.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class I) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
70% MSCI EAFE/30% J.P. Morgan Global Bond Index+ + 6.24% +9.03%
- -------------------------------------------------------------------------------------------------------
Lipper International Funds Index+ +15.56% +17.68%
- -------------------------------------------------------------------------------------------------------
Consumer Price Index**++ + 2.47% +2.88%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
++Source: CDA/Wiesenberger.
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
16
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
17
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 26.1%
Japan 21.7%
United Kingdom 14.8%
France 7.1%
Germany 6.6%
Hong Kong 6.4%
Switzerland 5.2%
Netherlands 5.1%
Sweden 3.0%
Australia 2.0%
Spain 2.0%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 12.8%
Banks, Retail 9.1%
Telecommunications 6.8%
Pharmaceuticals 5.5%
Engineering 4.7%
Top 10 Holdings
Canon Inc.
Japanese off ice equipment and imaging company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
DDI Corp.
Japanese telecommunications company
HSBC Holdings
British banking and financial services company
Ricoh Company
Japanese off ice and business equipment company
Kyocera Corp.
Japanese component manufacturer
Roche Holdings
Swiss pharmaceutical company
Cheung Kong
Hong Kong property development and investment
company
Inchcape PLC
U.K. car distributor and trading company
Portfolio Structure (% of Net Assets)
Stocks 80.8%
Bonds 13.2%
Cash 6.0%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 87% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 6.3% of its ordinary income.
18
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Stocks - 80.8%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Australia - 2.0%
Capral Aluminum Ltd. (Metals) 81,700 $ 295,325
Western Mining (Holding Company) 47,400 306,247
------------
$ 601,572
- -------------------------------------------------------------------------
Austria - 0.9%
OMV AG (Oil and Gas) 2,100 $ 266,469
- -------------------------------------------------------------------------
Belgium - 0.9%
Generale de Banque (Finance) 690 $ 272,752
- -------------------------------------------------------------------------
France - 7.1%
Accor (Lodging) 1,720 $ 239,013
Compagnie de St. Gobain (Building Materials) 1,960 271,343
Dexia France (Finance) 2,930 274,322
Eaux (Cie Generale) (Utilities - Water) 1,430 176,359
Lafarge S.A., Bearer Shares (Building
Materials) 4,000 256,383
Legrand, Preference Shares (Electrical
Equipment) 1,400 159,528
Michelin, "B" (Tires) 3,700 202,642
Societe Nationale Elf Aquitaine (Oils) 2,700 270,610
TOTAL S.A., "B" (Oils)* 2,560 234,789
------------
$ 2,084,989
- -------------------------------------------------------------------------
Germany - 6.6%
Bayer AG (Chemicals) 9,100 $ 353,489
Deutsche Bank AG (Banks) 4,030 223,771
Deutsche Telekom AG (Utilities - Telephone) 14,960 332,444
Mannesmann AG (Diversified Machinery) 550 223,805
Siemens AG (Electrical Equipment) 4,800 271,114
VEBA AG (Oil and Gas) 4,700 266,209
Volkswagen AG (Automotive) 420 271,873
------------
$ 1,942,705
- -------------------------------------------------------------------------
Hong Kong - 6.4%
Cheung Kong Holdings Ltd. (Real Estate) 41,000 $ 419,366
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 47,000 169,244
HSBC Holdings PLC (Finance) 15,600 473,154
New World Development Co. (Real Estate) 32,000 203,201
Swire Pacific Air Ltd., "A" (Transportation) 45,000 377,517
Wharf Holdings Ltd. (Real Estate) 51,000 228,407
------------
$ 1,870,889
- -------------------------------------------------------------------------
Italy - 1.5%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 89,580 $ 263,439
Telecom Italia S.p.A. (Telecommunications
Services) 60,750 167,692
------------
$ 431,131
- -------------------------------------------------------------------------
Stocks -continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Japan - 21.7%
Canon, Inc. (Consumer Goods) 29,000 $ 735,914
DDI Corp. (Telecommunications) 79 590,546
Fujisawa Pharmaceuticals (Pharmaceuticals) 37,000 350,108
Hitachi (Electronics) 16,000 170,667
Hitachi Zosen (Engineering) 63,000 241,161
Ito-Yokado Co. Ltd. (Retail) 7,000 399,828
Kyocera Corp. (Electronics) 6,000 433,032
Marubeni Corp. (Distribution/Wholesale) 81,000 344,903
Matsushita Electric Industrial Co.
(Electrical Equipment) 18,000 339,097
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 38,000 273,927
NKK Corp. (Steel) 114,000 224,568
Oji Paper Co. Ltd. (Paper Products) 833 4,822
Omron Corp. (Electronics) 32,000 644,129
Pioneer Electronic Corp. (Electronics) 26,000 644,129
Ricoh Co. Ltd. (Office/Business Equipment) 34,000 447,484
TDK Corp. (Special Products and Services) 5,000 384,516
Tokyo Broadcasting System (Broadcasting) 9,000 164,129
------------
$ 6,392,960
- -------------------------------------------------------------------------
Malaysia - 2.0%
Genting Berhad (Entertainment) 11,000 $ 57,353
Malayan Banking Berhad (Finance) 9,000 94,925
Petronas Gas Berhad (Oil and Gas)*## 85,000 307,861
Sime Darby Berhad (Holding Company) 36,000 117,493
------------
$ 577,632
- -------------------------------------------------------------------------
Netherlands - 5.1%
ABN Amro Holdings N.V. (Finance) 17,200 $ 318,236
Akzo Nobel (Chemicals) 1,800 239,881
Philips Electronics N.V. (Manufacturing) 5,080 278,266
Royal Dutch Petroleum Co. (Oils) 400 77,365
Vendex International N.V. (Retail) 4,800 269,683
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 13,660 308,982
------------
$ 1,492,413
- -------------------------------------------------------------------------
Singapore - 1.6%
City Developments Ltd. (Real Estate) 22,000 $ 204,615
Development Bank of Singapore Ltd. (Banks) 8,000 100,140
Overseas-Chinese Banking Corp. Ltd. (Finance) 13,600 169,287
------------
$ 474,042
- -------------------------------------------------------------------------
Spain - 2.0%
Repsol S.A. (Oils) 6,050 $ 253,427
Telefonica de Espana (Utilities - Telephone) 11,450 330,586
------------
$ 584,013
- -------------------------------------------------------------------------
Sweden - 3.0%
Ericsson LM, "B" (Telecommunications) 8,760 $ 307,591
Sparbanken Sverige AB, "A" (Banks) 15,960 313,167
Swedish Match AB (Tobacco) 3,200 10,410
Volvo AB, "B" (Automobiles) 9,600 265,827
------------
$ 896,995
- -------------------------------------------------------------------------
19
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Switzerland - 5.2%
Ciba Specialty AG (Chemicals) 2,570 $ 243,809
Nestle AG, Registered Shares (Food and
Beverage Products) 230 286,584
Novartis AG (Pharmaceuticals) 210 285,451
Roche Holdings AG (Pharmaceuticals) 48 427,497
Winterthur (Insurance) 350 286,443
------------
$ 1,529,784
- -----------------------------------------------------------------------
United Kingdom - 14.8%
Allied Domecq PLC (Food and Beverage
Products) 32,850 $ 240,699
BAA PLC (Transportation) 33,560 291,561
British Petroleum PLC (Oil and Gas) 23,600 282,401
British Telecommunications PLC
(Telecommunications) 40,430 293,589
BTR PLC (Holding Company) 57,040 186,065
Caradon PLC (Holding Company) 7,449 11,844
Caradon PLC (Holding Company) 26,397 90,867
Carlton Communications PLC (Broadcasting) 31,620 273,152
General Accident PLC (Insurance) 13,180 194,658
Glaxo Wellcome PLC (Pharmaceuticals) 14,460 289,649
Granada Group PLC (Leisure) 10,960 155,942
Inchcape PLC (Commercial Services) 85,470 403,495
Land Securities PLC (Real Estate) 9,350 140,697
Lloyds TSB Group PLC (Banks and Credit Cos.) 29,620 298,480
National Westminster (Finance) 9,000 110,203
Sainsbury (J.) PLC (Retail) 30,550 175,772
Smith (W.H.) Group PLC (Retail) 38,200 264,245
Storehouse PLC (Retail) 50,400 179,689
Tesco PLC (Retail) 32,580 200,269
Unilever PLC (Consumer Goods) 10,200 273,369
------------
$ 4,356,646
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $20,959,241) $23,774,992
- -----------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------
France
Eaux (Cie General) (Utilities - Water) 1,150 $ 789
Sweden
Volvo AB, "B" (Automobiles) 9,600 2,565
- -----------------------------------------------------------------------
Total Warrants (Identified Cost, $0) $ 3,354
- -----------------------------------------------------------------------
Bonds - 13.2%
- -----------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------
Australia - 2.0%
Commonwealth of Australia,
8.75s, 2001 AUD 170 $ 138,620
Commonwealth of Australia,
9.75s, 2002 365 310,680
Commonwealth of Australia,
10s, 2002 165 142,516
-----------
$ 591,816
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 6s, 1999 DKK 518 $ 82,584
Kingdom of Denmark, 8s, 2001 482 82,436
Kingdom of Denmark, 7s, 2007 526 83,357
Nykredit, 8s, 2026 522 82,442
-----------
$ 330,819
- -----------------------------------------------------------------------
France - 0.8%
Government of France, 7s, 2000 FRF 1,286 $ 241,921
- -----------------------------------------------------------------------
Greece - 0.7%
Hellenic Republic, 12.6s, 2003 GRD 20,500 $ 79,306
Hellenic Republic, 13.4s, 2003 10,000 38,227
Hellenic Republic, 14.8s, 2003 20,000 76,528
-----------
$ 194,061
- -----------------------------------------------------------------------
Ireland - 1.2%
Republic of Ireland, 6.25s, 1999 IEP 60 $ 91,044
Republic of Ireland, 8s, 2000 50 80,012
Republic of Ireland, 6.5s, 2001 110 169,258
-----------
$ 340,314
- -----------------------------------------------------------------------
Italy - 2.6%
Republic of Italy, 9.5s, 1999 ITL 625,000 $ 385,503
Republic of Italy, 9.5s, 2001 605,000 387,880
-----------
$ 773,383
- -----------------------------------------------------------------------
New Zealand - 1.0%
Government of New Zealand,
8s, 2001 NZD 420 $ 296,411
- -----------------------------------------------------------------------
Spain - 2.0%
Government of Spain, 6.75s, 2000 ESP 19,700 $ 141,459
Government of Spain, 8.4s, 2001 17,330 131,820
Government of Spain, 10.5s, 2003 16,180 136,952
Government of Spain, 7.35s, 2007 25,380 183,809
-----------
$ 594,040
- -----------------------------------------------------------------------
Sweden - 0.6%
Kingdom of Sweden, 10.25s, 2000 SEK 1,100 $ 159,837
- -----------------------------------------------------------------------
United Kingdom - 1.2%
United Kingdom Treasury,
7s, 2001 GBP 210 $ 343,156
- -----------------------------------------------------------------------
Total Bonds (Identified Cost, $4,001,187) $3,865,758
- -----------------------------------------------------------------------
Short-Term Obligation - 5.9%
- -----------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/02/97, at Amortized Cost $1,720 $1,719,735
- -----------------------------------------------------------------------
20
<PAGE>
Portfolio of Investments - continued
Call Options Purchased
- ---------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ---------------------------------------------------------------------------
Canadian Dollars
June/1.365 CAD $ 524 $ 50
Deutsche Marks/British Pounds
July/2.7 DEM 538 910
Japanese Government Bonds
June/117.226 JPY 48,000 96
June/117.622 115,000 115
July/114.635 29,000 116
Swiss Francs
August/1.350 CHF 894 6,012
- ---------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $28,209) $7,299
- ---------------------------------------------------------------------------
Put Options Purchased
- ------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ------------------------------------------------------------------------------
Deutsche Marks
June/1.72 (Premium Paid,
$2,736) DEM 1,034 $ 991
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $26,711,108) $ 29,372,129
- ------------------------------------------------------------------------------
Put Options Written - (0.1)%
- ------------------------------------------------------------------------------
British Pounds
July/1.65 GBP 371 $ (3,823)
Japanese Government Bonds
June/117.226 JPY 48,000 (5,472)
July/114.635 29,000 (6,989)
- ------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $6,589) $ (16,284)
- ------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.1% $ 54,211
- ------------------------------------------------------------------------------
Net Assets - 100.0% $ 29,410,056
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
21
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International
Lipper International Growth Fund -- Consumer Price MSCI
Funds Index Class A Index -- U.S. EAFE
-------------------- --------------------- -------------- ----
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10613 10214 10836
5/31/97 12940 10838 10465 11687
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth Fund (Class A) including 4.75% sales charge
(SEC results) - 2.70% + 5.15%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class A) at net asset value + 2.13% + 8.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) with CDSC (SEC results) - 2.44% + 5.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) at net asset value + 1.56% + 7.80%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) with CDSC (SEC results) + 0.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) at net asset value + 1.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class I) at net asset value + 2.31% + 8.52%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE+ + 7.88% +10.23%
- ---------------------------------------------------------------------------------------------------------
Lipper International Funds Index++ +15.56% +17.68%
- ---------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
22
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
23
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 24.6%
Japan 23.1%
UK 14.0%
Germany 6.4%
France 5.9%
Netherlands 5.5%
Switzerland 5.3%
Hong Kong 5.0%
Brazil 3.9%
Sweden 3.5%
Australia 2.8%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 11.9%
Telecommunications 8.9%
Banks, Retail 8.2%
Engineering 6.4%
Diversified Industries 6.3%
Top 10 Holdings
TDK Corp.
Japanese manufacturer of audio and
video products
Telecomunicacoes Brasileiras
Leading Brazilian telecommunications company
Capral Aluminum
Australian aluminum company
Taipei Fund
Closed-end Taiwan country fund
Volkswagen AG
German automobile and truck manufacturer
Cheung Kong
Hong Kong property development and investment
company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
Kyocera Corp.
Japanese component manufacturer
Stork NV
Dutch machinery and tool manufacturer
Portfolio Structure (% of Net Assets)
Stocks 98.2%
Cash 1.8%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 82% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 10.3% of its ordinary income.
24
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Stocks - 98.2%
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Argentina - 0.7%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 3,287 $ 86,284
Perez Companc S.A. (Oils) 23,159 177,255
Siderar S.A.I.C., ADR (Steel)*## 2,900 97,875
Telecom Argentina Stet - France Telecom
S.A. (Telecommunications) 1,800 96,075
Telefonica de Argentina, ADR
(Uitlities - Telephone) 2,600 94,250
Transportadora de Gas del Sur, S.A. (TGS)
(Pipelines) 7,500 94,687
YPF Sociedad Anonima, ADR (Oils) 8,150 244,500
-------------
$ 890,926
- -------------------------------------------------------------------------------
Australia - 2.8%
Capral Aluminum Ltd. (Metals) 406,269 $ 1,468,561
Futuris Corp. Ltd. (Commercial Services) 695,738 1,090,681
Western Mining (Holding Company) 134,478 868,848
-------------
$ 3,428,090
- -------------------------------------------------------------------------------
Austria - 0.4%
OMV AG (Oil and Gas) 3,440 $ 436,502
- -------------------------------------------------------------------------------
Belgium - 0.5%
Generale de Banque (Finance) 1,560 $ 616,658
- -------------------------------------------------------------------------------
Brazil - 3.9%
Centrais Eletricas Brasile, ADR
(Utilities - Electric) 38,980 $ 916,030
Companhia Energetica S.A., ADR
(Utilities - Electric) 4,650 206,344
Companhia Paranaense de Energia -
COPEL, "B", Preferred (Electrical) 13,900 205,195
Itausa Investimentos Itau S.A. (Conglomerate) 200,000 166,308
Lojas Americanas S.A., ADR (Retail) 7,800 105,300
Petroleo Brasileiro S.A., Preferred (Oils) 4,110,000 983,051
Telecomunicacoes Braileiras S.A.
(Utilities - Telephone) 1,500,000 195,492
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 12,900 1,767,300
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 18,300 201,300
-------------
$ 4,746,320
- -------------------------------------------------------------------------------
Canada - 0.1%
Super Sol Ltd. (Supermarkets) 32,500 $ 107,605
- -------------------------------------------------------------------------------
China - 0.4%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 10,200 $ 244,800
Qingling Motors Co. "H" (Automotive) 308,000 170,935
Yizheng Chemical Fibre Co., Ltd. (Textiles) 452,000 88,673
-------------
$ 504,408
- -------------------------------------------------------------------------------
Colombia - 0.5%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 5,900 $ 225,675
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 11,500 202,687
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Colombia - continued
Cementos Diamante S.A., ADR
(Construction)## 11,100 $ 174,825
-------------
$ 603,187
- -------------------------------------------------------------------------------
Egypt - 0.3%
Commercial International Bank (Banks and
Credit Cos.)## 10,500 $ 204,750
South Cairo Flour Mills (Food Products) 3,250 63,285
Torah For Cement (Construction) 3,500 88,805
-------------
$ 356,840
- -------------------------------------------------------------------------------
Finland - 0.2%
Oy Tamro AB (Pharmaceuticals)## 34,660 $ 230,438
- -------------------------------------------------------------------------------
France - 5.9%
Accor (Lodging) 5,620 $ 780,962
Compagnie de St. Gobain (Building Materials) 5,800 802,953
Dexia France (Finance) 6,980 653,503
Filipacchi Medias (Publishing) 1,600 346,292
Guilbert S.A. (Distributing) 2,895 430,956
Lafarge S.A., Bearer Shares (Building Materials) 2,200 141,011
Lafarge S.A., Bearer Shares (Building Materials) 4,700 301,251
Michelin, "B" (Tires) 15,800 865,336
Seb S.A. (Household Goods) 2,800 479,555
Societe Nationale Elf Aquitaine (Oils) 8,060 807,820
Strafor-Facom S.A. (Office Equipment) 3,600 248,880
TOTAL S.A., "B" (Oils)* 10,350 949,244
Union des Assurances Federales S.A.
(Insurance) 3,500 425,569
- -------------------------------------------------------------------------------
$ 7,233,332
- -------------------------------------------------------------------------------
Germany - 6.4%
Bayer AG (Chemicals) 12,500 $ 485,562
Buderus AG (Manufacturing) 1,403 715,690
Deutsche Bank AG (Banks) 11,140 618,562
Deutsche Telekom AG
(Utilities - Telephone) 44,545 989,889
Fresenius AG (Medical Supplies) 311 67,652
Fresenius AG (Medical Supplies) 2,800 620,581
Mannesmann AG (Diversified Machinery) 2,000 813,838
Moebel Walther AG (Furniture) 10,500 560,246
Siemens AG (Electrical Equipment) 15,580 879,989
VEBA AG (Oil and Gas) 14,400 815,620
Volkswagen AG (Automotive) 1,900 1,229,903
-------------
$ 7,797,532
- -------------------------------------------------------------------------------
Greece - 0.5%
Ergo Bank (Banks and Credit Cos.) 2,100 $ 148,376
Hellenic Telecommunication Organization
S.A. (Telecommunications) 6,500 162,232
Intracom (Telecommunications) 2,300 112,109
Titan Cement Co (Building Materials) 1,350 134,826
-------------
$ 557,543
- -------------------------------------------------------------------------------
25
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Hong Kong - 5.0%
Associated International Hotels (Lodging) 747,000 $ 501,342
Bank of East Asia Ltd. (Banks and Credit
Cos.) 42,000 152,865
Chen Hsong Holdings (Machines) 1,034,000 607,215
Cheung Kong Holdings Ltd. (Real Estate) 118,000 1,206,957
Citic Pacific Ltd. (Conglomerates) 19,000 108,635
HSBC Holdings PLC (Finance) 34,200 1,037,300
Li & Fung Ltd. (Wholesale) 1,120,000 1,113,061
New World Development Co. (Real Estate) 40,000 254,001
Swire Pacific Air Ltd., "A" (Transportation) 61,500 515,940
Wharf Holdings Ltd. (Real Estate) 136,000 609,086
-------------
$ 6,106,402
- --------------------------------------------------------------------------------
India - 1.8%
Bajaj Auto Ltd. (Automotive) 250 $ 6,033
Eih Ltd. (Consumer Goods and Services) 18,000 207,741
Hindustan Lever Ltd. (Consumer Goods
and Services) 11,500 358,892
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 20,000 238,522
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 109,000 279,976
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 41,000 327,701
State Bank of India (Banks and Credit Cos.) 47,000 403,618
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 800 8,847
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 19,910 410,146
-------------
$ 2,241,476
- --------------------------------------------------------------------------------
Israel - 0.5%
Israel Chemicals Ltd. (Chemicals) 90,000 $ 110,391
Makhteshim Chemical Works Ltd.
(Chemicals)* 17,000 110,066
NICE Systems Ltd., ADR
(Telecommunications) 2,100 64,050
Tadiran Telecommunications Ltd.
(Telecommunications) 5,000 90,625
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 3,800 228,000
-------------
$ 603,132
- --------------------------------------------------------------------------------
Italy - 2.0%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 179,480 $ 527,820
Industrie Natuzzi S.p.A., ADR (Consumer
Goods and Services) 42,620 1,076,155
Telecom Italia S.p.A. (Telecommunications
Services) 287,000 792,222
-------------
$ 2,396,197
- --------------------------------------------------------------------------------
Japan - 23.1%
Aeon Credit Service Co. Ltd. (Financial Services) 10,800 $ 667,045
Aiphone Co. Ltd. (Telecommunications) 30,000 467,097
ALBIS Co. Ltd. (Food) 36,000 359,226
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Japan - continued
Ariake Japan Co. Ltd. (Food) 13,200 $ 433,755
Canon, Inc. (Consumer Goods) 40,000 1,015,054
Chofu Seisakusho Co. (Machines) 18,700 337,806
Daimei Telecom Engineer Corp.
(Telecommunications) 46,000 415,484
Daiwa Industries Co. Ltd. (Distributor) 41,000 352,335
DDI Corp. (Telecommunications) 93 695,200
Diamond Computer Service Co.
(Computers-Software) 23,000 387,785
Exedy Corp. (Automotive Parts) 23,700 285,419
Fuji Photo Film Co. (Photographic Products) 15,000 581,935
Fujisawa Pharmaceuticals (Pharmaceuticals) 100,000 946,237
Fukuda Denshi (Electronics) 24,000 466,581
Hitachi Zosen Tomioka (Automotive) 120,000 459,355
Homac Corp. (Retail) 21,300 324,310
Ito-Yokado Co. Ltd. (Retail) 20,000 1,142,366
Keyence Corp. (Electronics) 7,700 1,112,774
Kyocera Corp. (Electronics) 16,000 1,154,753
Mandom (Cosmetics) 40,700 483,148
Marubeni Corp. (Distribution/Wholesale) 216,000 919,742
Matsuda Sangyo Co. Ltd. (Food) 24,000 454,193
Matsushita Electric Industrial Co.
(Electrical Equipment) 56,000 1,054,968
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 130,000 937,118
Miura Co. (Machines) 24,000 334,452
NAC Co. Ltd. (Commercial Services) 30,240 395,396
NEC Corp. (Computers) 72,000 1,003,355
Nichiha (Building and Construction) 40,000 633,118
NKK Corp. (Steel) 392,000 772,198
Oi Electric Co. (Electronics) 31,000 274,667
Omron Corp. (Electronics) 58,000 1,167,484
Pioneer Electronic Corp. (Electronics) 48,000 1,189,161
Ricoh Co. Ltd. (Office/Business Equipment) 77,000 1,013,419
Ryohin Keikaku Co. Ltd. (Retail) 6,500 492,602
Sanshin Electronics Co. Ltd. (Electronics) 37,000 677,935
Sato Corp. (Machines) 19,536 329,381
Sawako Corp. (Engineering/Construction) 23,200 363,217
TDK Corp. (Special Products and Services) 38,000 2,922,323
TKC Corp. (Computer Software and Services) 23,600 560,310
Tokyo Broadcasting System (Broadcasting) 18,000 328,258
Yoshinoya D&C Co. Ltd. (Retail) 28 325,161
-------------
$ 28,236,123
- --------------------------------------------------------------------------------
Malaysia - 1.8%
Genting Berhad (Entertainment) 21,000 $ 109,492
Malayan Banking Berhad (Finance) 10,000 105,473
Malaysian Industrial Development Finance
Berhad (Finance) 229,000 331,765
Petronas Gas Berhad (Oil and Gas)*## 226,000 818,547
Resorts World Berhad (Entertainment) 27,000 90,269
Tenaga Nasional Berhad (Utilities - Electric) 104,000 476,020
United Engineers Berhad (Engineering) 33,000 266,627
-------------
$ 2,198,193
- --------------------------------------------------------------------------------
26
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Mexico - 2.1%
Cemex S.A., "B" (Construction) 66,000 $ 246,979
Corporacion GEO, S.A. de C.V., "B"
(Real Estate) 21,000 100,752
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 13,000 188,500
Fomento Economico Mexicano S.A., "B"
(Beverage) 36,950 196,195
Gruma S.A. (Food Products) 73,666 349,238
Grupo Carso S.A. de C.V. (Conglomerates) 52,800 188,238
Grupo Carso, "A1" (Conglomerates) 52,800 299,712
Grupo Financiero Banamex, "B" (Finance) 58,000 125,532
Grupo Financiero Inbursa S.A. de C.V.
(Finance) 1,842 6,392
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 30,000 103,919
Telefonos de Mexico S.A.
(Utilities - Telephone) 201,000 446,723
Tubos de Acero de Mexico S.A.
(Iron/Steel)* 17,340 305,149
-------------
$ 2,557,329
- ----------------------------------------------------------------------------
Morocco - 0.4%
Banque Marocaine du Commerce (Banks
and Credit Co.)## 5,300 $ 105,735
Brasserica du Maroc (Consumer Goods
and Services) 530 92,612
Credit Eqdom (Financial Institutions) 750 75,845
ONA S.A. (Conglomerate) 1,500 121,415
Societe Nationale d'Investissement
(Conglomerate) 1,350 100,382
-------------
$ 495,989
- ----------------------------------------------------------------------------
Netherlands - 5.5%
ABN Amro Holdings N.V. (Finance) 52,000 $ 962,110
Ahrend Groep N.V. (Furniture and
Home Appliances) 13,248 838,918
Akzo Nobel (Chemicals) 6,200 826,257
Hagemeyer (Distributing) 18,020 885,644
Royal Dutch Petroleum Co. (Oils) 600 116,047
Stork NV (Machinery) 25,965 1,150,271
Vendex International N.V. (Retail) 19,000 1,067,494
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 41,300 934,185
-------------
$ 6,780,926
- ----------------------------------------------------------------------------
Pakistan - 0.6%
Hub Power Co. Ltd., GDR (Utilities - Electric)* 20,000 $ 462,000
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 4,800 297,600
-------------
$ 759,600
- ----------------------------------------------------------------------------
Peru - 1.4%
Alicorp S.A. (Consumer Goods and Services) 136,000 $ 236,966
Compania de Minas Buenaventura S.A.
(Mining) 33,507 308,269
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Peru - continued
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 238,080 $ 609,728
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 23,328 527,796
-------------
$ 1,682,759
- ----------------------------------------------------------------------------
Poland - 0.6%
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 56,500 $ 504,969
Stomil Olsztyn S.A. (Tires and Rubber) 22,500 281,250
-------------
$ 786,219
- ----------------------------------------------------------------------------
Portugal - 1.0%
Cimentos de Portugal S.A. (Building Materials) 7,326 $ 161,155
Inparsa - Industria e Participacoes, SGPS,
S.A. (Building Materials) 3,500 29,771
Jeronimo Martins & Filho S.A. (Retail) 1,866 126,849
Portugal Telecom S.A. (Utilities - Telephone) 7,400 284,131
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 7,000 262,814
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 5,418 416,468
-------------
$ 1,281,188
- ----------------------------------------------------------------------------
Russia - 1.2%
Lukoil Oil Co., ADR (Oils) 13,800 $ 822,825
Mosenergo, ADR (Utilities - Electric)## 9,900 374,220
Rostelecom (Telecommunications)## 8 303,200
-------------
$ 1,500,245
- ----------------------------------------------------------------------------
Singapore - 1.9%
City Developments Ltd. (Real Estate) 44,000 $ 409,231
Development Bank of Singapore Ltd. (Banks) 59,000 738,531
Overseas-Chinese Banking Corp. Ltd. (Finance) 21,400 266,378
Wing Tai Holdings Ltd. (Holding Company) 300,000 893,706
-------------
$ 2,307,846
- ----------------------------------------------------------------------------
South Africa - 1.0%
Anglo American Corp. of South Africa
Ltd. (Mining) 2,400 $ 140,529
De Beers Centenary AG (Diamonds -
Precious Stones) 5,500 192,734
Liberty Life Association of Africa Ltd.
(Insurance) 7,250 202,922
Nedcor Ltd. (Financial Services) 10,539 205,305
Sappi (Paper Products) 7,000 64,263
Sasol Ltd. (Oils) 18,500 226,797
South African Breweries Ltd. (Brewery) 7,350 206,544
-------------
$ 1,239,094
- ----------------------------------------------------------------------------
Spain - 1.4%
BCO Intercont (Banks) 2,200 $ 372,277
Cristaleria Espanola S.A. (Glass Products) 3,700 295,119
Repsol S.A. (Oils) 10,600 444,021
Telefonica de Espana (Utilities - Telephone) 21,100 609,202
-------------
$ 1,720,619
- ----------------------------------------------------------------------------
27
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Sweden - 3.5%
Autoliv AB (Automotive) 9,280 $ 351,606
Enator AB (Computer Services) 9,600 187,132
Ericsson LM, "B" (Telecommunications) 25,500 895,384
Munksjo AB (Forest and Paper Products) 59,700 578,010
Nobel Biocare AB (Medical and Health Products) 26,280 305,329
PLM AB (Packaging and Containers) 11,400 207,503
Sparbanken Sverige AB, "A" (Banks) 43,680 857,090
Volvo AB, "B" (Automobiles) 31,160 862,829
-------------
$ 4,244,883
- -------------------------------------------------------------------------------
Switzerland - 5.3%
Ciba Specialty AG (Chemicals) 6,720 $ 637,508
Fotolabo S.A. (Leisure) 1,300 423,363
Kuoni Reisen Holdings AG (Transportation) 300 998,230
Lindt & Spruengli AG (Food) 40 795,752
Logitech International (Electrical Equipment) 5,220 901,720
Nestle AG, Registered Shares (Food and
Beverage Products) 750 934,513
Novartis AG (Pharmaceuticals) 560 761,204
Roche Holdings AG (Pharmaceuticals) 112 997,494
-------------
$ 6,449,784
- -------------------------------------------------------------------------------
Taiwan - 1.1%
Taipei Fund (Finance) 125 $ 1,362,500
- -------------------------------------------------------------------------------
Turkey - 0.1%
Adana Cimento Sanayii (Building
Materials) 1,363,600 $ 89,869
- -------------------------------------------------------------------------------
United Kingdom - 14.0%
ASDA Property Holdings PLC (Real Estate) 157,600 $ 392,674
BAA PLC (Transportation) 121,780 1,057,995
Blick PLC (Electrical) 51,200 234,996
British Petroleum PLC (Oil and Gas) 65,540 784,262
British Telecommunications PLC
(Telecommunications) 108,940 791,084
BTR PLC (Holding Company) 169,520 552,975
Bullough PLC (Manufacturing) 275,900 547,229
Carlton Communications PLC (Broadcasting) 104,640 903,941
Close Brothers Group PLC (Banks) 71,800 556,695
David Brown Group PLC
(Engineering/Construction) 88,400 315,893
Devro International PLC (Food) 96,300 513,028
Fine Art Developments PLC (Retail) 66,600 324,237
Forth Ports PLC (Harbor Transportation
Services) 21,000 206,539
Glaxo Wellcome PLC (Pharmaceuticals) 45,880 919,023
Hazlewood Foods PLC (Food) 280,800 464,890
Inchcape PLC (Commercial Services) 54,150 255,636
Independent Insurance Group PLC (Insurance) 46,300 610,954
Lloyds TSB Group PLC (Banks and Credit Cos.) 105,800 1,066,144
Marley PLC (Building Materials) 193,900 400,479
Midland Independent Newspapers PLC
(Publishing) 138,000 334,790
National Westminster (Finance) 20,900 255,917
Roxboro Group PLC (Manufacturing) 89,700 313,187
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
United Kingdom - continued
Sainsbury (J.) PLC (Retail) 36,800 $ 211,732
Serco Group PLC (Commercial Services) 24,500 284,135
Seton Healthcare Group PLC (Medical Supplies) 39,000 303,662
SIG PLC (Building Materials) 105,940 541,531
Storehouse PLC (Retail) 170,460 607,734
T & S Stores PLC (Retail) 119,400 346,425
Tesco PLC (Retail) 114,000 700,758
Triplex Lloyd PLC (Hardware) 121,600 324,902
Unilever PLC (Consumer Goods) 33,580 899,974
Vardon PLC (Entertainment) 197,050 361,765
VCI PLC (Leisure) 58,000 239,585
Walker Greenbank PLC (Maufacturing) 247,300 235,117
Wardle Storeys PLC (Chemicals) 32,500 223,751
-------------
$ 17,083,639
- -------------------------------------------------------------------------------
Venezuela - 0.3%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 10,000 $ 371,250
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $107,428,950) $120,004,643
- -------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------
Sweden
Volvo AB, "B" (Automobiles)
(Identified Cost, $0) $ 31,160 $ 8,327
- -------------------------------------------------------------------------------
Short-Term Obligations - 0.5%
- -------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/23/97 $ 450 $ 448,493
General Electric Capital Corp., due
6/02/97 205 204,968
- -------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 653,461
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $108,082,411) $120,666,431
Other Assets, Less Liabilities - 1.3% 1,583,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $122,249,901
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio Footnotes:
*Non-income producing security.
##SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs GRD = Greek Drachmas
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Netherlands Guilders
ESP = Spanish Pesetas NZD = New Zealand Dollars
FRF = French Francs SEK = Swedish Kronor
28
<PAGE>
Financial Statements
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
May 31, 1997 Equity and Income Growth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $76,343,323, $26,711,108, and
$108,082,411,respectively) $89,854,857 $29,372,129 $120,666,431
Cash -- -- 44,183
Foreign currency, at value (identified cost, $651,563, $13,658, and $482,608,
respectively) 651,681 13,586 483,169
Net receivable for forward foreign currency exchange contract sold -- 283,017 958,593
Net receivable for master netting agreements and closed foreign currency exchange
contracts purchased -- 74,704 --
Net receivable for forward foreign currency exchange contracts purchased -- 111,737 131,216
Receivable for Fund shares sold 1,133,639 286,428 774,640
Receivable for investments sold -- 280,112 --
Interest and dividends receivable 319,469 226,451 498,231
Deferred organization expenses 20,691 18,385 19,115
----------- ----------- ------------
Total assets $91,980,337 $30,666,549 $123,575,578
----------- ----------- ------------
Liabilities:
Cash overdraft $ 2,136 $ 555,757 $ --
Payable for Fund shares reacquired 50,712 39,749 237,117
Payable for investments purchased 229,460 563,801 892,412
Written options outstanding, at value (premiums received $0, $6,589, and $0,
respectively) -- 16,284 --
Payable to affiliates -
Management fee 6,191 1,579 6,554
Administrative fee 74 24 101
Shareholder servicing agent fee 644 211 874
Distribution fee 42,423 14,110 58,398
Accrued expenses and other liabilities 131,058 64,978 130,221
----------- ----------- ------------
Total liabilities $ 462,698 $ 1,256,493 $ 1,325,677
----------- ----------- ------------
Net assets $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Net assets consist of:
Paid-in capital $80,593,249 $27,843,519 $114,182,502
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 13,408,306 3,116,858 13,675,208
Accumulated net realized loss on investments and foreign currency transactions (2,016,103) (1,182,827) (4,780,289)
Accumulated net investment loss (467,813) (367,494) (827,520)
----------- ----------- ------------
Total $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Shares of beneficial interest outstanding 4,838,654 1,805,209 7,251,124
=========== =========== ============
Class A shares:
Net asset value per share
(net assets of $37,539,578, $13,425,340, and $56,810,289 [divided by] 1,979,873,
822,833, and 3,361,154 shares of beneficial interest outstanding, respectively) $18.96 $16.32 $16.90
====== ====== ======
Offering price per share (100 - 95.25 of net asset value per share) $19.91 $17.13 $17.74
====== ====== ======
Class B shares:
Net asset value and offering price per share
(net assets of $51,019,984, $15,748,793, and $62,958,124 [divided by] 2,701,302,
967,802, and 3,741,995 shares of beneficial interest outstanding, respectively) $18.89 $16.27 $16.82
====== ====== ======
Class C shares:
Net asset value and offering price per share
(net assets of $2,658,810, $235,453, and $2,397,128 [divided by] 141,725, 14,545,
and 142,994 shares of beneficial interest outstanding, respectively) $18.76 $16.19 $16.76
====== ====== ======
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $299,267, $470.34, and $84,360 [divided by] 15,754, 28.825, and
4,981 shares of beneficial interest outstanding, respectively) $19.00 $16.32 $16.94
====== ====== ======
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
29
<PAGE>
kl.
Financial Statements - continued
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
Year Ended May 31, 1997 Equity and Income Growth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Interest $ 202,857 $ 459,577 $ 403,067
Dividends 1,028,372 475,670 2,092,771
Foreign taxes withheld (63,610) (59,180) (233,349)
------------ ------------ ------------
Total investment income $ 1,167,619 $ 876,067 $ 2,262,489
------------ ------------ ------------
Expenses -
Management fee $ 687,535 $ 277,086 $ 1,049,705
Trustees' compensation 6,458 6,892 11,015
Administrative fee 3,019 1,100 4,467
Shareholder servicing agent fee 37,906 15,593 62,315
Shareholder servicing agent fee (Class A) 18,926 11,517 42,410
Shareholder servicing agent fee (Class B) 28,770 19,201 68,426
Shareholder servicing agent fee (Class C) 223 24 525
Distribution and service fee (Class A) 128,054 66,872 252,648
Distribution and service fee (Class B) 284,900 149,349 559,606
Distribution and service fee (Class C) 8,454 1,034 11,524
Custodian fee 66,789 53,394 116,586
Registration fees 58,565 49,349 34,241
Printing 47,823 22,734 69,269
Postage 37,403 9,202 24,397
Auditing fees 32,111 26,826 38,272
Legal fees 9,916 10,794 10,649
Amortization of organization expenses 5,197 5,197 5,197
Miscellaneous 41,506 33,494 79,131
------------ ------------ ------------
Total expenses $ 1,503,555 $ 759,658 $ 2,440,383
Fees paid indirectly (4,573) (7,370) (7,957)
Refund of expenses to investment adviser 25,887 -- --
------------ ------------ ------------
Net expenses $ 1,524,869 $ 752,288 $ 2,432,426
------------ ------------ ------------
Net investment income (loss) $ (357,250) $ 123,779 $ (169,937)
------------ ------------ ------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,983,312) $ (1,254,793) $(4,497,196)
Written option transactions -- 7,796 --
Foreign currency transactions (83,420) (430,595) (441,519)
------------ ------------ ------------
Net realized loss on investments and foreign currency transactions $(2,066,732) $ (1,677,592) $(4,938,715)
------------ ------------ ------------
Change in unrealized appreciation (depreciation) -
Investments (net of applicable deferred foreign taxes of $103,099, $0, and $1,118,
respectively) $11,949,720 $ 1,748,881 $ 7,102,874
Written options -- (32,094) --
Translation of assets and liabilities in foreign currencies 2,504 589,842 1,120,254
------------ ------------ ------------
Net unrealized gain on investments and foreign currency translation $11,952,224 $ 2,306,629 $ 8,223,128
------------ ------------ ------------
Net realized and unrealized gain on investments and foreign currency $ 9,885,492 $ 629,037 $ 3,284,413
------------ ------------ ------------
Increase in net assets from operations $ 9,528,242 $ 752,816 $ 3,114,476
============ ============= ============
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity International Growth and Income
------------------------------ --------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
- --------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (357,250) $ 13,002 $ 123,779 $ 81,065
Net realized gain (loss) on investments and foreign
currency transactions (2,066,732) 502,931 (1,677,592) 87,073
Net unrealized gain on investments and foreign
currency translation 11,952,224 1,456,082 2,306,629 810,229
-------------- ------------- -------------- -------------
Increase in net assets from operations $ 9,528,242 $ 1,972,015 $ 752,816 $ 978,367
-------------- ------------- -------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (8,868) $ (68,626) $ (12,226)
From net investment income (Class B) -- -- -- (7,299)
From net investment income (Class C) -- -- (575) --
From net realized gain on investments and foreign
currency transactions (Class A) (309,984) -- (35,996) --
From net realized gain on investments and foreign
currency transactions (Class B) (238,475) -- (39,731) --
From net realized gain on investments and foreign
currency transactions (Class C) (11,143) -- (193) --
In excess of net investment income (Class B) -- (3,354) -- --
-------------- ------------- -------------- -------------
Total distributions declared to shareholders $ (559,602) $ (12,222) $ (145,121) $ (19,525)
-------------- ------------- -------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 92,886,375 $ 46,419,714 $ 14,540,133 $ 27,711,754
Net asset value of shares issued to shareholders in
reinvestment of distributions 500,512 12,183 128,054 15,767
Cost of shares reacquired (50,719,552) (8,510,026) (11,456,699) (3,095,490)
-------------- ------------- -------------- -------------
Increase in net assets from Fund share
transactions $ 42,667,335 $ 37,921,871 $ 3,211,488 $ 24,632,031
-------------- ------------- -------------- -------------
Total increase in net assets $ 51,635,975 $ 39,881,664 $ 3,819,183 $ 25,590,873
Net assets:
At beginning of period 39,881,664 -- 25,590,873 --
-------------- ------------- -------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 91,517,639 $ 39,881,664 $ 29,410,056 $ 25,590,873
============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
International Growth
--------------------------------
Year Ended Period Ended
May 31, 1997 May 31, 1996*
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (169,937) $ (4,270)
Net realized gain (loss) on investments and foreign
currency transactions (4,938,715) 334,764
Net unrealized gain on investments and foreign
currency translation 8,223,128 5,452,080
-------------- -------------
Increase in net assets from operations $ 3,114,476 $ 5,782,574
-------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (6,653)
From net investment income (Class B) -- --
From net investment income (Class C) -- --
From net realized gain on investments and foreign
currency transactions (Class A) (469,661) --
From net realized gain on investments and foreign
currency transactions (Class B) (305,586) --
From net realized gain on investments and foreign
currency transactions (Class C) (14,849) --
In excess of net investment income (Class B) -- --
-------------- -------------
Total distributions declared to shareholders $ (790,096) $ (6,653)
-------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 129,496,667 $ 84,291,229
Net asset value of shares issued to shareholders in
reinvestment of distributions 830,061 5,219
Cost of shares reacquired (95,147,991) (5,325,585)
-------------- -------------
Increase in net assets from Fund share
transactions $ 35,178,737 $ 78,970,863
-------------- -------------
Total increase in net assets $ 37,503,117 $ 84,746,784
Net assets:
At beginning of period 84,746,784 --
-------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 122,249,901 $ 84,746,784
============== =============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996
See notes to financial statements.
31
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity
----------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
---------------- --------------- -------------- ---------------
Class A Class B
- -------------------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.52 $ 15.00 $ 16.47 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ (0.07) $ 0.04 $ (0.15) $ (0.02)
Net realized and unrealized gain on
investments and foreign currency
transactions 2.74 1.50 2.73 1.50
------- ------- ------- -------
Total from investment operations $ 2.67 $ 1.54 $ 2.58 $ 1.48
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.02) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.23) -- (0.16) --
In excess of net investment income -- -- -- (0.01)
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.23) $ (0.02) $ (0.16) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 18.96 $ 16.52 $ 18.89 $ 16.47
------- ------- ------- -------
Total return+++ 16.43% 10.24%++ 15.87% 9.85%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 2.51% 2.48%+ 3.04% 3.06%+
Net investment income (loss) (0.42)% 0.35%+ (0.87)% (0.19)%+
Portfolio turnover 47% 22% 47% 22%
Average commission rate $0.0019 $0.0136 $0.0019 $0.0136
Net assets at end of period (000 omitted) $37,540 $19,861 $51,020 $20,021
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets Equity
- ---------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
---------------- ----------------
Class C Class I
- ---------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.77 $ 16.47
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.08) $ 0.10
Net realized and unrealized gain on
investments and foreign currency
transactions 2.36 2.43
------- -------
Total from investment operations $ 2.28 $ 2.53
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.29) --
In excess of net investment income -- --
------- -------
Total distributions declared to
shareholders $ (0.29) $ --
-------- -------
Net asset value - end of period $ 18.76 $ 19.00
-------- -------
Total return+++ 13.89%++ 15.36%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 3.00%+ 2.01%+
Net investment income (loss) (0.48)%+ 1.14%+
Portfolio turnover 47% 47%
Average commission rate $0.0019 $0.0019
Net assets at end of period (000 omitted) $2,659 $299
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
+++Total returns for Class A shares do not include the applicable sales charge.
If the sales charge had been included, the results would have been lower.
ss.For the year ended May 31, 1997, the Adviser voluntarily agreed to bear,
subject to reimbursement by the Fund, expenses of each class of shares of the
Fund such that expenses, exclusive of management, distribution, service fees,
and certain other expenses, of the Fund's Class A shares, Class B shares,
Class C shares, and Class I shares do not exceed 0.75%, respectively, of the
Fund's average daily net assets on an annualized basis. For the period ended
May 31, 1996, the Adviser voluntarily agreed to maintain total expenses of
the Fund at not more than 2.50%, 3.07%, and 3.00% of average daily net assets
for Class A, Class B, and Class C shares, respectively. To the extent actual
expenses were over/under these limitations, the net investment income (loss)
per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $(0.06) $ 0.02 $ (0.14) $ (0.08) $ (0.07) $ 0.10
Ratios (to average net assets):
Expenses 2.45% 2.73%+ 2.98% 3.30%+ 2.97%+ 1.99%+
Net investment income (loss) (0.37)% 0.10%+ (0.82)% (0.44)%+ (0.39)%+ 1.14%+
</TABLE>
See notes to financial statements
32
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth and Income
--------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
------------------------------ ------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.98 $ 15.00 $ 15.94 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.11 $ 0.11 $ 0.03 $ 0.05
Net realized and unrealized gain on
investments and foreign currency
transactions 0.35 0.90 0.34 0.90
------- ------- ------- -------
Total from investment operations $ 0.46 $ 1.01 $ 0.37 $ 0.95
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.08) $ (0.03) $ -- $ (0.01)
From net realized gain on investments and
foreign currency transactions (0.04) -- (0.04) --
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.12) $ (0.03) $ (0.04) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 16.32 $ 15.98 $ 16.27 $ 15.94
======= ======= ======= =======
Total return[dbldag] 2.88% 6.71%++ 2.33% 6.37%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.39% 2.52%+ 2.94% 3.11%+
Net investment income 0.72% 1.04%+ 0.18% 0.49%+
Portfolio turnover 89% 29% 89% 29%
Average commission rate $0.0197 $0.0291 $0.0197 $0.0291
Net assets at end of period (000 omitted) $13,425 $11,950 $15,749 $13,641
</TABLE>
<TABLE>
<CAPTION>
International Growth and Income
- -------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
-------------------------------
Class C Class I
-------------- ---------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.02 $15.71
------- ------
Income from investment operations# -
Net investment income $ 0.12 $ 0.16
Net realized and unrealized gain on
investments and foreign currency
transactions 0.21 0.45
------- ------
Total from investment operations $ 0.33 $ 0.61
------- ------
Less distributions declared to shareholders -
From net investment income $ (0.12) $ --
From net realized gain on investments and
foreign currency transactions (0.04) --
------- ------
Total distributions declared to
shareholders $ (0.16) $ --
------- ------
Net asset value - end of period $ 16.19 $16.32
------- ------
Total return[dbldag] 2.09%++ 3.88%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.64%+ 1.89%+
Net investment income 0.80%+ 2.33%+
Portfolio turnover 89% 89%
Average commission rate $0.0197 $0.0197
Net assets at end of period (000 omitted) $235 $--
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares,
January 2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
33
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth
-------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
-------------- ------------- ------------ --------------
Class A Class B
- ----------------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.71 $ 15.00 $ 16.66 $ 15.00
------ ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ 0.02 $ 0.03 $ (0.07) $ (0.03)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.32 1.69 0.31 1.69
------ ------- ------- -------
Total from investment operations $ 0.34 $ 1.72 $ 0.24 $ 1.66
------ ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.01) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.15) -- (0.08) --
------ ------- ------- -------
Total distributions declared to
shareholders $(0.15) $ (0.01) $ (0.08) --
------ ------- ------- -------
Net asset value - end of period $16.90 $ 16.71 $ 16.82 $ 16.66
====== ======= ======= =======
Total return[dbldag] 2.13% 11.43%++ 1.56% 11.07%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 1.99% 2.24%+ 2.53% 2.85%+
Net investment income (loss) 0.13% 0.24%+ (0.42)% (0.31)%+
Portfolio turnover 53% 11% 53% 11%
Average commission rate $0.0069 $0.0107 $0.0069 $0.0107
Net assets at end of period (000 omitted) $56,810 $41,483 $62,958 $43,264
</TABLE>
<TABLE>
<CAPTION>
International Growth
---------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
--------------- ----------------
Class C Class I
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.83 $ 15.90
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.04) $ 0.11
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.15 0.93
------- -------
Total from investment operations $ 0.11 $ 1.04
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.18) --
------- -------
Total distributions declared to
shareholders $ (0.18) $ --
------- -------
Net asset value - end of period $ 16.76 $ 16.94
======= =======
Total return[dbldag] 0.79%++ 6.54%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.50%+ 1.52%+
Net investment income (loss) (0.27)%+ 1.40%+
Portfolio turnover 53% 53%
Average commission rate $0.0069 $0.0069
Net assets at end of period (000 omitted) $2,397 $84
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
34
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS/Foreign & Colonial Emerging Markets Equity Fund (Emerging Market Equity),
MFS/Foreign & Colonial International Growth and Income Fund (International
Growth and Income), and MFS/Foreign & Colonial International Growth Fund
(International Growth) (the Funds) are each a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed
issues and forward contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the base
currency and translated into U.S. dollars at the closing daily exchange rate.
Future contracts, options, and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices. Over-the-counter
options are valued by brokers through the use of a pricing model which takes
into account closing bond valuations, implied volatility, and short-term
repurchase rates. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Repurchase Agreements - The Funds may enter into repurchase agreements with
institutions that the Funds' investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Funds require
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Funds to obtain those securities
in the event of a default under the repurchase agreement. The Funds monitor, on
a daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each repurchase
agreement is greater than amounts owed to the Funds under each such repurchase
agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
and losses. That portion of both realized and unrealized gains and losses on
investments that results from fluctuations in foreign currency exchange rates
is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Funds in connection with
their organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of operations of the Funds.
Written Options - The Funds may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Funds. The Funds, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bear the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to
35
<PAGE>
Notes to Financial Statements - continued
the extent of the premium received. Written options may also be used as part of
an income-producing strategy reflecting the view of the Funds' management on
the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Funds may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Funds will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Funds may enter into contracts to deliver or receive foreign
currency they will receive from or require for their normal investment
activities. They may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Funds may enter into
contracts with the intent of changing the relative exposures of the Funds'
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly - The Funds' custodian bank calculates its fee based on
the Funds' average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Funds. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Funds' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Funds file a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Funds' tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that reported
to shareholders on Form 1099-DIV. Foreign taxes have been provided for on
interest and dividend income earned on foreign investments in accordance with
the applicable country's tax rates and to the extent unrecoverable are recorded
as a reduction of investment income. Distributions to shareholders are recorded
on the ex-dividend date.
The 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 May 31, 1997, the following amounts were
reclassified due to differences between book and tax accounting for currency
transactions. These changes had no effect on the net assets or net asset value
per share.
Emerging International
Markets Growth and International
Equity Income Growth
------------- -------------- --------------
Increase (decrease):
Paid-in-capital ............ $ 4,043 $ -- $ 32,902
Accumulated undistributed net
realized gain on investments
and foreign currency
transactions ............... 83,420 545,761 404,453
Accumulated undistributed net
investment income ......... (87,463) (545,761) (437,355)
Multiple Classes of Shares of Beneficial Interest - The Funds offer Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in
their respective distribution and service fees. All shareholders bear the
common expenses of each Fund pro rata based on average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
difference in per share dividend rates are generally due to differences in
separate class expenses.
36
<PAGE>
Notes to Financial Statements - continued
(3) Transactions with Affiliates
Investment Adviser - Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
of 0.975% of average daily net assets for the International Growth Fund and the
International Growth and Income Fund, and 1.25% of average daily net assets for
the Emerging Markets Equity Fund The advisory agreements permit the adviser to
engage one or more sub-advisers and the adviser, MFS, has engaged Foreign &
Colonial Management Ltd., an England and Wales Company, to assist in the
performance of its services.
Under a temporary expense reimbursement agreement, MFS has voluntarily agreed
to pay all of the Emerging Markets Equity Fund's operating expenses, exclusive
of management, distribution, and service fees. The Emerging Markets Equity Fund
in turn will pay MFS an expense reimbursement fee not greater than 0.75% of
average daily net assets for Class A, Class B, and Class C shares. To the
extent that the expense reimbursement fee exceeds the Emerging Markets Equity
Fund's actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At May 31, 1997, the aggregate unreimbursed expenses owed to MFS
by the Emerging Markets Equity Fund amounted to $38,092.
Administrator - Effective March 1, 1997, each Fund has an administrative
services agreement with MFS to provide each Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, each Fund pays
MFS an administrative fee up to 0.015% per annum of each Fund's average daily
net assets, provided that the administrative fee is not assessed on Fund assets
that exceed $3 billion.
The Funds pay no compensation directly to their Trustees who are officers of
the investment adviser, or to officers of the Funds, all of whom receive
remuneration for their services to the Funds from MFS. Certain of the officers
and Trustees of the Funds are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). Each of the
Funds has an unfunded defined benefit plan for all of its independent Trustees
and Mr. Bailey. Included in Trustees' compensation are net periodic pension
expenses of $1,701, $1,701, and $1,701 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$44,930, $18,575, and $79,525 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997, as its portion of the sales
charge on sales of Class A shares of each Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares of each Fund pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
Each Fund's distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A in order that
MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each
securities dealer that enters into a sales agreement with MFD of up to 0.25%
per annum of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers, and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for
accounts not attributable to a securities dealer which amounted to $15,111,
$6,002, and $28,940 for the Emerging Markets Equity Fund, International Growth
and Income Fund, and International Growth Fund, respectively, for the year
ended May 31, 1997. Fees incurred under each Fund's distribution plan during
the year ended May 31, 1997, were 0.50% of average daily net assets
attributable to Class A shares on an annualized basis.
Each Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and Class
C shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class
C shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $1,469, $1,835, and $5,117 for Class B
shares of the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively, for the year ended May 31,
1997 and $2, $0, and $26 for Class C shares of the Emerging Markets Equity
Fund, International Growth and Income Fund, and Interna-
37
<PAGE>
Notes to Financial Statements - continued
tional Growth Fund, respectively, for the period ended May 31, 1997. Fees
incurred under each Fund's distribution plan during the year ended May 31,
1997, were 1.00% of the Fund's average daily net assets attributable to Class B
and Class C shares, respectively, on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption with six years of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges for Class A shares imposed
during the year ended May 31, 1997, were $48, $11, and $1,254 for the Emerging
Markets Equity Fund, International Growth and Income Fund, and International
Growth Fund, respectively. Contingent deferred sales charges for Class B shares
imposed during the period ended May 31, 1997, were $43,118, $32,134, and
$103,091 for the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively. Contingent deferred sales
charges for Class C shares imposed during the period ended May 31, 1997, were
$1,252, $213, and $3,733 for the Emerging Markets Equity Fund, International
Growth and Income Fund, and International Growth Fund, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of each 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 of each Fund at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated $62,033,984
and $24,482,588, $27,162,926 and $22,901,788, and $90,622,329 and $25,759,078
for the Emerging Markets Equity Fund, International Growth and Income Fund, and
International Growth Fund, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
---------------- -------------------- -------------
<S> <C> <C> <C>
Aggregate cost $ 76,343,323 $ 26,735,821 $ 108,082,411
============= ============ =============
Gross unrealized appreciation $ 15,430,144 $ 3,339,321 $ 17,283,458
Gross unrealized depreciation (1,918,610) (703,013) (4,699,438)
------------- ------------ -------------
Net unrealized appreciation $ 13,511,534 $ 2,636,308 $ 12,584,020
============= ============ =============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares ------------------------------- ------------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- ------------------------------------ -------------- ---------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,277,472 $ 39,713,990 365,309 $ 5,792,690 3,428,135 $ 55,431,605
Shares issued to shareholders
in reinvestment of distributions 17,927 287,543 5,771 90,897 36,196 576,007
Transfer to Class I (1,982) (32,637) -- -- (1,308) (20,795)
Shares reacquired (1,516,023) (26,385,091) (296,169) (4,680,979) (2,584,373) (41,727,368)
----------- -------------- ---------- -------------- ----------- --------------
Net increase 777,394 $ 13,583,805 74,911 $ 1,202,608 878,650 $ 14,259,449
=========== ============== ========== ============== =========== ==============
</TABLE>
38
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares - continued ------------------------------- ------------------------------ -----------------------------
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- ------------------------------------------------- ---------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,490,414 $ 23,464,680 793,963 $ 12,142,184 2,712,981 $ 42,075,064
Shares issued to shareholders
in reinvestment of distributions 514 7,966 658 10,210 367 5,219
Shares reacquired (288,449) (4,694,661) (46,699) (723,607) (230,844) (3,729,818)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,202,479 $ 18,777,985 747,922 $ 11,428,787 2,482,504 $ 38,350,465
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class B Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,844,356 $ 50,086,036 462,559 $ 7,367,431 4,424,042 $ 71,166,884
Shares issued to shareholders in
reinvestment of distributions 12,630 202,215 2,318 36,552 15,231 240,644
Shares reacquired (1,371,122) (23,955,353) (352,648) (5,601,722) (3,294,305) (52,883,159)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,485,864 $ 26,332,898 112,229 $ 1,802,261 1,144,968 $ 18,524,369
=========== ============== ========= ============== =========== ==============
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- -------------- ----------- --------------
Shares sold 1,451,675 $ 22,955,034 1,009,636 $ 15,569,570 2,695,977 $ 42,216,165
Shares issued to shareholders in -- --
reinvestment of distributions 268 4,217 358 5,557
Shares reacquired (236,505) (3,815,365) (154,421) (2,371,883) (98,950) (1,595,767)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,215,438 $ 19,143,886 855,573 $ 13,203,244 2,597,027 $ 40,620,398
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class C Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997** Shares Amount Shares Amount Shares Amount
- ----------------------------------------------- -------------- --------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 160,074 $ 2,796,205 89,056 $ 1,379,569 174,418 $ 2,818,920
Shares issued to shareholders in
reinvestment of distributions 676 10,754 39 605 852 13,410
Shares reacquired (19,025) (339,707) (74,550) (1,173,998) (32,276) (516,669)
----------- -------------- --------- -------------- ----------- --------------
Net increase 141,725 $ 2,467,252 14,545 $ 206,176 142,994 $ 2,315,661
=========== ============= ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class I Shares Equity Fund and Income Fund Growth Fund
---------------------------- ----------------------------- ----------------------------
Period Ended May 31, 1997*** Shares Amount Shares Amount Shares Amount
- ----------------------------------------- -------------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 14,138 $ 257,507 29 $ 443 3,673 $ 58,463
Transfer from Class A 1,982 32,637 -- -- 1,308 20,795
Shares reacquired (366) (6,764) -- -- -- --
----------- -------------- --------- -------------- ----------- -------------
Net increase 15,754 $ 283,380 29 $ 443 4,981 $ 79,258
=========== ============== ========= ============== =========== ==============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997, for the Emerging Markets Equity Fund. For the period
from the commencement of offering of Class C shares, July 1, 1996, to May 31,
1997, for the International Growth and Income Fund and the International
Growth Fund.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 31, 1997.
(6) Line of Credit
The Funds entered into agreements which enable them to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fees allocated to the Funds for the year ended May 31,
1997, were $0, $283, and $1,198 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively.
39
<PAGE>
Notes to Financial Statements - continued
(7) Financial Instruments
The Funds trade financial instruments with off-balance sheet risk in the normal
course of their investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Funds have in particular classes of financial
instruments and do not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
International Growth and Income Fund
Written Option Transactions
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
---------------------------------- ---------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
------------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Canadian Dollars -- $ -- 1,457 $ 3,828
Deutsche Marks 1,499 6,983 -- --
Deutsche Marks/British Pounds 1,386 4,209 -- --
Italian Lire/Deutsche Marks 2,817,989 20,484 -- --
Japanese Yen -- -- 122,808 7,290
Spanish Pesetas/Deutsche Marks -- -- 63,527 1,575
Options written -
Australian Dollars 147 993 -- --
British Pounds -- -- 371 2,800
Deutsche Marks 1,325 6,313 1,545 3,143
Deutsche Marks/British Pounds 1,819 7,202 728 9,382
Japanese Yen 219,563 19,049 282,000 17,466
Swiss Francs/Deutsche Marks 477 1,447 1,059 13,071
Options terminated in closing transactions -
Australian Dollars (147) (993) -- --
Deutsche Marks (2,824) (13,296) (1,545) (3,143)
Deutsche Marks/British Pounds (1,386) (4,209) (728) (9,382)
Italian Lire/Deutsche Marks (2,817,989) (20,484) -- --
Japanese Yen (219,563) (19,049) (205,000) (13,677)
Swiss Francs/Deutsche Marks -- -- (1,059) (13,071)
Options expired -
Canadian Dollars (1,457) (3,828)
Deutsche Marks/British Pounds (1,819) (7,202) -- --
Japanese Yen -- -- (122,808) (7,290)
Spanish Pesetas/Deutsche Marks -- -- (63,527) (1,575)
Swiss Francs/Deutsche Marks (477) (1,447) -- --
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
Options outstanding at end of period consist of:
British Pounds -- $ -- 371 $ 2,800
Japanese Yen -- -- 77,000 3,789
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
40
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts
International Growth and Income Fund
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
=================== ============================ ================= ============ ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 8/26/97 AUD 400,387 $ 310,670 $ 304,877 $ 5,793
6/30/97 BEF 12,095,412 376,125 343,957 32,168
8/26/97 CHF 88,335 62,423 63,218 (795)
8/26/97-10/14/97 DEM 4,413,501 2,704,813 2,607,501 97,312
9/30/97 ESP 13,746,758 95,400 95,375 25
10/14/97 FRF 6,200,000 1,180,728 1,085,825 94,903
9/30/97 GBP 39,621 64,860 64,782 78
6/30/97 ITL 305,660,812 180,124 180,646 (522)
10/14/97 JPY 239,000,000 2,143,210 2,096,030 47,180
6/30/97 SEK 520,009 74,073 67,198 6,875
----------- ----------- --------
$7,192,426 $6,909,409 $283,017
=========== =========== ========
Purchases 9/30/97 CAD 433,166 $ 314,490 $ 316,682 $ 2,192
8/26/97 CHF 935,115 640,200 669,230 29,030
9/30/97 DEM 161,159 95,400 95,311 (89)
6/30/97-8/26/97 ESP 38,703,652 270,694 268,111 (2,583)
6/30/97-8/26/97 JPY 217,948,304 1,797,772 1,884,856 87,084
8/26/97 NLG 1,148,588 606,000 602,103 (3,897)
----------- ----------- --------
$3,724,556 $3,836,293 $111,737
=========== =========== ========
</TABLE>
At May 31, 1997, forward foreign currency exchange contract purchases and sales
under master netting arrangements and closed forward foreign currency exchange
contracts excluded above for the International Growth and Income Fund amounted
to a net receivable of $74,704. At May 31, 1997, the Fund had sufficient cash
and/or securities to cover any commitments under these contracts.
Forward Foreign Currency Exchange Contracts
International Growth Fund
<TABLE>
<CAPTION>
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Appreciation
================= =============================== ================= ============= ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 10/14/97 DEM 6,400,000 $ 4,114,618 $ 3,789,018 $325,600
10/14/97 FRF 20,500,000 3,904,018 3,590,227 313,791
10/14/97 JPY 1,617,000,000 14,500,292 14,181,090 319,202
------------ ------------ ---------
$22,518,928 $21,560,335 $958,593
============ ============ =========
Purchases 10/14/97 JPY 808,500,000 $ 6,959,329 $ 7,090,545 $131,216
============ ============ =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
41
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Trustees of MFS Series Trust X and Shareholders of MFS/Foreign &
Colonial International Funds:
We have audited the accompanying statements of assets and liabilities of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund, ("the Funds") including the schedules of portfolio investments, as
of May 31, 1997, and the related statements of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
the year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of May 31, 1997, by correspondence with the
custodian and brokers or other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund at May 31, 1997, the results of their operations for the year then
ended, and the changes in their net assets and financial highlights for the
year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 1, 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.
42
<PAGE>
It's Easy to Contact Us
[PHONE GRAPHIC] MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Investment Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[QUESTION MARK GRAPHIC] MFS Personal Service
Account Service/Literature:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
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from 9 a.m. to 5 p.m. Eastern time.
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Call 1-800-637-1255 any business day
from 9 a.m. to 5 p.m. Eastern time.
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Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[LETTER GRAPHIC] MFS Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
World Wide Web:
www.mfs.com
43
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
Stock
- ----------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Value Fund
Stock and Bond
- ----------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- ----------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- ----------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- ----------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International
Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland,
Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia, West
Virginia
Money Market
- ----------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
44
<PAGE>
MFS/Foreign & Colonial International Funds
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer,
Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University
Graduate School of Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director
and Secretary, Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management
Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
Arnab Kumar Banerji
Jeff Chowdhry
Richard O. Hawkins*
June Scott
Ian K. Wright
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Ernst & Young LLP
Investor Information
For MFS stock and bond market outlooks, call toll free:
1-800-637-4458 anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any
business day from 8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free:
1-800-637-6576 any business day from 9 a.m. to 5 p.m.
Eastern time. (To use this service, your phone must be
equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll
free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
World Wide Web
www.mfs.com
[DALBAR GRAPHIC]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The
firm achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey.
A total of 110 firms responded, offering input on the quality of service they
received from 29 mutual fund companies nationwide. The survey contained
questions about service quality in 15 categories, including "knowledge of
phone service contracts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
45
<PAGE>
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[DALBAR GRAPHIC]
500 Boylston Street
Boston, MA 02116-3741
[MFS LOGO]
Bulk Rate
U.S. Postage
Paid
MFS
(C) 1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
85/285/385/885
86/286/386/886
87/287/387/887
MFC-2 7/97 48M
<PAGE> 80
MFS INTERNATIONAL GROWTH AND INCOME FUND
SUPPLEMENT TO THE OCTOBER 1, 1997 PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION (AS REVISED NOVEMBER 1, 1997)
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED OCTOBER 1,
1997 (AS REVISED NOVEMBER 1, 1997), AND CONTAINS A DESCRIPTION OF CLASS I
SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I SHARES
<S> <C>
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 (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)(1):
Management Fees.............................................................. 0.975%
Rule 12b-1 Fees.............................................................. None
Other Expenses (2)(3)........................................................ 0.91%
----
Total Operating Expenses .................................................... 1.89%
</TABLE>
- ----------------------
(1) All expenses, other than "Management Fees," are rounded to two decimal
places.
(2) "Other Expenses" is based on Class A expenses incurred during the period
ended May 31, 1997.
(3) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, 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:
<TABLE>
<CAPTION>
PERIOD CLASS I SHARES
------ --------------
<S> <C>
1 year................................... $19
3 years.................................. 59
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are Ernst
& Young LLP.
-1-
<PAGE> 81
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997*
-------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.71
-------
Income from investment operations# -
Net investment income $ 0.16
Net realized and unrealized gain
on investments and foreign currency transactions 0.45
-------
Total from investment operations $ 0.61
-------
Less distributions declared to shareholders -
From net investment income $ --
From net realized gain (loss) on investments --
-------
Total distributions declared to shareholders $ --
-------
Net asset value - end of period 16.32
-------
Total return 3.88%####
Ratios (to average net assets)/Supplemental data:
Expenses## 1.89%###
Net investment income 2.33%###
Portfolio turnover 0.89%
Average commission rate $0.0197
Net assets at end of period (000 omitted) $ --
</TABLE>
- --------------------------
* For the period from the commencement of offering of Class I shares,
January 2, 1997 to May 31, 1997.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### Annualized.
#### Not annualized.
ELIGIBLE PURCHASERS
Class I shares of the Fund are available for purchase only by the following
purchasers ("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed
by MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
-2-
<PAGE> 82
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS OCTOBER 1, 1997
(AS REVISED NOVEMBER 1, 1997)
-3-
<PAGE> 83
<TABLE>
<S> <C>
PROSPECTUS
October 1, 1997 (as revised November 1, 1997)
MFS(R)INTERNATIONAL Class A Shares of Beneficial Interest
GROWTH AND INCOME FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary........................................................................... 2
2. Condensed Financial Information........................................................... 4
3. The Fund.................................................................................. 5
4. Investment Objective and Policies......................................................... 5
5. Certain Securities and Investment Techniques.............................................. 6
6. Risk Factors.............................................................................. 13
7. Management of the Fund.................................................................... 16
8. Information Concerning Shares of the Fund................................................. 17
Purchases............................................................................ 17
Exchanges............................................................................ 23
Redemptions and Repurchases.......................................................... 24
Distribution Plan.................................................................... 26
Distributions........................................................................ 28
Tax Status........................................................................... 28
Net Asset Value...................................................................... 29
Description of Shares, Voting Rights and Liabilities................................. 29
Performance Information.............................................................. 29
Expenses............................................................................. 30
9. Shareholder Services...................................................................... 30
Appendix A -- Waivers of Sales Charges.................................................... A-1
Appendix B -- Description of Bond Ratings................................................. B-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
MFS INTERNATIONAL GROWTH AND INCOME FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
MFS INTERNATIONAL GROWTH AND INCOME FUND (the "Fund") -- The investment
objective of the International Growth and Income Fund is capital appreciation
and current income. The Fund seeks to achieve its investment objective by
investing, under normal market conditions, at least 65% of its total assets in
equity securities of foreign "blue chip" companies and foreign growth companies.
No assurance can be given that the investment objective of the International
Growth and Income Fund (hereinafter referred to as the "Fund") will be achieved.
The Fund is a diversified series of MFS Series Trust X (the "Trust"), an
open-end management investment company. The minimum initial investment generally
is $1,000 per account (see "Purchases"). THE FUND IS INTENDED FOR INVESTORS WHO
UNDERSTAND AND ARE WILLING TO ACCEPT THE RISKS ENTAILED IN SEEKING CAPITAL
APPRECIATION AND IN INVESTING IN FOREIGN SECURITIES. 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 and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated October 1, 1997 (as revised
November 1, 1997), as amended or supplemented from time to time (the "SAI"),
which contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 32 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 the Prospectus and the SAI, and other information
regarding the Fund. This Prospectus is available on the Adviser's Internet World
Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 84
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price).... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)........................... See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS)(2):
<TABLE>
<S> <C> <C> <C>
Management Fees..................................... 0.975% 0.975% 0.975%
Rule 12b-1 Fees(3).................................. 0.50% 1.00% (5) 1.00% (5)
Other Expenses(4)................................... 0.91% 0.91% 0.66%
---- ---- ----
Total Operating Expenses............................ 2.89% 2.89% 2.64%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) All expenses, other than "Management Fees," are rounded to two decimal
places.
(3) The Fund has adopted a Distribution Plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.50% per annum of the average daily net assets attributable to the Fund's
Class A shares. Distribution expenses paid under the Plan with respect to
Class A shares, 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.
(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."
(5) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Fund's Class B and Class C
shares, respectively, under the Distribution Plan (see "Distribution Plan"
below). Distribution expenses paid under the Plan with respect to Class B
and Class C shares, together with any CDSC payable upon redemption of Class
B and Class C shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge.
2
<PAGE> 85
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year............................... $ 71 $ 69 $ 29 $ 39 $ 19
3 years.............................. 119 119 89 $ 89 $ 59
5 years.............................. 169 172 152 152 102
10 years.............................. 307 309(2) 309(2) 321 221
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately 8 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 --
"Management of the Fund"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE> 86
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception 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
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Period Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996* May 31, 1997**
------------ ------------- ------------ ------------- --------------
Class A Class B Class C
---------------------------- ---------------------------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period... $ 15.98 $ 15.00 $ 15.94 $ 15.00 $ 16.02
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income.................. $ 0.11 $ 0.11 $ 0.03 $ 0.05 $ 0.12
Net realized and unrealized gain on
investments and foreign currency
transactions......................... 0.35 0.90 0.34 0.90 0.21
------- ------- ------- ------- -------
Total from investment operations... $ 0.46 $ 1.01 $ 0.37 $ 0.95 $ 0.33
------- ------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income............. $ (0.08) $ (0.03) $ -- $ (0.01) $ (0.12)
From net realized gain on investments
and foreign currency transactions.... (0.04) -- (0.04) -- (0.04)
------- ------- ------- ------- -------
Total distributions declared to
shareholders..................... $ (0.12) $ (0.03) $ (0.04) $ (0.01) $ (0.16)
------- ------- ------- ------- -------
Net asset value -- end of period......... $ 16.32 $ 15.98 $ 16.27 $ 15.94 $ 16.19
------- ------- ------- ------- -------
Total return++........................... 2.88% 6.71%++ 2.33% 6.37%++ 2.09%++
RATIOS (TO AVERAGE DAILY NET ASSETS)/
SUPPLEMENTAL DATA:
Expenses##............................... 2.39% 2.52%+ 2.94% 3.11%+ 2.64%+
Net investment income.................... 0.72% 1.04%+ 0.18% 0.49%+ 0.80%+
PORTFOLIO TURNOVER......................... 89% 29% 89% 29% 89%
AVERAGE COMMISSION RATE.................... $0.0197 $0.0291 $0.0197 $0.0291 $0.0197
NET ASSETS AT END OF PERIOD (000
OMITTED)................................. $13,425 $11,950 $15,749 $13,641 $ 235
</TABLE>
- ---------------
* For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
** For the period from the commencement of offering of Class C shares, July 1,
1996, to May 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.
++ Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
4
<PAGE> 87
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. This Prospectus relates to the International Growth and Income
Fund. Shares of the other series of the Trust, MFS International Growth Fund,
MFS Emerging Markets Equity Fund and MFS Government Mortgage Fund, are offered
and sold pursuant to a separate prospectus and statement of additional
information. Shares of the Fund are sold continuously to the public and the Fund
then uses the proceeds to buy securities for its portfolio. Three classes of
shares of the Fund currently are offered to the general public. Class A shares
are offered at net asset value plus an initial sales charge up to a maximum of
4.75% of the offering price (or a CDSC of 1.00% upon redemption during the first
year in the case of certain purchases of $1 million or more and certain
purchases by retirement plans) and are subject to an annual distribution fee and
service fee up to a maximum of 0.50% per annum. Class B shares are offered at
net asset value without an initial sales charge but are subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum; Class B shares will convert to Class A shares approximately eight years
after purchase. Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class C shares do not convert to any other class of shares of a Fund. 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 operations of each Fund. The
Adviser manages each portfolio from day to day in accordance with the Fund's
investment objective and policies. A majority of the Trustees are not affiliated
with the Adviser. The Trust also offers to buy back (redeem) shares of the Fund
from shareholders at any time at net asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund has an investment objective which it pursues through separate
investment policies, as described below. The objectives and policies of the Fund
can be expected to affect the market and financial risk to which the Fund is
subject and the performance of the Fund. The investment objective and policies
of the Fund may, unless otherwise specifically stated, be changed by the
Trustees of the Trust without a vote of the shareholders. A change in the Fund's
objective may result in the Fund having an investment objective different from
the objective which the shareholder considered appropriate at the time of
investment in the Fund. Any investment involves risk and there is no assurance
that the investment objective of the Fund will be achieved.
The Fund's investment objective is to seek capital appreciation and current
income. The Fund seeks to achieve its objective by investing primarily in equity
securities of issuers whose principal activities are outside the U.S.
The Fund will invest, under normal market conditions, at least 65% of its total
assets (and generally expects to invest a substantial portion of its total
assets) in equity securities of foreign "blue chip" companies and foreign growth
companies. See "Certain Securities and Investment Techniques -- Foreign Growth
Securities" below. The Fund considers a security to be "blue chip" if the total
equity market capitalization of the issuer is at least U.S. $5 billion. It is
expected that the Fund's equity securities will include income producing
securities.
The Fund may invest up to 10% of its net assets in securities of issuers whose
principal activities are located in emerging market countries. See "Certain
Securities and Investment Techniques -- Emerging Market Securities" below.
The Fund does not intend to emphasize any particular country or region in making
its investments, but under normal market
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conditions, the Fund will be invested in at least three countries (outside the
U.S.) and will not invest more than 50% of its net assets in issuers whose
principal activities are located in a single country. See "Risk Factors --
Investments in One or a Limited Number of Countries" below. Currently, the Fund
does not expect to invest more than 25% of its net assets in issuers whose
principal activities are located in a single country, except that the Fund
generally expects to invest between 15% to 45% of its assets in issuers whose
principal activities are in Japan. The Fund will seek to reduce risk by
investing its assets in a number of markets and issuers, performing credit
analyses of potential investments and monitoring current developments and trends
in both the international economy and financial markets.
The Adviser determines where an issuer's principal activities are located by
considering such factors as its country of organization, the principal trading
market for its securities and the source of its revenues and location of its
assets. The issuer's principal activities generally are deemed to be located in
a particular country if: (a) the security is issued or guaranteed by the
government of that country or any of its agencies, authorities or
instrumentalities; (b) the issuer is organized under the laws of, and maintains
a principal office in, that country; (c) the issuer has its principal securities
trading market in that country; (d) the issuer derives 50% or more of its total
revenues from goods sold or services performed in that country; or (e) the
issuer has 50% or more of its assets in that country.
For temporary defensive reasons, such as during times of international political
or economic uncertainty or turmoil, most or all of the Fund's investments may be
in cash (U.S. dollars, foreign currencies or multinational currency units)
and/or securities that are denominated in U.S. dollars or whose issuers are
domiciled in the U.S. The Fund is not restricted as to the portions of its
assets which may be invested in securities denominated in a particular currency
and up to 100% of the Fund's net assets may be invested in securities
denominated in foreign currencies and multinational currency units.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, THE FUND MAY
ENGAGE IN THE FOLLOWING SECURITIES TRANSACTIONS AND INVESTMENT TECHNIQUES, MANY
OF WHICH ARE DESCRIBED MORE FULLY IN THE SAI. SEE "INVESTMENT POLICIES AND
RESTRICTIONS" IN THE SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
FOREIGN GROWTH SECURITIES: The Fund may invest in securities of foreign growth
companies, including established foreign companies, whose rates of earnings
growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Risk Factors" below. It is anticipated that these
companies will primarily be in nations with more developed securities markets,
such as Japan, Australia, Canada, New Zealand and most Western European
countries, including Great Britain.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser and the Sub-Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low- to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser and the Sub-Adviser determine whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and location of its assets. The
issuer's principal activities generally are deemed to be located in a particular
country if: (a) the security is issued or guaranteed by the government of that
country or any of its
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agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country. See "Risk Factors -- Emerging Markets" below.
FIXED INCOME SECURITIES: Fixed income securities in which the Fund may invest
include all types of long- or short-term debt obligations, such as bonds, notes,
bills, debentures, loans, loan assignments and commercial paper. The Fund may
invest in emerging market fixed income securities, which, in addition to the
securities identified above, may take the form of interests issued by entities
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by emerging market country issuers. Fixed
income securities in which the Fund may invest include securities in the lower
rating categories of recognized rating agencies and comparable unrated
securities. See "Risk Factors" below. The Fund will not invest more than 25% of
its net assets in fixed income securities rated Ba or lower by Moody's or BB or
lower by S&P or Fitch and comparable unrated securities. See "Risk Factors --
Lower Rated Fixed Income Securities" below. However, because most foreign fixed
income securities are not rated, the Fund will invest in foreign fixed income
securities primarily based on the Adviser's or the Sub-Adviser's credit analysis
without relying on published ratings.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund may invest in other
investment companies to the extent permitted by the 1940 Act and applicable
state securities laws (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase thinly traded securities of emerging market companies, or (iii) when
the Adviser or the Sub-Adviser believes such investments may be more
advantageous to the Fund than a direct market purchase of securities. If the
Fund invests in such investment companies, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser) but also will indirectly bear similar
expenses of the underlying investment companies.
PRIVATIZATIONS: The governments in some countries, including emerging market
countries, have been engaged in programs of selling part or all of their stakes
in government owned or controlled enterprises ("privatizations"). The Fund may
invest in privatizations. In certain countries, the ability of foreign entities
to participate in privatizations may be limited by local law and the terms on
which the foreign entities may be permitted to participate may be less
advantageous than those afforded local investors.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depositary
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of the
Fund in ADRs, GDRs and other types of depositary receipts are deemed to be
investments in the underlying securities.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, the Philippines, Peru, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as
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the bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
bonds may be viewed as speculative.
STRUCTURED SECURITIES: The Fund may invest a portion of its assets in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with, or purchase by, an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which the Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. The Fund is permitted to invest in a class of Structured
Securities that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated Structured Securities typically have higher
yields and present greater risks than unsubordinated Structured Securities.
Structured Securities are typically sold in private placement transactions, and
there currently is no active trading market for Structured Securities.
REPURCHASE AGREEMENTS: 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, a Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk. Foreign repurchase agreements may be less well secured than U.S.
repurchase agreements, and may be denominated in foreign currencies. They may
also involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in U.S.
markets.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors 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 under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest
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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.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate, government or
other borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The Fund may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loans acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
For a further discussion of loans and the risks related to transactions therein,
see the SAI.
RESTRICTED SECURITIES: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is illiquid and thus subject to the Fund's
limitations on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring liquidity of restricted
securities. The Board, however, 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's portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's 15% limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the Fund might
not be able to sell these securities when the Adviser or Sub-Adviser wishes to
do so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. Such loans
will usually be made only to member banks of the Federal Reserve System and
member firms (and subsidiaries thereof) of the New York Stock Exchange, and
would be required to be secured continuously by collateral in cash, irrevocable
letters of credit or U.S. Government securities maintained on a current basis at
an amount at least equal to the market value of the securities loaned. As with
other extensions of credit there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to entities deemed by the Adviser or the
Sub-Adviser to be of good standing, and when, in the judgment of the Adviser or
the Sub-Adviser, the consideration which can be earned currently from securities
loans of this type justifies the attendant risk. If the Adviser or the
Sub-Adviser determines to make securities loans, it is intended that the value
of the securities loaned would not exceed 30% of the value of the Fund's total
assets.
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WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to 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 to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 10% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. While awaiting delivery of securities purchased
on such basis, the Fund will segregate liquid assets sufficient to cover its
commitments. Although the Fund does not intend to make such purchases for
speculative purposes, purchases of securities on such bases may involve more
risk than other types of purchases. For additional information concerning these
securities, see the SAI.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options on securities that are
traded on foreign and U.S. securities exchanges and over the counter. The Fund
will write such Options for the purpose of increasing its return and/or
protecting the value of its portfolio. The Fund may also write combinations of
put and call Options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk. The Fund may purchase put or call Options in anticipation of declines in
the value of portfolio securities or increases in the value of securities to be
acquired. However, the writing of Options constitute only a partial hedge, up to
the amount of the premium, less any transaction costs.
The Fund may purchase and sell options that are traded on foreign and U.S.
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. 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, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options the yield curve option is based on the difference between the yields
of designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the SAI.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put Options
and purchase call and put Options on foreign and domestic stock indices
("Options on Stock Indices"). The Fund may write such options for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In addition, if the value
of an underlying index moves adversely to the Fund's option position, the option
may be exercised, and the Fund will experience a loss which may only be
partially offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
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FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of contracts based on indices of securities as such
instruments become available for trading or fixed income securities or foreign
currencies ("Futures Contracts"). Such transactions will be entered into for
hedging purposes, in order to protect the Fund's current or intended investments
from the effects of changes in interest or exchange rates, or for non-hedging
purposes to the extent permitted by applicable law. For example, in the event
that an anticipated decrease in the value of portfolio securities occurs as a
result of a decline in the dollar value of foreign currencies in which portfolio
securities are denominated or a general increase in interest rates, the adverse
effects of such changes may be offset, in whole or in part, by gains on Futures
Contracts sold by the Fund. Conversely, the adverse effects of an increase in
the cost of portfolio securities to be acquired, occurring as a result of a rise
in the dollar value of securities denominated in foreign currencies or a decline
in interest rates, may be offset, in whole or in part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the Fund
believes that use of such contracts will benefit the Fund, if its investment
judgment about the general direction of interest or exchange rates is incorrect,
the Fund's overall performance may be poorer than if it had not entered into any
such contract and the Fund may realize a loss. Transactions entered into for
non-hedging purposes involve greater risk including the risk of losses which are
not offset by gains on other portfolio assets. The Fund will not enter into any
Futures Contract if immediately thereafter the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on futures
contracts ("Options on Futures Contracts") in order to protect against declines
in the values of portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, however, does
not present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, the Fund may suffer a loss on the transaction. Options
on Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted under applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the Option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by the Fund will be traded on foreign and
U.S. exchanges or over-the-counter.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date at a price set at the time of the contract ("Forward Contracts").
The Fund may enter into Forward Contracts for hedging purposes as well as for
the non-hedging purpose of increasing the Fund's current income. By entering
into transactions in Forward Contracts, however, the Fund may be required to
forego the benefits of advantageous changes in exchange rates and, in the case
of Forward Contracts entered into for non-hedging purposes, the Fund may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative. Forward Contracts are traded over-the-counter, and
not on organized commodities or securities exchanges. As a result, such
contracts operate in a manner distinct from exchange-traded instruments, and
their use involves certain risks beyond those associated
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with transactions in Futures Contracts or options traded on exchanges. The Fund
may also enter into a Forward Contract on one currency in order to hedge against
risk of loss arising from fluctuations in the value of a second currency
(referred to as a "cross hedge") if, in the judgment of the Adviser or the
Sub-Adviser, a reasonable degree of correlation can be expected between
movements in the values of the two currencies. The Fund has established
procedures which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by a Fund with another party of cash payments
based upon different interest rate indices, currencies and other prices or
rates, such as the value of mortgage prepayment rates. For example, in the
typical interest rate swap, the Fund might exchange a sequence of cash payments
based on a floating rate index for cash payments based on a fixed rate. Payments
made by both parties to a swap transaction are based on a notional principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for more information on, and the risks involved in,
these activities.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser and the Sub-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.
While it is not generally the Fund's policy to invest or trade for short-term
profits, the Fund may dispose of a portfolio security whenever the Adviser or
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate.
Transaction costs incurred by the Fund and realized capital gains and losses of
the Fund may be greater than that of a fund with a lesser portfolio turnover
rate.
12
<PAGE> 95
6. RISK FACTORS
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. The Fund may invest up
to 100% of its assets in foreign securities which are not traded on a U.S.
exchange. Special considerations may also include more limited information about
foreign issuers, higher brokerage and custody costs, different or less stringent
accounting standards and thinner trading markets. Foreign securities markets may
also be less liquid, more volatile and less subject to government supervision
than in the U.S. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods.
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities in
emerging markets may be less liquid and more volatile in price than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
repatriation of assets, and may have less protection of property rights than
more developed countries. The economies of countries with emerging markets may
be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by a delay in obtaining a grant of, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund. See the SAI for a further discussion of
emerging markets securities as well as the associated risks.
ALLOCATION AMONG EMERGING MARKETS: The Fund may allocate all or a portion of its
investments in emerging market securities among the emerging markets of Latin
America, Asia, Africa, the Middle East and the developing countries of Europe,
primarily in Eastern Europe. The Fund will allocate its investments among these
emerging markets in accordance with the Adviser's determination as to the
allocation most appropriate with respect to the Fund's investment objective and
policies. The Fund may
13
<PAGE> 96
invest its assets allocated to investment in emerging markets without limitation
in any particular region, and, in accordance with the Adviser's investment
discretion, at times may invest all of its assets allocated to investment in
emerging markets in securities of emerging market issuers located in a single
region (e.g., Latin America). To the extent that the Fund's investments are
concentrated in one or a few emerging market regions, the Fund's investment
performance correspondingly will be more dependent upon the economic, political
and social conditions and changes in those regions. The ability of the Fund to
allocate its investments among emerging market regions without restriction may
have the effect of increasing the volatility of the Fund, as compared to a fund
which limits such allocations.
INVESTMENTS IN ONE OR A LIMITED NUMBER OF COUNTRIES: The Fund will seek to
reduce risk by investing its assets in a number of markets and issuers. However,
the Fund may invest up to 50% of its net assets in issuers located in a single
country. To the extent that the Fund invests a significant portion of its assets
in a single or limited number of countries, the Fund's investment performance
correspondingly will be more dependent upon the economic, political and social
conditions and changes in that country or countries, and the risks associated
with investments in such country or countries will be particularly significant.
The ability of the Fund to focus its investments in one or a limited number of
countries may have the effect of increasing the volatility of the Fund.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
companies, including established companies. Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk than would established
growth stocks.
FOREIGN CURRENCIES: Because the Fund may invest up to 100% of its asset in
securities denominated in currencies other than the U.S. dollar, and because the
Fund may hold foreign currencies, the value of the Fund's investments, and the
value of dividends and interest earned by the Fund, may be significantly
affected by changes in currency exchange rates. Some foreign currency values may
be volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Fund. Although the Adviser and Sub-Adviser may attempt to manage
currency exchange rate risks, there is no assurance that the Adviser and
Sub-Adviser will do so at an appropriate time or that the Adviser and
Sub-Adviser will be able to predict exchange rates accurately. For example, if
the Adviser and Sub-Adviser hedge the Fund's exposure to a foreign currency, and
that currency's value rises, the Fund will lose the opportunity to participate
in the currency's appreciation. The Fund may hold foreign currency received in
connection with investments in foreign securities, and enter into Forward
Contracts, Futures Contracts and Options on Foreign Currencies when, in the
judgment of the Adviser or Sub-Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rates. While the holding of foreign currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange rate,
it also exposes the Fund to risk of loss if such rates move in a direction
adverse to the Fund's position. Such losses could also adversely affect the
Fund's hedging strategies. See the SAI for further discussion of the holding of
foreign currencies as well as the associated risks.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund is subject
to no restrictions on the maturities of the fixed income securities it holds.
The Fund's investments in fixed income securities with longer terms to maturity
are subject to greater volatility than the Fund's shorter-term obligations.
LOWER RATED FIXED INCOME SECURITIES: Fixed income securities in which the Fund
may invest may be rated Baa by Moody's or BBB by S&P or Fitch (and comparable
unrated securities). For a description of these and other rating categories, see
14
<PAGE> 97
Appendix B. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch (and comparable unrated securities). No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater yield than investments in
higher rated securities, will involve greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. These lower rated high yielding fixed income securities
generally tend to be affected by economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's and the Sub-Adviser's judgment
may at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
While the Adviser and the Sub-Adviser may refer to ratings issued by established
credit rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such ratings
with the Adviser's and the Sub-Adviser's own independent and ongoing review of
credit quality. The Fund's achievement of its investment objective may be more
dependent on the Adviser's and the Sub-Adviser's own credit analysis than in the
case of an investment company primarily investing in higher quality fixed income
securities.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of shares of the
Fund will vary as the aggregate value of the portfolio securities of the Fund
increases or decreases. However, changes in the value of securities subsequent
to their acquisition will not affect cash or yield to maturity to the Fund.
TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the
Fund may enter into transactions in Options, Options on Stock Indices, Forward
Contracts, Futures Contracts, Options on Futures Contracts and Options on
Foreign Currencies for hedging purposes, such transactions nevertheless involve
certain risks. For example, a lack of correlation between the instrument
underlying an option or futures contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in Options, Options on Stock Indices, Forward Contracts, Futures
Contracts and Options on Futures Contracts for other than hedging purposes, to
the extent permitted by applicable law, which involves greater risk. In
particular, such transactions may result in losses for 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
15
<PAGE> 98
description of the nature and trading mechanics of Options, Options on Stock
Indices, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies, and includes a discussion of the risks related to
transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Options and Futures Contracts traded by a Fund will include U.S. Government
securities as well as foreign securities.
------------------------
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated. See "Investment Policies and
Restrictions" in the SAI.
Except with respect to the Fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1995 (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 an annual management fee computed and paid
monthly, in an amount equal to 0.975% of the first $500 million of the average
daily net assets of the Fund and 0.925% thereafter.
For the fiscal year ended May 31, 1997, MFS received a management fee under the
Advisory Agreement of $277,086 (equivalent on an annualized basis to 0.975% of
the Fund's average daily net assets).
This management fee is greater than the fees paid by most funds, but is
comparable to fees paid by funds having similar investment objectives and
policies. MFS also serves as investment adviser to each of the other funds in
the MFS Family of Funds (the "MFS Funds"), and to MFS(R) Municipal Income Trust,
MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Union Standard Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $67.1
billion on behalf of approximately 2.6 million investor accounts as of September
30, 1997. As of such date, the MFS organization managed approximately $43.2
billion of assets in equity securities, approximately $20.4 billion of assets
invested in fixed income funds and fixed income portfolios and approximately
$4.4 billion of assets in foreign securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), which is 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, Donald A. Stewart, Arnold D. Scott and John D. McNeil. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and Stewart are the
Chairman and President, respectively, of Sun Life. Sun Life, a mutual life
insurance
16
<PAGE> 99
company, is one of the largest international life insurance companies and has
been operating in the U.S. since 1895, establishing a headquarters office here
in 1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman of MFS, is also the Chairman and President of the
Trust. W. Thomas London, Stephen E. Cavan, James O. Yost, Ellen M. Moynihan,
Mark E. Bradley and James R. Bordewick, Jr., all of whom are officers of MFS,
are officers of the Trust.
The Advisory Agreement permits the Adviser from time to time to engage one or
more sub-advisers to assist in the performance of its services. Pursuant to the
Advisory Agreement for the Fund, through and including the period ended
September 8, 1997 the Adviser engaged Foreign & Colonial Management Ltd., a
company incorporated under the laws of England and Wales ("FCM"), located at
Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, as sub-adviser
to render advisory services to the Fund with respect to the Fund's investments
in emerging markets securities.
Pursuant to the Sub-Advisory Agreement for the Fund through and including the
period ended September 8, 1997, FCM engaged Foreign & Colonial Emerging Markets
Limited, a company incorporated under the laws of England and Wales ("FCEM"),
located at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, as
sub-adviser to render advisory services to the Fund. On September 8, 1997, the
Sub-Advisory Agreements pursuant to which FCM and FCEM provided their services
terminated.
For the fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser a fee
under the Sub-Advisory Agreement of $165,930 in connection with its services for
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.
PORTFOLIO MANAGERS -- Frederick J. Simmons, a Senior Vice President of MFS, has
been a portfolio manager of the Fund since September, 1997. Mr. Simmons has been
employed by MFS as a portfolio manager since 1988.
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 May 31, 1997, MFS received fees under the Administrative
Services Agreement of $1,100 (equivalent on an annualized basis to 0.0039% of
the Fund's average daily net assets).
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
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
invest-
17
<PAGE> 100
ment adviser, financial planner and any other financial institutions having a
selling agreement or other similar agreement with MFD. Dealers may also charge
their customers fees relating to investments in the Fund.
This prospectus offers three classes of shares to the general public (Class A,
Class B and Class C shares) which bear sales charges and distribution fees in
different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares of the Fund are
offered at net asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF: DEALER
------------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED 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**
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages above
(see the SAI).
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the 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
18
<PAGE> 101
shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in its
sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR CLASSES
OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject to
ERISA if: (a) the plan establishes an account with the Shareholder Servicing
Agent on or after July 1, 1997; (b) such plan's records are maintained on a
pooled basis by the Shareholder Servicing Agent; and (c) the sponsoring
organization demonstrates to the satisfaction of MFD that, at the time of
purchase, the employer has at least 200 eligible employees and the plan has
aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------- --------------------------
<S> <C>
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
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(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
19
<PAGE> 102
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 or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CLASS B SHARES: Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC upon redemption as
follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
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<PAGE> 103
CONVERSION OF CLASS B SHARES. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the 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.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of each class of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their
21
<PAGE> 104
Account Application and designate thereon a bank and account number from which
purchases will be made. If a telephone purchase request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange (generally, 4:00 p.m., Eastern time), the purchase will
occur at the closing net asset value of the shares purchased on that day. The
Shareholder Servicing Agent may be liable for any losses resulting from
unauthorized telephone transactions if it does not follow reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
RIGHT TO REJECT PURCHASE ORDERS / MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, 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. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B and/or Class C shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of 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
22
<PAGE> 105
effective shareholder services in respect of shareholders who invested in a Fund
through a national bank. It is not expected that shareholders would suffer any
adverse financial consequence as a result of these occurrences. In addition,
state securities laws on this issue may differ from the interpretation of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from 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 in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange
23
<PAGE> 106
will occur on that day if all the requirements set forth above have been
complied with at that time and subject to the Fund's right to reject purchase
orders. No more than five exchanges may be made in any one Exchange Request by
telephone. Additional information concerning this exchange privilege and
prospectuses for any of the other MFS Funds may be obtained from dealers or the
Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be responsible for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
24
<PAGE> 107
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares of any MFS Fund purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all transactions
made during a calendar month, regardless of when during the month they have
occurred, will age one year at the close of business on the last day of such
month in the following calendar year and each subsequent year. For Class B
shares of any MFS Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
each class of 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 each Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
25
<PAGE> 108
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
Any distribution in-kind of portfolio securities may include foreign securities,
including securities of issuers in emerging markets. Such securities may be
subject to risks not typically associated with the risks of U.S. securities. See
"Risk Factors -- Foreign Securities" and " -- Emerging Markets."
INVOLUNTARY REDEMPTIONS / SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares of the Fund pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plan"), after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of Shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A, Class B or Class C
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expenses incurred
by MFD under its
26
<PAGE> 109
distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of Shares covered by the Distribution Plan.
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 of the Fund are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.25% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund (e.g., MFD pays commissions to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). Distribution fee payments under the Distribution Plan
may be used by MFD to pay securities dealers a distribution fee in an amount
equal on an annual basis to 0.25% per annum of the Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors for whom that securities
dealer is the holder or dealer of record. See "Purchases -- Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Distribution Plan does not exceed 0.50% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES. Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
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CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's distribution/service
fee for its current fiscal year is equal to 0.50%, 1.00% and 1.00% per annum of
the average daily net assets attributable to the Fund's Class A shares, Class B
shares and Class C shares, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income as
dividends on an annual basis. In determining the net investment income available
for distributions, 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 same class with respect to which a distribution is made. See "Tax Status"
and "Shareholder Services -- Distribution Options" below. Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the 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 federal income or excise taxes, although
the Fund's foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. Shortly after
the end of each calendar year, each shareholder will be sent a statement setting
forth the federal income tax status of all dividends and distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion, if any, representing a return of capital
(which is free of current taxes but results in a basis reduction) and the
amount, if any, of federal income tax withheld. In certain circumstances, the
Fund may also elect to "pass through" to shareholders foreign income taxes paid
by the Fund. Under those circumstances, the Fund will notify shareholders of
their pro rata portion of the foreign income taxes paid by the Fund;
shareholders may be eligible for foreign tax credits or deductions with respect
to those taxes, but will be required to treat the amount of the taxes as an
amount distributed to them and thus includible in their gross income for federal
income tax purposes.
The Fund's distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on 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
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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
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without par
value). Each Fund also has a class of shares which it offers exclusively to
certain institutional investors entitled Class I Shares. The Trust has reserved
the right to create and issue additional classes and series of shares, in which
case each class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series are entitled to vote separately to approve investment advisory agreements
or changes in investment restrictions, but shares of all series vote together in
the election of Trustees and selection of accountants. Additionally, each class
of shares of a series will vote separately on any material increases in the fees
under the Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's Declaration of Trust provides that a
Trustee may be removed from office in certain instances. See "Description of
Shares, Voting Rights and Liabilities" in the SAI.
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation, and Wiesenberger Investment Companies Service. The Fund may also
provide its yield and current distribution rate. Total rate of return quotations
will reflect the average annual percentage change over stated periods in the
value of an investment in a class of the Fund made at the maximum public
offering price of the shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher.
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<PAGE> 112
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public. See the SAI for further information on the
calculation of total rate of return for share classes initially offered for sale
to the public on different dates.
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.
Yield calculations for Class B and Class C shares assume no CDSC is paid. The
current distribution rate for each class is generally based upon the total
amount of dividends per share paid by the Fund to shareholders of that class
during the past 12 months and is computed by dividing the amount of such
dividends by the maximum public offering price of that class at the end of such
period. Current distribution rate calculations for Class B and Class C shares
assume no CDSC is paid. The current distribution rate differs from the yield
calculation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing,
short-term capital gains, and return of invested capital, and is calculated over
a different period of time.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as stated and current distribution rate reflects only the rate of
distributions paid by the International Growth and Income Fund over a stated
period of time. 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 total rate of
return, yield and current distribution rate see the SAI. In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time make a list of all or a portion of its holdings available to
investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Trust'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 a Fund and the preparation, printing
and mailing of prospectuses are borne by the Fund except that the Distribution
Agreement with MFD requires MFD to pay for prospectuses that are to be used for
sales purposes. Expenses of the Trust which are not attributable to a specific
series of the Trust are allocated among the series in a manner believed by
management of the Trust to be fair and equitable.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
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DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares;
this option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of 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 of the classes of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and not subject to any CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and not subject to any CDSC) in
shares of the same class of another MFS Fund, if shares of such MFS Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments, as designated on the account application, and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be
at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP will not
be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
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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 participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated October 1, 1997 (as revised November 1, 1997), as amended
or supplemented from time to time, contains more detailed information about the
Fund, including information related to (i) the Fund's investment policies and
restrictions, including the purchase and sale of Options, Options on Stock
Indices, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies; (ii) the Trustees, officers, Investment Adviser
and Sub-Adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions; (vi)
the Distribution Plan; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS / LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND / CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of America ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and
Repurchases -- General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(A) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
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- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemption of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
- 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.
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2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- 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.
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<PAGE> 118
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(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
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules;
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 119
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
B-1
<PAGE> 120
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S & P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
B-2
<PAGE> 121
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS SERVICES, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA.' Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for potential
B-3
<PAGE> 122
downgrade, or "Evolving," where ratings may be lowered, FitchAlert is relatively
short-term, and should be resolved within 12 months.
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1 +'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics, which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
B-4
<PAGE> 123
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
B-5
<PAGE> 124
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund(1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund(2)
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity Fund
MFS(R) Value Fund
STOCK AND BOND
- --------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
BOND
- --------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- --------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund World
WORLD
- --------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/International Growth Fund(3)
MFS(R)/International Growth and Income Fund(4)
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 125
Investment Adviser [MFS LOGO]
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Distributor MFS(R) INTERNATIONAL
MFS Fund Distributors, Inc. GROWTH AND INCOME FUND
500 Boylston Street
Boston, MA 02116 Prospectus
(617) 954-5000
October 1, 1997
(As revised November 1, 1997)
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO]
MFS(R) INTERNATIONAL GROWTH AND INCOME FUND
500 Boylston Street
Boston, MA 02116
MGI-1-11/97/58M
<PAGE> 126
[MFS INVESTMENT MANAGEMENT LOGO]
<TABLE>
<S> <C>
STATEMENT OF
MFS(R)INTERNATIONAL GROWTH ADDITIONAL INFORMATION
AND INCOME FUND
October 1, 1997
(Members of the MFS Family of Funds(R)) (As revised November 1, 1997)
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions..................................................................................... 2
2. Investment Policies and Restrictions............................................................ 2
3. Management of the Fund.......................................................................... 15
Trustees........................................................................................ 15
Officers........................................................................................ 15
Trustee Compensation Table...................................................................... 17
Investment Adviser.............................................................................. 18
Administrator................................................................................... 18
FCM............................................................................................. 18
FCEM............................................................................................ 18
Custodian....................................................................................... 19
Shareholder Servicing Agent..................................................................... 19
Distributor..................................................................................... 19
4. Portfolio Transactions and Brokerage Commissions................................................ 20
5. Shareholder Services............................................................................ 21
Investment and Withdrawal Programs.............................................................. 21
Exchange Privilege.............................................................................. 24
Tax-Deferred Retirement Plans................................................................... 24
6. Tax Status...................................................................................... 25
7. Distribution Plan............................................................................... 26
8. Determination of Net Asset Value and Performance................................................ 27
9. Description of Shares, Voting Rights and Liabilities............................................ 30
10. Independent Auditors and Financial Statements................................................... 31
Appendix A -- Performance Information........................................................... A-1
</TABLE>
MFS(R) INTERNATIONAL GROWTH AND INCOME FUND
A series of MFS Series Trust X
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
October 1, 1997 (as revised November 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> 127
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS International Growth and Income Fund, a
diversified series of the Trust. The Fund was known
as MFS/Foreign & Colonial International Growth and
Income Fund prior to September 8, 1997
"MFS" or the -- Massachusetts Financial Services Company, a Delaware
"Adviser" corporation.
"Sub-Adviser" -- Foreign & Colonial Manage- ment Ltd., a company
incorporated under the laws of England and Wales
("FCM") and Foreign & Colonial Emerging Markets
Limited, a company incorporated under the laws of
England and Wales ("FCEM").
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Funds, dated October 1, 1997
(as revised November 1, 1997), as amended or
supplemented from time to time.
"Trust" -- MFS Series Trust X, a Massachusetts business Trust.
The Trust has changed its name several times during
the past five years. The Trust was previously known
as MFS Government Mortgage Fund (prior to June 2,
1995), MFS Government Income Plus Fund (prior to
March 1, 1993), MFS Government Income Plus Trust
(prior to August 3, 1992) and MFS Government
Securities Trust (after December 7, 1990).
</TABLE>
2. INVESTMENT POLICIES AND
RESTRICTIONS
INVESTMENT POLICIES: The investment policies of the Fund are described in the
Prospectus and below. The following discussion of the Fund's investment policies
and restrictions supplements and should be read in conjunction with the
information set forth in the "Investment Objective and Policies" section of the
Prospectus.
FOREIGN SECURITIES: The Fund may invest up to 100% of its assets in foreign
securities as discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described in the
Prospectus under the caption "Risk Factors" and as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or inter-
2
<PAGE> 128
est when due may result in the cancellation of such third parties' commitments
to lend funds to the governmental entity, which may further impair such debtor's
ability or willingness to service its debts in a timely manner. Consequently,
governmental entities may default on their sovereign debt. Holders of sovereign
debt (including the Fund) may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance of
payments, including export performance, and its access to international credits
and investments. An emerging market whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for any
period during which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Board of Trustees.
DEFAULT; LEGAL RECOURSE -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by the Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging market
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
The Fund's ability to enforce its rights against private issuers may be limited.
The ability to attach assets to enforce a judgment may be limited. Legal
recourse is therefore somewhat diminished. Bankruptcy, moratorium and other
similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no
3
<PAGE> 129
assurance can be given that the holders of commercial bank debt may not contest
payments to the holders of debt obligations in the event of default under
commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by the Fund could be reduced by
a withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Adviser and the
Sub-Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
FOREIGN CURRENCIES -- The Fund may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the value
of these currencies against the U.S. dollar may result in corresponding changes
in the U.S. dollar value of the Fund's assets denominated in those currencies.
The Fund may attempt to minimize the impact of these changes to the U.S. dollar
value of the Fund's portfolio by engaging in certain hedging practices, such as
entering into Futures Contracts and Options on Foreign Securities as described
below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act"), and applicable
state securities laws. Such investment may also involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities, and the total return on such investment will be reduced by the
operating expenses and fees of such other investment companies, including
advisory fees.
REPURCHASE AGREEMENTS: 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"), members of the Federal Reserve System, recognized
domestic or foreign securities dealers or institutions which the Adviser or the
Sub-Adviser has determined to be of comparable creditworthiness. The securities
that the Fund purchases and holds have values which are equal to or greater than
the repurchase price agreed to be paid by the seller. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a standard
rate due to the Fund together with the repurchase price on repurchase.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, 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 or the Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or the Sub-Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon margin.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs") which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary
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receipts in the United States can reduce costs and delays as well as potential
currency exchange and other difficulties. The Fund may purchase securities in
local markets and direct delivery of these ordinary shares to the local
depository of an ADR agent bank in the foreign country. Simultaneously, the ADR
agents create a certificate which settles at the Fund's custodian in five days.
The Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to the
same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its own country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject to
exchange rate risks if the underlying foreign securities are denominated in a
foreign currency. The Fund may also invest in Global Depositary Receipts
("GDRs") and other types of depositary receipts. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies and
evidence ownership of underlying securities issued by either a foreign or U.S.
company.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against an issuer of emerging market debt instruments (a
"borrower"). In purchasing a loan, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate, governmental or
other borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account liquid assets in
an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. Direct indebtedness of developing countries involves
the risk that the governmental entities responsible for the repayment of the
note may be unable, or unwilling, to pay interest and repay principal where due.
In selecting the loans and other direct investments which the Fund will
purchase, the Adviser will rely upon its (and not that of the original lending
institution's) own credit analysis of the borrower. As the Fund may be required
to rely upon another lending institution to collect and pass on to the Fund
amounts payable with respect to the loan and to enforce the Fund's rights under
the loan, an insolvency, bankruptcy or reorganization of the lending institution
may delay or prevent the Fund from receiving such amounts. In such cases, the
Fund will evaluate as well the creditworthiness of the lending institution and
will treat both the borrower and the lending institution as an "issuer" of the
loan for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged nature
of many such loans may make such loans especially vulnerable to adverse changes
in economic or market conditions. Investments in such loans may involve
additional risks to the Fund.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES:When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such basis may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities to entities deemed creditworthy by the Adviser or the
Sub-Adviser. Such loans would be required to be secured continuously by
collateral in cash, irrevocable letters of credit or U.S. Government securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of the cash collateral or a fee. The Fund would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an
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important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing, and when, in the judgment of the Adviser, the
consideration which 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.
WARRANTS: The Fund will not invest more than 10% of its net assets, taken at
market value, in warrants not acquired in a unit transaction. Warrants are
securities that give the Fund the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. An Option provides the
purchaser, or "holder", with the right, but not the obligation, to purchase, in
the case of a "call" Option, or sell, in the case of a "put" Option, the
security or securities in connection with which the Option was written, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a non-refundable purchase price for the
Option, known as the "premium." The maximum amount of risk the purchaser of the
Option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer", however, is
potentially unlimited, unless the Option is "covered." A call option written by
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
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in liquid assets in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is (a) equal to or greater than the exercise price of the put
written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counter party with which the option is traded, and
applicable laws and regulations. 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 the purpose of increasing its return and 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.
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
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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 solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. 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 15% of
the Fund's assets. 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 15%
test imposed by the SEC staff. The Fund may also write over-the-counter Options
with non-primary dealers, including foreign dealers, and will treat the assets
used to cover these Options as illiquid for purposes of such 15% test.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, the Fund may write (sell)
covered call and put options and purchase call and put options on stock indices
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser or the
Sub-Adviser, are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a stock
index through ownership of securities, such securities may not match the
composition of the index and, in that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in liquid assets
in a segregated account with its custodian. The Fund may cover put options on
stock indices by maintaining liquid assets in a segregated account with its
custodian, or else by holding a put on the same security and in the same
principal amount as the put written where the exercise price of the put held (a)
is equal to or greater than the exercise price of the put written or (b) is less
than the exercise price of the put written if the difference is maintained by
the Fund in liquid assets in a segregated account with its custodian. Put and
call options on stock indices may also be covered in such other manner as may be
in accordance with the rules of
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the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of long-term bonds or other
securities which the Fund intends to purchase at a later date. Futures Contracts
may also be entered into for non-hedging purposes to the extent permitted by
applicable law. A "sale" of a Futures Contract means a contractual obligation to
deliver the securities or foreign currency called for by the contract at a fixed
price at a specified time in the future. A "purchase" of a Futures Contract
means a contractual obligation to acquire the securities or foreign currency at
a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
One purpose of the purchase or sale of a Futures Contract, for hedging purposes
in the case of a portfolio holding long-term debt securities, is to protect the
Fund from fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, if the Fund owned long-term bonds and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Fund's Futures Contracts should increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase or by buying bonds with long maturities and
selling bonds with short maturities when interest rates are expected to decline.
However, since the futures market is more liquid than the cash market, the use
of Futures Contracts as an investment technique allows the Fund to maintain a
defensive position without having to sell its portfolio securities. Transactions
entered into for non-hedging purposes have greater risk, including the risk of
losses which are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of
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new shares of the Fund could have the effect of diluting dividend earnings. To
the extent the Fund enters into Futures Contracts for this purpose, the assets
in the segregated asset account maintained to cover the Fund's obligations with
respect to such Futures Contracts will consist of liquid assets from the
portfolio of the Fund in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
Futures Contracts, thereby assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The index underlying a Futures Contract is a broad based index of fixed-
income securities designed to reflect movements in the relevant market as a
whole.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase Options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying securities. As with
the purchase of Futures Contracts, when the Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the 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 constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option 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 purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, or a decline in the dollar value of
foreign currencies in which portfolio securities are denominated, 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 rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, 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 amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
A Fund's ability to engage in the options and futures strategies described above
will depend on the availability of liquid markets in such instruments. It is
impossible to predict the amount of trading interest that may exist in various
types of options or futures. Therefore, no assurance can be given that the Fund
will be able to utilize these instruments effectively for the purposes set forth
above. Furthermore, the Fund's ability to engage in options and futures
transactions may be limited by tax considerations.
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
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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 Contact, subject to
regulation by the CFTC and the performance guarantee of the exchange clearing
house. Options on Futures Contracts, as noted in the Prospectus, are also traded
on foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. The
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser or the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to the
value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative.
The Fund has established procedures which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be offset by the amount of
the premium received less related transaction costs.
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Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. A put option written 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 (a) is equal
to or greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the difference is maintained by the Fund in
liquid assets in a segregated account with its custodian. Call and put options
on foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded and applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: Unlike transactions entered into by the Fund in
Futures Contracts, Options on Foreign Currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities and on
stock indices may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, 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, Futures
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, 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. Where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the Option, Futures
Contract and Forward Contract markets. The trading of Options on Futures
Contracts also entails the risk that changes in the value of the underlying
Futures Contract will not be fully reflected in the value of the option.
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The risk of imperfect correlation, however, generally tends to diminish as the
maturity or termination date of the Option, Futures Contract or Forward Contract
approaches.
The trading of Options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's or the Sub-Adviser's judgment as to the general
direction of exchange rates is incorrect, a Fund's overall performance may be
poorer than if it had not entered into any such contract.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of portfolio securities or decreases in the
cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract, Option on
a Futures Contract or Option on a Foreign Currency can only be terminated by
entering into a closing purchase or sale transaction, which requires a secondary
market for such instruments on the exchange on which the initial transaction was
entered into. If no such market exists, it may not be possible to close out a
position, and 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.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES: The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC has jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take delivery of such currencies. Under
certain circumstances, such as where the Adviser or the Sub-Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser or the Sub-Adviser
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anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit a Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options 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 ensuring that the leveraging effect of such Futures
Contract is minimized.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, indices, currencies, or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their value may decline
substantially if the issuer's creditworthiness deteriorates.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount of the Fund
is entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser or the Sub-Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Fund's risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive. The Fund
anticipates that it will be able to eliminate or reduce its exposure under these
arrange-
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ments by assignment or other disposition or by entering into an offsetting
agreement with the same or another counterparty.
------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS: The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or the Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or the Fund or class, as applicable, are
represented in person or by proxy). Except for investment policy(1) and
nonfundamental investment policy(1), these investment restrictions and policies
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), any type of swap agreement,
Forward Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its assets would be invested in securities of issuers
whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), if more than 15% of the Fund's
net assets (taken at market value) would be invested in such securities.
Repurchase agreements maturing in more than seven days will be deemed to be
illiquid for purposes of the Fund's limitation on investment in illiquid
securities. Securities that are not registered under the Securities Act of
1933, as amended, and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% limitation;
(2) invest more than 10% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such amount may be
warrants which are not listed on the New York or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser or a sub-adviser of
the Fund, if one or more of such persons also owns beneficially more than 0.5%
of the securities of such issuer, and such persons owning more than 0.5% of
such securities together own beneficially more than 5% of such securities;
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(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts, Options, Options on Stock Indices and Options on Foreign
Currencies), any type of swap agreement, any type of futures contract
(including Futures Contracts) and Forward Contracts;
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(9) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any type of swap
agreement, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(10) borrow, except as a temporary measure for extraordinary or emergency
purposes;
(11) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities, (ii) put or call options or combinations thereof with
respect to securities or indexes of securities or (iii) Options on Foreign
Currencies, any type of swap agreement or any type of futures contract
(including Futures Contracts) or (b) the purchase, ownership, holding or sale
of contracts for the future delivery of securities or currencies; or
(12) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of the
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (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 and
Secretary
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 (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, 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
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
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JAMES O. YOST,* Assistant Treasurer; (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of the non-interested Trustees and Mr. Bailey
(who currently receive a fee per Fund of $250 per year plus $25 per meeting and
$20 per committee meeting attended, together with such Trustee's out-of-pocket
expenses), and have adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 73 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth below is certain information concerning the cash compensation
estimated to be paid by the Fund to the Trustees, and benefits accrued and
estimated benefits pay-able, under the retirement plan.
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<PAGE> 142
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED
TRUSTEE FEES ACCRUED AS CREDITED TOTAL TRUSTEE FEES
FROM THE PART OF FUND YEARS FROM FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
------ ------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey............................... $519 $ 56 5 $247,168
A. Keith Brodkin................................ N/A N/A N/A N/A
Peter G. Harwood................................ 599 64 5 105,995
J. Atwood Ives.................................. 559 58 13 98,750
Lawrence T. Perera.............................. 514 58 12 98,310
William J. Poorvu............................... 574 62 12 102,840
Charles W. Schmidt.............................. 599 64 5 105,995
Arnold D. Scott................................. N/A N/A N/A N/A
Jeffrey L. Shames............................... N/A N/A N/A N/A
Elaine R. Smith................................. 674 64 23 105,995
David B. Stone.................................. 619 66 5 108,710
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
------------ ---- ---- ---- ----------
<S> <C> <C> <C> <C>
$463 $ 69 $116 $162 $231
518 78 130 181 259
574 86 144 201 287
630 94 157 220 315
686 103 171 240 343
741 111 185 259 371
</TABLE>
- ---------------
(1) For the fiscal year ending May 31, 1997.
(2) Based upon normal retirement age (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) Information provided is 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 $21.1
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).
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of June 30, 1997, the Trustees and officers as a group owned less than 1% of
the Fund's shares outstanding on that date.
As of June 30, 1997, Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake Drive,
East, 3rd Floor, Jacksonville, Florida 32246-6484 was the record owner of
approximately 8.25%, 11.49% and 5.95%, respectively, of the outstanding Class A,
Class B and Class C shares of the Fund. In addition, Roney & Co. as Custodian
For the Benefit of James J. O'Day -- IRA, 7056 Oakleaf Court, Canton, Michigan
48187-5231, Wheat First Securities, Inc., A/C 5479-3952, George T. McDonald and
Sherry H. McDonald, 229 Brambleton Court, Winston Salem, North Carolina
27106-4961, The First National Bank of Boston, Trustee for IRA A/C John R.
Lawrence, 136 Amblewood Lane, Naples, Florida 34105-7145, The First National
Bank of Boston, Custodian, Newington Board of Education, Tax Sheltered Annuity
403B, A/C James A. Vendetti, 34 Wells Drive, Farmington, Connecticut 06032-3104,
The First National Bank of Boston, Trustee, IRA R/O Faye H. Hinson, 1010 Kings
Row, Greensboro, GA 30642-7038 and The First National Bank of Boston, Trustee,
IRA A/C Lawrence L. Spaeth, 1511 Violet Lane, Little Chute, WI 54140-2444 were
the record owners of approximately 9.38%, 10.74%, 10.17%, 7.99%, 8.16% and
6.04%, respectively, of the outstanding Class C shares of the Fund. As of June
30, 1997, MFS Defined Contribution Plan, c/o Mark Leary, Massachusetts Financial
Services, 500 Boylston Street, Boston, MA 02116-3740, MFS Service Center Inc.
Audit Account Reinvestments, Corporate Actions -- 10th Floor, Attn: Todd Jundi,
500 Boylston Street, Boston, MA 02116-3740 and MFS Service Center Inc., Audit
Account Cash, Corporate Actions -- 10th Floor, Attn: Todd Jundi, 500 Boylston
Street, Boston, MA 02116-3740 were the record owners of approximately 77.86%,
11.07% and 11.07%, respectively, of Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to
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<PAGE> 143
liability to the Trust or its shareholders, it is determined that they engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in their offices, or with respect to any matter, unless it is
adjudicated that they did not act in good faith in the reasonable belief that
their actions were in the best interests of the Trust. In the case of
settlement, such indemnification will not be provided unless it has been
determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER -- MFS and its predecessor organizations have a history of
money management dating from 1924. MFS is a subsidiary of Sun Life of Canada
(U.S.), which in turn is an indirect wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life").
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 May 31, 1997, MFS received fees under the Administrative
Services Agreement of $1,100 (equivalent on an annualized basis to 0.0039%, of
the Fund's average daily net assets).
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreements, dated as of September 1, 1995 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, in an amount equal to 0.975% of the first $500 million of the
average daily net assets of the Fund and 0.925% thereafter.
For the period from commencement of investment operation, October 24, 1995, to
May 31, 1996, MFS received management fees under the Advisory Agreement of
$103,167 (equivalent on an annualized basis to 0.975% of the Fund's average
daily net assets). For the fiscal year ended May 31, 1997, MFS received
management fees under the Advisory Agreement of $277,086 (equivalent on an
annualized basis to 0.975% of the Fund's average daily net assets).
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 1998
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Policies and Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the Fund's shares (as defined in "Investment Policies
and Restrictions"), or by either party on not more than 60 days' nor less than
30 days' written notice. The Advisory Agreement provides that if MFS ceases to
serve as the Adviser to the Fund, the Fund will change its name so as to delete
the initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management of
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
FCM -- FCM served as the Fund's sub-adviser, through and including the period
ended September 8, 1997, pursuant to a Sub-Advisory Agreement, dated September
1, 1995 between the Adviser and FCM (the "FCM Sub-Advisory Agreement"). The FCM
Sub-Advisory Agreement provided that the Adviser may delegate to FCM the
authority to make investment decisions for the Fund. FCM provided portfolio
management services for the Fund during this period. For these services, the
Adviser paid FCM an annual fee computed and paid monthly in an amount equal to
1.00% of the average daily net assets of the Fund.
FCEM -- FCEM served as the Fund's sub-adviser for the Fund, through and
including the period ended September 8, 1997, pursuant to a separate
Sub-Advisory Agreement dated September 1, 1995 between FCM and FCEM (the "FCEM
Sub-Advisory Agreement" and together with the FCM Sub-Advisory Agreement, the
"Sub-Advisory Agreements"). The FCEM Sub-Advisory Agreement provided that FCM
may delegate to FCEM the authority to make investment decisions for the Fund.
FCEM provided portfolio management services for the portion of the assets
invested in emerging markets securities with respect to the Fund during this
period. For these services, FCM paid FCEM an annual fee computed and paid
monthly in an amount equal to 1.00% of the average daily net assets of the Fund
managed by FCEM.
18
<PAGE> 144
On September 8, 1997, the Sub-Advisory Agreements pursuant to which FCM and FCEM
provided their services terminated.
For the period from commencement of investment operations, October 24, 1995, to
May 31, 1996, the Adviser paid FCM and FCEM fees under the Sub-Advisory
Agreements of $59,933 in connection with its services for the Fund. For the
fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser fees under the
Sub-Advisory Agreement of $165,930 in connection with its services for Fund.
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 each Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated December 19, 1985, as modified, (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement with the
Trust dated as of September 1, 1995.
CLASS A SHARES: MFD acts as agent in selling Class A shares of 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
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B shares,
Class C shares and Class I shares of each Fund. The public offering price of
Class B, Class C and
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<PAGE> 145
Class I shares is their net asset value next computed after the sale (see
"Purchases" in the Prospectus and the Prospectus Supplement 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 period from the commencement of operations, October 24, 1995, to May
31, 1996 for the Fund, and the fiscal year ended May 31, 1997, MFD and dealers
and certain other financial institutions received sales charges of $17,609 and
$233,028 and $18,575 and $92,100, respectively (as their concession on gross
sales charges of $250,637 and $110,675, respectively), for selling Class A
shares. The Fund received $8,330,330 and $3,420,373, respectively, representing
the aggregate net asset value of such shares.
During the fiscal year ended May 31, 1997, the CDSC paid on Class A shares for
the Fund was $11. During the period from the commencement of operations, October
24, 1995, to May 31, 1996 and the fiscal year ended May 31, 1997, the CDSC paid
on Class B shares for the Fund was $7,513 and $32,134, respectively. During the
fiscal year ended May 31, 1997, the CDSC paid on Class C shares for the Fund was
$213. During the period from the commencement of operations, October 24, 1995 to
May 31, 1996, there were no CDSC paid on Class A shares for the Fund.
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 Trust's shares (as defined in "Investment Policies and
Restrictions -- Investment Restrictions") and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or interested
persons of any such party. The Distribution Agreement terminates automatically
if it is assigned and may be terminated without penalty by either party on not
more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
an Advisory Agreement, be bought from or sold to dealers who have furnished
statistical, research and other information or services to the Adviser or the
Sub-Adviser. At present no arrangements for the recapture of commission payments
are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers (the "NASD") and such other policies
as the Trustees may determine, the Adviser may consider sales of shares of the
Fund and of the other investment company clients of MFD as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Under an Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser, an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction, if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transac-
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<PAGE> 146
tions on behalf of the Fund and the Adviser's other clients in part for
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers, on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the
Adviser, any subsidiary of the Adviser. Investment decisions for a Fund and for
such other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, a Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
For the fiscal year ended May 31, 1997, the Fund paid brokerage commissions of
$32,101 on total transactions of $14,083,274.
During the fiscal year ended May 31, 1997, the Fund acquired and owned
securities issued by Deutsche Bank, a broker-dealer of this Fund, in the amounts
of $223,771 as of May 31, 1997.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period, in the case of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
the Letter of Intent section of the Account Application or filing a separate
Letter of Intent application (available from the Shareholder Servicing Agent)
within 90 days of the commencement of purchases. Subject to acceptance by MFD
and the conditions mentioned below, each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional
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<PAGE> 147
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the Fund
pursuant to the Distribution Investment Program will also not apply toward
completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a Fund, the sales charge for the $25,000
purchase would be at the rate of 4% (the rate applicable to single transactions
of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide MFD) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
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 will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Reinvested Shares"; (ii) to the extent necessary, any
"Free Amount"; and (iii) to the extent necessary, the "Direct Purchase" subject
to the lowest CDSC (as such terms are defined under "Information Concerning
Shares of the Funds -- Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B and Class C shares
pursuant to a SWP, but will not be waived in the case of SWP redemptions of
Class A shares which are subject to a CDSC. To the extent that redemptions for
such periodic withdrawals exceed dividend income reinvested in the account, such
redemptions will reduce and may eventually exhaust the number of shares in the
shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be received in full and fractional shares of a Fund at
the net asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares generally having an
aggregate value of at least $5,000 either must be held on deposit by, or
certificates for such shares must be deposited with, the Shareholder Servicing
Agent.
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<PAGE> 148
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 a Fund with respect to the liquidation
of shares. No charge is currently assessed against the account, but one could be
instituted by the Shareholder Servicing Agent on 60 days' notice in writing to
the shareholder in the event that a Fund ceases to assume the cost of these
services. 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 the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder if such MFS Fund is available for sale. Under
the Automatic Exchange Plan, transfers of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in 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
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS
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<PAGE> 149
Money Market Fund, MFS Government Money Market Fund and Class A shares of MFS
Cash Reserve Fund, the shareholder has the right to exchange the acquired shares
for shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days of
the redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase in the case of Class B shares or within 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if the purchaser is eligible to purchase the class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by 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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
24
<PAGE> 150
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
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, although the
Fund's foreign-source income may be subject to foreign withholding taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 the
Fund's 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%. The 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 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.
A Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares were
held for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a redemption of shares may also
be disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of the Fund within ninety days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) 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. The
Fund's investments in zero coupon bonds, deferred interest bonds, payment in
kind bonds, and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to
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<PAGE> 151
other positions in its portfolio may constitute "straddles," and may be subject
to special tax rules that would cause deferral of Fund losses, adjustments in
the holding periods of Fund securities, and conversion of short-term into
long-term capital losses. Certain tax elections exist for straddles that may
alter the effects of these rules. The Fund will limit its activities in options,
Futures Contracts, Forward Contracts and swaps and related transactions to the
extent necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries is not known. If
the Fund holds more than 50% of its assets in foreign stock and securities at
the close of its taxable year, the Fund may elect to "pass through" to the
Fund's shareholders foreign income taxes paid. If the Fund so elects,
shareholders will be required to treat their pro-rata portion of the foreign
income taxes paid by the Fund as part of the amounts distributed to them by the
Fund and thus includable in their gross income for federal income tax purposes.
Shareholders who itemize deductions would then be allowed to claim a deduction
or credit (but not both) on their federal income tax returns for such amounts,
subject to certain limitations. Shareholders who do not itemize deductions would
be able (subject to such limitations) to claim a credit but not a deduction. No
deductions for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to its shareholders foreign income taxes paid by it, shareholders
will not be able to claim any deduction or credit for any part of the foreign
taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at 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.
No Fund will be required to pay Massachusetts income or excise taxes as long as
it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for each of the Class A, Class B
and Class C shares of the Fund (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 the Fund and each class of
shares offered by the Fund. The Distribution Plan is designed to promote sales,
thereby increasing the net assets of the Fund. Such an increase may reduce the
expense ratio to the extent a Fund's fixed costs are spread over a larger net
asset base. Also, an increase in net assets may lessen the adverse effects that
could result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid 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.
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
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and/or account maintenance services performed by MFD or its affiliates for
shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL PERIOD: During
the fiscal year ended May 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
------------------ ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $ 66,872 $ 39,438 $ 27,434
Class B Shares $149,349 $ 113,848 $ 35,501
Class C Shares $ 1,034 $ 776 $ 258
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide to the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by a vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the 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 or any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the 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.
8. 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 Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.)
This determination is made once each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the Nasdaq system for unlisted national
market issues, or at the last quoted bid price for listed securities in which
there were no sales during the day or for unlisted securities not reported on
the Nasdaq system. Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in the Fund's portfolio are valued on
the basis of valuations furnished by a pricing service which utilizes both
dealer-supplied valuations and electronic data processing techniques which take
into account appropriate factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data without exclusive reliance upon
quoted prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration market
data from an external pricing source. Use of the pricing services has been
approved by the Board of Trustees. All other securities, futures contracts and
options in the Fund's portfolio (other than short-term obligations) for which
the principal market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at the
settlement price prior to the determination (or if there has been no current
sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the Nasdaq system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations
27
<PAGE> 153
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular
trading on the Exchange. Occasionally, events affecting the values of such
securities may occur between the times at which they are determined and the
close of regular trading on the Exchange which will not be reflected in the
computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value in which case an adjustment
would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD or its
agent, the Shareholder Servicing Agent, prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge applicable to Class A shares (4.75% maximum) and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The Fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the Performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of each 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 share). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
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 hereto under the heading "Performance Results" assume an initial
investment of $10,000 in Class A shares of the Fund and cover the period from
October 24, 1995 to December 31, 1996. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield or total rate of return quotation
provided by the 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 each of the Fund's portfolio,
but also on changes in the current value of such securities and on changes in
the expenses of the 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. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8355).
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
28
<PAGE> 154
per share of such class on the last day of the period. The Fund's yield
calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B and Class C shares.
The yield quotations for the Fund for each class 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 International Growth and Income Fund shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B and Class C shares assumes no CDSC is paid.
The current distribution rate calculation for each Class of shares of the Fund
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. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. Each Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund and MFD may discuss or quote a Fund's current
portfolio manager(s) as well as other investment personnel, including such
persons' views on: various foreign and emerging market economies; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the Fund; the Fund's portfolio holdings; the investment
research and analysis process; the formulation and evaluation of investment
recommendations; the assessment and evaluation of credit, interest rate, market
and economic risks; and similar and related matters. In addition, from time to
time the Fund and MFD may discuss the Fund's current or anticipated allocations
of the Fund's securities by country or region. Any such allocations are subject
to change.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly.
MFS FIRSTS: MFS has a long history of innovations.
<TABLE>
<C> <S>
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
</TABLE>
29
<PAGE> 155
<TABLE>
<C> <S>
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 (the "Truth in Securities Act" or the
"Full Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) Union Standard Trust is the first mutual fund to invest
solely in companies deemed to be union-friendly by an advisory board of
senior labor officials, senior managers of companies with significant
labor contracts, academics and other national labor leaders or experts.
</TABLE>
9. DESCRIPTION OF SHARES, VOTING
RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and three other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each of the four series of the Trust (Class A, Class
B, Class C and Class I shares). Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the Fund's net assets allocable to such class
available for distribution to shareholders. The Trust reserves the right to
create and issue a number of series and additional classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares voting as a
single class, or of the affected series of the Trust, except that if the
Trustees recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares will be sufficient, or (ii) upon liquidation and distribution of the
assets of a Fund, if approved by the vote of the holders of two-thirds of its
outstanding shares of the Trust, or (iii) by the Trustees by written notice to
its shareholders. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will
30
<PAGE> 156
not be liable for any action or failure to act, but nothing in the Declaration
of Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of his willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolios of Investments and the Statements of Assets and Liabilities at
May 31, 1997, the Statements of Operations for the period from October 24, 1995
(commencement of investment operations) to May 31, 1997, the Statements of
Changes in Net Assets for the period from October 24, 1995 (commencement of
investment operations) to May 31, 1997, the Notes to Financial Statements and
the Report of Independent Auditors, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
31
<PAGE> 157
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ------------------------------------------------------------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1995............................................ 9,873 0 15 9,888
December 31, 1996............................................ 10,057 0 90 10,147
</TABLE>
EXPLANATORY NOTES: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment on October 24, 1995 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 May 31, 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS CURRENT
------------------------------ 30-DAY DISTRIBUTION
1 YEAR LIFE OF FUND(3) YIELD RATE
------ --------------- ------ ------------
<S> <C> <C> <C> <C>
Class A shares with sales charge......................... -2.02% 2.82% 0.26% 0.45%
Class A shares without sales charge...................... 2.88% 6.00% N/A N/A
Class B shares with CDSC................................. -1.67% 3.00% N/A N/A
Class B shares without CDSC.............................. 2.33% 5.43% -0.22% 0.00
Class C shares with CDSC................................. 1.61%(1) 5.61%(1) N/A N/A
Class C shares without CDSC.............................. 2.61%(1) 5.61%(1) -0.31% 0.70%
Class I shares........................................... 2.88%(2) 6.00%(2) 1.03% N/A
</TABLE>
(1) Class C share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class C shares
on July 1, 1996 for the Fund. Sales charges, expenses and expense ratios,
and therefore performance, for Class B and Class C shares differ. Class C
share performance has been adjusted to reflect that Class C shares generally
are subject to a lower CDSC (unless the performance quotation does not give
effect to the CDSC) than Class B shares. Class C share performance has not,
however, been adjusted to reflect differences in operating expenses, which
generally are not significantly different from Class B and Class C shares.
(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the commencement of offering of Class I
shares on January 2, 1997. Sales charges, expenses and expense ratios, and
therefore performance for Class I and A shares differ. Class I share
performance has been adjusted to reflect that Class I shares are not subject
to an initial sales charge, whereas Class A shares generally are subject to
an initial sales charge. Class I share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class I shares. The current
distribution rate for Class I shares is calculated by annualizing the last
dividend.
(3) Start of investment operations was October 24, 1995.
A-1
<PAGE> 158
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
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R) INTERNATIONAL GROWTH AND INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
LOGO
MGI-13-10/96/500
<PAGE> 159
[MFS logo]
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[photo of Bogota, Colombia]
MFS(R)/ Annual Report
Foreign & Colonial for Year Ended
Emerging Markets May 31, 1997
Equity Fund
MFS(R)/
Foreign & Colonial
International Growth
and Income Fund
MFS(R)/
Foreign & Colonial
International
Growth Fund
<PAGE>
Table of Contents
Letter from the Chairman ....................................... 1
MFS(R)/Foreign & Colonial International Funds Overview .......... 2
Investment Strategies .......................................... 3
Portfolio Managers' Profiles .................................... 4, 6
Fund Facts ...................................................... 9
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
Performance Summary .......................................... 10
Portfolio Concentration ....................................... 12
Tax Form Summary ................................................ 12
Portfolio of Investments ....................................... 13
MFS(R)/Foreign & Colonial International Growth and Income Fund
Performance Summary .......................................... 16
Portfolio Concentration ....................................... 18
Tax Form Summary ................................................ 18
Portfolio of Investments ....................................... 19
MFS(R)/Foreign & Colonial International Growth Fund
Performance Summary .......................................... 22
Portfolio Concentration ....................................... 24
Tax Form Summary ................................................ 24
Portfolio of Investments ....................................... 25
Financial Statements ............................................. 29
Notes to Financial Statements .................................... 35
Report of Independent Auditors ................................. 42
It's Easy to Contact Us .......................................... 43
The MFS Family of Funds(R) ..................................... 44
Trustees and Officers ............................................. 45
Cover Photo: Bogota, Colombia
Highlights
[bullet] Several emerging-country equity markets are outperforming the strong
U.S. stock market, as these countries reap the benefits of both their
own economic growth and that of developed countries.
[bullet] The renewed strength of the U.S. dollar versus the Japanese yen
resulted in a strong performance from Japanese blue-chip stocks, many
of which reached all-time highs.
[bullet] Uncertainty over monetary union continued to be a factor in European
markets, although some European stocks, such as Volkswagen, performed
well as they benefited from restructuring.
[bullet] As of May 31, 1997, assets in the three MFS/F&C funds exceeded $241
million, a 30% increase over the past six months, reflecting a growing
interest in international investing.
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
We are pleased to report that, in their second full year of operation, the
MFS/Foreign & Colonial (F&C) International Funds continue to see a steady growth
of assets thanks to investors' renewed interest in international securities
markets, particularly the increasingly vibrant emerging markets.
In fact, in what may be one of the biggest investment stories of the past
year, some rapidly growing emerging-country equity markets are outperforming the
strong U.S. stock market. Many of these countries are not only reaping the
benefits of their own economic growth, they are also benefiting from demands for
their services and manufactured goods by developed countries. This trend is
reflected in the performance of MFS(R)/Foreign & Colonial Emerging Markets
Equity Fund, whose performance within this category has been quite favorable.
Assets for the three MFS/F&C funds have reached over $241 million -- a 30%
increase since November 1996. This growing interest in international investing
has come in spite of the continuing strength of the U.S. equity market. We
regard this as a sign of investors' understanding of the need for
diversification across a range of global markets as well as their belief that,
in time, the recent trend of underperformance by international markets will
begin to reverse itself. Before the recent upsurge in U.S. equities, many
overseas markets were outperforming the U.S. market, a situation we expect to
see again, particularly as investors continue to seek the world's highest-growth
areas.
We are pleased to report that Arnab Kumar Banerji, chief investment officer
of Foreign & Colonial Emerging Markets Ltd. and portfolio manager of MFS/Foreign
& Colonial Emerging Markets Equity Fund, has accepted the additional
responsibility of chief investment officer of Foreign & Colonial Management Ltd.
Dr. Banerji succeeds Tony Thomson, whom we thank for his contribution in helping
launch the MFS/F&C funds.
Also, we would like to remind investors using annuities for their
long-term, tax-deferred retirement investing that MFS/Foreign & Colonial
Emerging Markets Equity Series, MFS(R)/Foreign & Colonial International Growth
and Income Series, and MFS(R)/Foreign & Colonial International Growth Series are
available as part of the MFS Regatta Gold(R) annuity.
This annual report to shareholders covers all three MFS/F&C funds. Each of
these funds has varying objectives, which are outlined on page 9 of this report.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/A. Keith Brodkin
A. Keith Brodkin
Chairman and President
June 12, 1997
1
<PAGE>
MFS/Foreign & Colonial International Funds Overview
[photo of Arnab Kumar Banerji]
Dear Shareholders:
Liquidity continued to underpin international equity markets over the past
year, while disinflationary forces remained in place despite somewhat stronger
world economic growth. International markets experienced increased volatility
following the interest-rate increase by the U.S. Federal Reserve Board in
February, which also caused a setback for the bond markets.
One of the major events in international markets over this period was the
strength of the U.S. dollar versus the Japanese yen. The yen started the year
at just under 116 to the dollar and fell to a low of 127 on May 2, 1997, a fall
of just under 10%. This weakening resulted in a strong performance from
Japanese blue-chip stocks, many of which reached all-time highs. The story in
the financial services sector was somewhat different. On top of bad-debt
worries, this sector was rocked by the "sokaiya" racketeering scandal at Nomura
Securities.
In continental Europe, uncertainty over European monetary union (EMU)
remained. Slow growth in Germany raised the prospect that this key EMU member
would have to be creative with its accounting policies in order to meet the
Maastricht criteria, allowing weaker members such as Italy to join at the first
stage. However, some European stocks such as Volkswagen performed well as
restructuring gathered pace. Growth in continental Europe remained weak
relative to the United States and the United Kingdom, and there appears to be
little need for interest rates to rise in the near term.
In the United Kingdom, the strength of sterling hit some exporters,
resulting in lower profits. The economy remained robust, and interest rates we
believe are set to continue their upward trend to offset inflation. The market
is likely to experience some volatility following the new Labor Party's first
budget, which is expected to detail the proposed windfall tax on privatized
utilities.
As an asset class, emerging markets performed well over the past 12
months, although Southeast Asia severely underperformed Latin America and
Eastern Europe. Structural imbalances have led to sharp falls in markets such
as Korea and Thailand. On the other hand, markets such as Brazil, Mexico,
Russia, and Egypt, driven by significant shifts in their economic policies and
relative political stability, have moved smartly higher.
Respectfully,
/s/Arnab Kumar Banerji
Arnab Kumar Banerji
Chief Investment Officer
Foreign & Colonial Management Ltd.
2
<PAGE>
Investment Strategies
MFS/Foreign & Colonial Emerging Markets Equity Fund
[photo of Jeff Chowdhry]
Jeff Chowdhry
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 16.43%, Class B shares 15.87%, Class C shares 15.97%, and Class
I shares 16.67%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 10.90% return for the
Lipper Emerging Markets Funds Index (the Lipper Index) and to a 7.76% return
for the Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF)
Index. The Lipper mutual fund indices are unmanaged indices of the largest
qualifying mutual funds within their respective investment objectives, adjusted
for the reinvestment of capital gains distributions and income dividends, while
the MSCI EMF Index is a broad, unmanaged, market-capitalization-weighted index
of equities in emerging markets. It is not possible to invest directly in an
index.
Emerging markets have shown much better performance over the past year
after a generally poor performance in 1994 and 1995. The Fund has outperformed
the MSCI EMF Index by having above-index weightings in most of Latin America,
including Brazil, Mexico, Colombia, and Peru, and below-index weightings in
Korea and South Africa. The Fund has outperformed the Lipper Index primarily
due to its higher weightings in Brazil, Mexico, Colombia, Russia, Egypt, and
Morocco and its lower weightings in Malaysia, Indonesia, Thailand, and the
Philippines.
The Fund remains well diversified at the country level, with major
industry weightings in telecommunications, banking, electric utilities, and
food and beverages. The largest country weightings are Brazil, Mexico, Hong
Kong, and India. Within Asia, we have sold most of our investments in Thailand,
Korea, the Philippines, and Indonesia, preferring instead Hong Kong, which is
being re-rated upward as the handover to China in mid-1997 approaches. We also
remain positive on India due to improving domestic liquidity and falling
interest rates. Elsewhere in Asia, we remain cautious, given our concern that
structural imbalances in that region's economies may continue to have a
negative impact on their stock markets.
We remain, on the whole, positive on other emerging market countries. Our
largest position in Latin America remains in Brazil, where interest rates have
been easing steadily and reforms are continuing while the stock market
continues to rise on the back of strong earnings growth. We are also positive
on the smaller Latin American markets of Colombia and Peru. In Colombia,
political worries have overshadowed what we believe are an improving inflation
environment and very attractive valuations. In Peru, economic growth is among
the best in the region, while valuations remain among the lowest.
In other emerging markets, Russia, Egypt, Portugal, and Greece deserve
special mention. Russia was among the best-performing markets in the world in
1996 and continues to move strongly higher in 1997, primarily due to continued
liberalization at the political and company level. The Egyptian economy is the
strongest in the Middle East as a result of efforts by the current
administration to introduce large-scale privatization of state-run companies.
Portugal has demonstrated over the past 12 months that its management of its
economy is among the best in western Europe. This has been validated by the
MSCI, which recently announced that Portugal's stock market will be in its
developed, rather than emerging market, index series beginning in December
1997. Greece is another country that has decided on an accelerated reform
program following
3
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial Emerging Markets Equity Fund
the landslide victory by Prime Minister Simitis in September last year, which
has led to inflation and interest rates. Having been cautious on the South
African stock market for most of the past year, we are now seeing some value
there following the sharp fall of the rand and the likely peaking in inflation
and interest rates.
Looking forward, we would expect to build up positions in South Africa and
will be monitoring our underweighted position in Asia very closely for signs of
a turn. Our positive stance toward Latin America is likely to be maintained,
although some trimming back of positions may be appropriate later this year.
Respectfully,
/s/Arnab Kumar Banerji /s/Jeff Chowdhry
Arnab Kumar Banerji Jeff Chowdhry
Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
Arnab Kumar Banerji is Chief Investment Officer of Foreign & Colonial
Management Ltd. Dr. Banerji earned degrees in physiology and medicine from
Oxford University before entering the investment management business with J.
Henry Schroder Wagg in London. He left that firm to become a research
analyst and later director of Nomura Securities before moving to Citibank
Global Asset Management to set up their Emerging Markets operation, which he
headed until 1993, when he joined Foreign & Colonial.
Jeff Chowdhry is a Director and Global Funds Manager of Foreign & Colonial
Emerging Markets Ltd. Mr. Chowdhry joined Foreign & Colonial in 1994 from
BZW Investment Management in London, where he was a Director in the Emerging
Markets Division. Mr. Chowdhry is a graduate of Brunel University and has a
Master of Business Administration degree from Kingston Business School.
4
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
[photo of June Scott]
June Scott
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.88%, Class B shares 2.33%, Class C shares 2.61%, and Class I
shares 2.88%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 6.24% return for a blend (70% and
30%) of the unmanaged MSCI EAFE (Europe, Australia, Far East) Index and the
J.P. Morgan Global Bond Index (the Morgan Index). The EAFE Index is an
unmanaged index of international stocks, while the Morgan Index is an unmanaged
index of bonds issued from 13 countries with remaining maturities of at least
one year.
The major feature in international markets over the past year was the
strength of the dollar, particularly against the Japanese yen, the German mark,
and the French franc. In January, half of the yen exposure and three-quarters
of the mark and franc exposures were hedged into dollars. Stronger growth in
the United States, weakness in the Japanese economy, and uncertainties in
Europe concerning EMU supported a stronger dollar, and we expect this dollar
strength to continue.
[photo of Ian K. Wright]
Ian K. Wright
The performance of Japanese equities during this period was a good
illustration of the current three-tier market: the international "nifty fifty"
blue chips such as Canon and TDK, which outperformed the market; the heavily
sold-off cyclicals; and the underperforming financial services sector. Japanese
blue-chip stocks were the main beneficiaries of the weak Japanese currency,
with many reaching all-time highs. The Fund held several of these stocks and
benefited from this upswing. Going forward, we expect the "nifty fifty" stocks
to continue to do well.
The U.K. market performed well, and sterling remained strong despite the
prospect of a left-wing victory in the general election. Economic growth was
strong, and the interest-rate cycle has turned. However, companies with high
overseas earnings are beginning to feel the effects of the strong currency, and
profit warnings are starting to come through. We believe that the portfolio
should benefit from the mini-consumer boom likely to be generated by the
windfalls resulting from the public offerings of several building societies
(savings and loans). However, the market is likely to experience some
uncertainty following Labor's first budget in July.
[photo of Richard O. Hawkins]
Richard O. Hawkins
Economic growth and the equity markets in continental Europe continued to
be affected by fiscal restraint as member states struggled to meet the
Maastricht criteria. In France, an unexpected general election was called for
late May/early June. This was a gamble by the French President, Jacques Chirac,
in the vain hope that a right-wing government would be returned with a
sufficient majority to push through the economic policies necessary for
monetary union. In Germany, a row erupted between the government and the
Bundesbank over revaluation of gold reserves that might be used to reduce the
budget deficit. This led to accusations of financial dishonesty and increased
the chance that some of the weaker European countries, such as Italy, would be
included in the first round of EMU. The outlook for Europe remains uncertain,
with political upheavals, high unemployment, and EMU concerns on the horizon.
Asian markets have shown a mixed performance over the past year. Hong Kong
has performed well due to positive sentiment over the imminent handover to
China. Other markets, however, have not performed as well due to worries over
high valuation levels.
5
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
The fixed-income portion of the Fund reflects a neutral weighting among
Europe, Japan, the United States, and the other dollar-bloc countries. U.S.
interest rates appear increasingly attractive from a global perspective. Hence,
we anticipate increasing the weighting in the dollar bloc relative to Europe
once the pickup in core European growth is confirmed and the U.S. market
adjusts to the Federal Reserve Board's tighter policy. In the meantime, we are
maintaining a defensive posture with respect to duration, or interest-rate
sensitivity, in both the dollar bloc and Europe.
The Fund remains overweighted in Australian bonds because we believe
current yield spreads reflect undue fears of a rate hike. Within Europe,
several potential developments suggest possible opportunities: the return of
the single-currency theme to the market, which would help potential entrants
such as Ireland and Spain; the likelihood of interest-rate cuts in Italy,
Spain, and possibly Sweden; and a more attractive U.K. market following the
election and moderate interest-rate hikes. Despite extremely low absolute
yields, the Japanese bond market should be well supported by accommodative
monetary policy and domestic institutional flows. Although some of the forces
pushing the dollar up are waning, we believe it should remain firm due to
capital inflows induced by favorable interest rates and moderate growth.
Respectfully,
/s/June Scott /s/Ian K. Wright /s/Richard O. Hawkins
June Scott Ian K. Wright Richard O. Hawkins
Portfolio Manager Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
June Scott is a Global Funds Manager of Foreign & Colonial Management Ltd. A
graduate of London Guildhall University, Ms. Scott joined Foreign & Colonial
in 1995 after completing her M.B.A. at the London Business School. Ms. Scott
worked previously as a Quantitative Portfolio Analyst in the Equity Research
Group at J.P. Morgan Investment Management in London.
Ian K. Wright is a Director of Foreign & Colonial Management Ltd. Mr.
Wright joined Foreign & Colonial in 1981. He heads up Foreign & Colonial's
Japanese equity investment team and is the manager of the Foreign & Colonial
Pacific Investment Trust. He is a graduate of the University of Southampton
and is an Associate of the Institute of Actuaries.
Richard O. Hawkins joined MFS in 1988 as Assistant Vice President -
Investments. A graduate of Brown University and the University of
Pennsylvania's Wharton Graduate School of Business Administration, he was
named Vice President - Investments in 1991 and Senior Vice President in
1993. On January 1, 1996, Mr. Hawkins became Director of the International
Fixed Income Department of MFS.
6
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.13%, Class B shares 1.56%, Class C shares 1.82%, and Class I
shares 2.31%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 7.88% return for the unmanaged MSCI
EAFE Index.
The Fund's exposure to smaller companies was reduced over the past 12
months, from 45% of assets to just over 30%. The money raised from this
asset-allocation shift was reinvested into blue-chip stocks. With liquidity
driving equity markets and deregulation and restructuring gathering pace, we
felt that blue chips would benefit more than smaller companies. Investors tend
to focus on larger, more liquid stocks when trying to invest large sums of
money, and restructuring tends to benefit larger companies with more room to
cut costs. During January, half of the Japanese yen exposure and three-quarters
of the German mark and French franc exposures were hedged into U.S. dollars.
Stronger growth in the United States, weakness in the Japanese economy, and
uncertainties in Europe concerning EMU all supported a strong dollar.
The Fund's weighting in Japan is similar to that of other funds in its
Lipper universe. Japanese blue-chip stocks with overseas exposure such as Canon
and TDK, both held in the Fund, continue to set all-time highs due to the yen's
weakness. The Fund's weighting in smaller Japanese companies has been reduced.
These companies continue to suffer from weak investor sentiment and, being
domestically oriented, have failed to benefit from the weak currency.
In the United Kingdom, we believe economic fundamentals remain strong,
although interest rates will almost certainly have to rise in the second or
third quarter in order to head off inflation. This, together with uncertainties
regarding the new government, the impact of a strong sterling on corporate
earnings, and volatility in the European and U.S. markets, may impact equities
in the short term. One of the best-performing sectors in the U.K. market has
been the banking sector. The Fund owns shares in Lloyds Bank, which is a
quality company with the fastest earnings growth in the sector and one of the
most profitable banks in the world. This stock is also benefiting from the
technical squeeze in the banking sector as index funds scramble to increase
their weightings in banks ahead of the public offerings of several building
societies (savings and loans).
Within continental Europe, growth remains weak relative to the United
States and the United Kingdom, and we see little need for interest rates to
rise in the near term. Worries over EMU continue, with the major concern being
whether or not it can proceed on time and in what form. Meanwhile, corporate
restructuring in Germany is beginning to gather pace. Volkswagen, a company
held in the Fund, has re-engineered its manufacturing process and can now
produce its main model, the VW Golf, in 17 hours, compared with the 34 hours it
used to take. All Volkswagen models are now produced from only four platforms,
which has significantly reduced costs.
7
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
The Fund continues to have a sizable exposure to emerging markets, with a
tilt toward Latin America. Brazil is our favored market due to falling
inflation rates and structural changes in the telecommunications sector, in
which Telebras is a core holding. The Fund has also benefited from its exposure
to Eastern Europe, where the Russian economy, in particular, has moved sharply
upwards.
Respectfully,
/s/June Scott /s/Ian K. Wright
June Scott Ian K. Wright
Portfolio Manager Portfolio Manager
8
<PAGE>
Fund Facts
MFS/Foreign & Colonial Emerging Markets Equity Fund
Strategy: The investment objective of Emerging Markets Equity
Fund is capital appreciation. The Fund seeks to achieve
its investment objective by investing, under normal
market conditions, at least 65% of its total assets in
equity securities of issuers whose principal activities
are located in emerging market countries.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: June 27, 1996
Class I: January 2, 1997
Size: $91.5 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Strategy: The investment objective of International Growth and
Income Fund is capital appreciation and current income.
The Fund seeks to achieve its investment objective by
investing, under normal market conditions, at least 65%
of its total assets in equity securities of issuers
whose principal activities are outside the United
States.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $29.4 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Strategy: The investment objective of International Growth Fund
is capital appreciation. The Fund seeks to achieve its
investment objective by investing, under normal market
conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are
outside the United States and which are growing at
rates expected to be well above the growth rate of the
overall U.S. economy.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $122.2 million net assets as of May 31, 1997
9
<PAGE>
Performance Summary
MFS/Foreign & Colonial Emerging Markets Equity Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial Emerging Markets Equity 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C Emerging
Lipper Emerging Markets Equity Fund -- Consumer Price MSCI EMF
Markets Funds Index Class A Index -- U.S. Index
------------------- ---------------------- -------------- ---------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11281 10499 10214 10847
5/31/97 13999 12224 10465 11456
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C Emerging Markets Equity Fund (Class A) including 4.75% sales charge
(SEC results) +10.92% +13.35%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class A) at net asset value +16.43% +16.85%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) with CDSC (SEC results) +11.87% +13.95%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) at net asset value +15.87% +16.24%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) with CDSC (SEC results) +14.96% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) at net asset value +15.97% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class I) at net asset value +16.67% +17.00%
- ------------------------------------------------------------------------------------------------------
MSCI EMF Index+ + 7.76% + 8.87%
- ------------------------------------------------------------------------------------------------------
Lipper Emerging Markets Funds Index++ +10.90% +16.30%
- ------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
10
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
11
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 36.6%
Brazil 14.0%
Mexico 10.0%
Hong Kong 6.9%
India 6.2%
South Africa 5.5%
Portugal 4.6%
Russia 4.5%
Greece 4.0%
Argentina 4.0%
Egypt 3.7%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Communications 18.9%
Banking 14.6%
Electricity, Gas, or Sanitation 11.3%
Food and Kindred Products 7.4%
Petroleum Refining 5.8%
Top 10 Holdings
Telecomunicacoes Brasileiras
Brazilian telecommunications company
Petroleo Brasileiro
Brazilian petroleum and natural
gas company
Taipei Fund
Closed-end Taiwan country fund
Telefonos de Mexico
Mexican telecommunications company
Compania Anonima Nacional Telefonos
de Venezuela
Venezuelan telecommunications company
Cheung Kong
Hong Kong property development
and investment company
Portugal Telecom
Portuguese telecommunications company
Credicorp Ltd.
Peruvian bank holding company
Swire Pacific
Diversif ied Hong Kong trading, property,
and manufacturing company
Hindustan Lever
Indian cosmetics and toiletries company
Portfolio Structure (% of Net Assets)
Stocks 95.1%
Cash 4.9%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 84% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 5.2% of its ordinary income.
12
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Stocks - 95.1%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Argentina - 4.0%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 15,016 $ 394,170
Perez Companc S.A. (Oils) 89,308 683,548
Siderar S.A.I.C., ADR (Steel)*## 11,900 401,625
Telecom Argentina S.A.
(Telecommunications) 7,450 397,644
Telefonica de Argentina, ADR
(Utilities - Telephone) 9,850 357,063
Transportadora de Gas del Sur, S.A.
(Pipelines) 31,300 395,162
YPF Sociedad Anonima, ADR (Oils) 33,200 996,000
------------
$ 3,625,212
- -------------------------------------------------------------------------
Brazil - 15.3%
Ing Baring Financial Products (Finance) 7,530 $ 1,030,047
Aracruz Celulos S.A. (Paper Products) 277,000 564,197
Banco Bradesco S.A., Preferred (Banks and
Credit Cos.) 57,000,000 454,807
Centrais Eletricas Brasileiras, ADR
(Utilities - Electric) 50,050 1,176,175
Centrais Eletricas Brasileiras S.A. -
Eletrobras, Preferred, "B"
(Utilities - Electric) 950,000 467,766
Cia Cervejaria Brahma, Preferred
(Beverages) 965,000 700,556
Cia Vale Rio Doce (Diversified Minerals) 24,000 0
Cia Vale Rio Doce, Preferred (Diversified
Minerals) 24,000 530,319
Companhia Energetica S.A., ADR
(Utilities - Electric) 8,700 386,062
Companhia Paranaense de Energia -
COPEL "B", Preferred (Electrical) 38,800 572,774
Itausa Investimentos Itau S.A.
(Conglomerate) 450,000 374,194
Petroleo Brasileiro S.A., Preferred (Oils) 10,400,000 2,487,527
Telebras (Telecommunications) 7,000,000 965,991
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 29,650 4,062,050
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 16,300 179,300
------------
$13,951,765
- -------------------------------------------------------------------------
Canada - 0.6%
Super Sol Ltd. (Supermarkets) 155,550 $ 515,015
- -------------------------------------------------------------------------
Chile - 0.9%
Compania de Telecom de Chile
(Telecommunications) 24,692 $ 845,701
- -------------------------------------------------------------------------
China - 2.0%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 40,850 $ 980,400
Qingling Motors Co. "H" (Automotive) 938,000 520,573
Yizheng Chemical Fibre Co. Ltd. (Textiles) 1,686,000 330,759
------------
1,831,732
- -------------------------------------------------------------------------
Stocks - continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Colombia - 3.2%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 26,700 $ 1,021,275
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 55,450 977,306
Cementos Diamante S.A., ADR
(Construction)## 59,900 943,425
------------
$ 2,942,006
- -------------------------------------------------------------------------
Egypt - 3.6%
Commercial International Bank (Banks and
Credit Cos.)## 11,765 $ 229,417
Nasar City For Housing (Housing
Development) 8,150 1,124,137
North Cairo Mills (Food) 11,700 557,480
Suez Cement Co., GDR (Construction)*## 64,185 1,177,795
Torah For Cement (Construction) 7,935 201,334
------------
$ 3,290,163
- -------------------------------------------------------------------------
Greece - 4.0%
Attica Enterprises (Transportation) 25,000 $ 224,812
Ergo Bank (Banks and Credit Cos.) 14,800 1,045,696
Hellenic Telecommunication Organization
S.A. (Telecommunications) 37,300 930,960
Intracom (Telecommunications) 15,300 745,766
Titan Cement Co (Building Materials) 7,500 749,037
------------
$ 3,696,271
- -------------------------------------------------------------------------
Hong Kong - 7.2%
Bank of East Asia Ltd. (Banks and Credit
Cos.) 234,400 $ 853,134
Cheung Kong Holdings Ltd. (Real Estate) 141,000 1,442,211
Citic Pacific Ltd. (Conglomerate) 52,000 297,315
Hong Kong & China Gas Ltd. (Oil and
Gas) 414,000 721,347
New World Development Co.
(Real Estate) 147,000 933,454
Swire Pacific Air Ltd., "A"
(Transportation) 150,500 1,262,584
Wharf Holdings Ltd. (Real Estate) 183,000 819,579
Zhenhai Refining and Chemical Co., Ltd.
(Oils) 515,000 212,700
------------
$ 6,542,324
- -------------------------------------------------------------------------
Hungary - 2.1%
Borsodchem Rt (Chemicals) 11,050 $ 404,917
Mol Magyar Olaj Es Gazipari Rt (Oils)## 18,400 340,400
Pannonplast Muanuagipari (Chemicals) 8,330 409,803
Richter Gedeon Veg (Medical) 8,840 734,894
------------
$ 1,890,014
- -------------------------------------------------------------------------
India - 6.2%
Bajaj Auto Ltd. (Automotive) 300 $ 7,240
East India Hotels (Lodging) 25,300 291,991
Eih Ltd. (Consumer Goods and Services) 12,700 146,573
Hindustan Lever Ltd. (Consumer Goods
and Services) 39,000 1,217,112
13
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
India - continued
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 55,000 $ 655,935
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 170,000 436,660
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 114,000 911,170
State Bank of India (Banks and
Credit Cos.) 91,000 781,474
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 270 2,986
Tata Steel (Steel) 100,000 483,622
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 36,120 744,072
------------
$ 5,678,835
- ------------------------------------------------------------------------------
Israel - 2.2%
Israel Chemicals Ltd. (Chemicals) 400,000 $ 490,626
Makhteshim Chemical Works Ltd.
(Chemicals)* 81,442 527,294
NICE Systems Ltd., ADR
(Telecommunications) 8,850 269,925
Tadiran Telecommunications Ltd.
(Telecommunications) 22,250 403,281
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 5,850 351,000
------------
$ 2,042,126
- ------------------------------------------------------------------------------
Malaysia - 3.1%
DCB Holdings Berhad (Finance) 120,000 $ 386,866
Malayan Banking Berhad (Finance) 82,600 871,204
Petronas Gas Berhad (Oil and Gas)*## 150,000 543,283
Resorts World Berhad (Entertainment) 63,000 210,627
Tenaga Nasional Berhad
(Utilities - Electric) 180,000 823,881
------------
$ 2,835,861
- ------------------------------------------------------------------------------
Mauritius - 2.1%
Mauritius Commercial Bank (Banks and
Credit Cos.) 130,000 $ 564,247
New Mauritius Hotels (Lodging) 170,000 302,649
Rogers & Co. Ltd. (Finance) 90,000 434,772
State Bank Mauritius (Banks and Credit
Cos.) 1,150,000 648,602
------------
$ 1,950,270
- ------------------------------------------------------------------------------
Mexico - 10.0%
Apasco S.A. (Building Materials) 56,000 $ 366,018
Cemex S.A., "B" (Construction) 175,000 654,867
Cifra S.A. de C.V. (Consumer Goods and
Services) 400,000 685,714
Corporacion GEO S.A. de C.V.
(Housing)## 22,500 455,625
Desc S.A. de C.V. (Special Products and
Services) 64,000 436,915
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 26,400 382,800
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
Mexico - continued
Fomento Economico Mexicano S.A., "B"
(Beverages) 84,376 $ 448,014
Gruma S.A. (Food Products) 245,493 1,163,842
Grupo Carso, "A1" (Conglomerate) 80,201 455,250
Grupo Financiero Banamex, "B" (Finance) 127,000 274,872
Grupo Financiero Inbursa S.A. de C.V. (Finance) 2,798 9,710
Hylsamex S.A. de C.V. (Steel) 133,000 643,982
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 70,000 242,478
Telefonos de Mexico S.A. (Utilities - Telephone) 1,011,000 2,246,951
Tubos de Acero de Mexico S.A. (Steel)* 38,678 680,655
------------
$ 9,147,693
- ------------------------------------------------------------------------------
Morocco - 2.5%
Banque Marocaine du Commerce (Banks
and Credit Cos.) 12,500 $ 744,901
Brasserica du Maroc (Consumer Goods and
Services) 2,100 366,953
Credit Eqdom (Financial Institutions) 2,182 220,657
ONA S.A. (Conglomerate) 6,600 534,226
Societe Nationale d'Investissement
(Conglomerate) 5,600 416,401
------------
$ 2,283,138
- ------------------------------------------------------------------------------
Pakistan - 1.6%
Hub Power Co. Ltd., GDR
(Utilities - Electric)* 40,200 $ 928,620
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 8,950 554,900
------------
$ 1,483,520
- ------------------------------------------------------------------------------
Peru - 3.7%
Alicorp S.A. (Consumer Goods and Services) 185,000 $ 322,343
Compania de Minas Buenaventura S.A.
(Mining) 66,640 613,098
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 449,870 1,152,127
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 58,584 1,325,463
------------
$ 3,413,031
- ------------------------------------------------------------------------------
Poland - 3.0%
Agros Holding S.A. (Food Products) 9,900 $ 266,063
Bank Slaski S.A. w Katowicach (Banks and
Credit Cos.) 3,800 296,875
Bydgoska Fabryka Kabli S.A.
(Electrical Equipment) 46,375 347,812
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 70,300 628,306
Exbud S.A. (Construction) 20,000 218,125
Stomil Olsztyn S.A. (Tires and Rubber) 26,500 331,250
Wedel S.A. (Food) 7,000 428,750
Zywiec (Brewery) 4,000 224,375
------------
$ 2,741,556
- ------------------------------------------------------------------------------
14
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Portugal - 4.6%
Banco Espirito Santo e Comercial de
Lisboa S.A. (Banks and Credit Cos.) 45,289 $ 938,822
Cimentos de Portugal S.A.
(Building Materials) 31,526 693,499
Jeronimo Martins & Filho S.A. (Retail) 6,200 421,471
Portugal Telecom S.A.
(Utilities - Telephone) 36,042 1,383,871
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 3,000 112,635
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 8,246 633,848
------------
$ 4,184,146
- -----------------------------------------------------------------------
Russia - 3.3%
Lukoil Oil Co., ADR (Oils) 18,100 $ 1,079,212
Mosenergo, ADR (Utilities - Electric)## 14,410 544,698
Rostelecom (Telecommunications)## 20 758,000
Surgutneftegaz (Oil and Gas) 15,400 656,425
------------
$ 3,038,335
- -----------------------------------------------------------------------
South Africa - 5.5%
Anglo American Corp. of South Africa
Ltd. (Mining) 8,000 $ 468,428
De Beers Centenary AG (Diamonds -
Precious Stones) 29,000 1,016,234
Liberty Life Association of Africa Ltd.
(Insurance) 28,000 783,699
Nedcor Ltd. (Financial Services) 38,964 759,039
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
South Africa - continued
Sappi (Paper Products) 30,000 $ 275,414
Sasol Ltd. (Oils) 62,700 768,658
South African Breweries Ltd. (Brewery) 35,000 983,542
------------
$ 5,055,014
- -----------------------------------------------------------------------
Taiwan - 2.5%
Taipei Fund (Finance) 207 $ 2,256,300
- -----------------------------------------------------------------------
Turkey - 0.2%
Adana Cimento (Building Materials) 3,257,000 $ 214,656
- -----------------------------------------------------------------------
Venezuela - 1.7%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 43,000 $ 1,596,375
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $73,539,525) $87,051,059
- -----------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Student Loan Marketing Assn., due
6/24/97 $1,750 $ 1,743,963
General Electric Capital Corp., due
6/02/97 1,060 1,059,835
- -----------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,803,798
- -----------------------------------------------------------------------
Total Investments (Identified Cost, $76,343,323) $89,854,857
Other Assets, Less Liabilities - 1.8% 1,662,782
- -----------------------------------------------------------------------
Net Assets - 100.0% $91,517,639
- -----------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
15
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth and Income Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth and Income 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 the
differences in loads and fees paid by shareholders investing in the different
classes. It is not possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International 70% MSCI EAFE/30%
Lipper International Growth and Income Consumer Price J.P. Morgan Global
Funds Index Fund -- Class A Index -- U.S. Bond Index
-------------------- -------------------- -------------- ------------------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10162 10214 10794
5/31/97 12940 10455 10465 11468
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth and Income Fund (Class A) including 4.75% sales
charge (SEC results) - 2.02% +2.82%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class A) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) with CDSC (SEC results) - 1.67% +3.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) at net asset value + 2.33% +5.43%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) with CDSC (SEC results) + 1.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) at net asset value + 2.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class I) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
70% MSCI EAFE/30% J.P. Morgan Global Bond Index+ + 6.24% +9.03%
- -------------------------------------------------------------------------------------------------------
Lipper International Funds Index+ +15.56% +17.68%
- -------------------------------------------------------------------------------------------------------
Consumer Price Index**++ + 2.47% +2.88%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
++Source: CDA/Wiesenberger.
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
16
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
17
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 26.1%
Japan 21.7%
United Kingdom 14.8%
France 7.1%
Germany 6.6%
Hong Kong 6.4%
Switzerland 5.2%
Netherlands 5.1%
Sweden 3.0%
Australia 2.0%
Spain 2.0%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 12.8%
Banks, Retail 9.1%
Telecommunications 6.8%
Pharmaceuticals 5.5%
Engineering 4.7%
Top 10 Holdings
Canon Inc.
Japanese off ice equipment and imaging company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
DDI Corp.
Japanese telecommunications company
HSBC Holdings
British banking and financial services company
Ricoh Company
Japanese off ice and business equipment company
Kyocera Corp.
Japanese component manufacturer
Roche Holdings
Swiss pharmaceutical company
Cheung Kong
Hong Kong property development and investment
company
Inchcape PLC
U.K. car distributor and trading company
Portfolio Structure (% of Net Assets)
Stocks 80.8%
Bonds 13.2%
Cash 6.0%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 87% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 6.3% of its ordinary income.
18
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Stocks - 80.8%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Australia - 2.0%
Capral Aluminum Ltd. (Metals) 81,700 $ 295,325
Western Mining (Holding Company) 47,400 306,247
------------
$ 601,572
- -------------------------------------------------------------------------
Austria - 0.9%
OMV AG (Oil and Gas) 2,100 $ 266,469
- -------------------------------------------------------------------------
Belgium - 0.9%
Generale de Banque (Finance) 690 $ 272,752
- -------------------------------------------------------------------------
France - 7.1%
Accor (Lodging) 1,720 $ 239,013
Compagnie de St. Gobain (Building Materials) 1,960 271,343
Dexia France (Finance) 2,930 274,322
Eaux (Cie Generale) (Utilities - Water) 1,430 176,359
Lafarge S.A., Bearer Shares (Building
Materials) 4,000 256,383
Legrand, Preference Shares (Electrical
Equipment) 1,400 159,528
Michelin, "B" (Tires) 3,700 202,642
Societe Nationale Elf Aquitaine (Oils) 2,700 270,610
TOTAL S.A., "B" (Oils)* 2,560 234,789
------------
$ 2,084,989
- -------------------------------------------------------------------------
Germany - 6.6%
Bayer AG (Chemicals) 9,100 $ 353,489
Deutsche Bank AG (Banks) 4,030 223,771
Deutsche Telekom AG (Utilities - Telephone) 14,960 332,444
Mannesmann AG (Diversified Machinery) 550 223,805
Siemens AG (Electrical Equipment) 4,800 271,114
VEBA AG (Oil and Gas) 4,700 266,209
Volkswagen AG (Automotive) 420 271,873
------------
$ 1,942,705
- -------------------------------------------------------------------------
Hong Kong - 6.4%
Cheung Kong Holdings Ltd. (Real Estate) 41,000 $ 419,366
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 47,000 169,244
HSBC Holdings PLC (Finance) 15,600 473,154
New World Development Co. (Real Estate) 32,000 203,201
Swire Pacific Air Ltd., "A" (Transportation) 45,000 377,517
Wharf Holdings Ltd. (Real Estate) 51,000 228,407
------------
$ 1,870,889
- -------------------------------------------------------------------------
Italy - 1.5%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 89,580 $ 263,439
Telecom Italia S.p.A. (Telecommunications
Services) 60,750 167,692
------------
$ 431,131
- -------------------------------------------------------------------------
Stocks -continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Japan - 21.7%
Canon, Inc. (Consumer Goods) 29,000 $ 735,914
DDI Corp. (Telecommunications) 79 590,546
Fujisawa Pharmaceuticals (Pharmaceuticals) 37,000 350,108
Hitachi (Electronics) 16,000 170,667
Hitachi Zosen (Engineering) 63,000 241,161
Ito-Yokado Co. Ltd. (Retail) 7,000 399,828
Kyocera Corp. (Electronics) 6,000 433,032
Marubeni Corp. (Distribution/Wholesale) 81,000 344,903
Matsushita Electric Industrial Co.
(Electrical Equipment) 18,000 339,097
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 38,000 273,927
NKK Corp. (Steel) 114,000 224,568
Oji Paper Co. Ltd. (Paper Products) 833 4,822
Omron Corp. (Electronics) 32,000 644,129
Pioneer Electronic Corp. (Electronics) 26,000 644,129
Ricoh Co. Ltd. (Office/Business Equipment) 34,000 447,484
TDK Corp. (Special Products and Services) 5,000 384,516
Tokyo Broadcasting System (Broadcasting) 9,000 164,129
------------
$ 6,392,960
- -------------------------------------------------------------------------
Malaysia - 2.0%
Genting Berhad (Entertainment) 11,000 $ 57,353
Malayan Banking Berhad (Finance) 9,000 94,925
Petronas Gas Berhad (Oil and Gas)*## 85,000 307,861
Sime Darby Berhad (Holding Company) 36,000 117,493
------------
$ 577,632
- -------------------------------------------------------------------------
Netherlands - 5.1%
ABN Amro Holdings N.V. (Finance) 17,200 $ 318,236
Akzo Nobel (Chemicals) 1,800 239,881
Philips Electronics N.V. (Manufacturing) 5,080 278,266
Royal Dutch Petroleum Co. (Oils) 400 77,365
Vendex International N.V. (Retail) 4,800 269,683
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 13,660 308,982
------------
$ 1,492,413
- -------------------------------------------------------------------------
Singapore - 1.6%
City Developments Ltd. (Real Estate) 22,000 $ 204,615
Development Bank of Singapore Ltd. (Banks) 8,000 100,140
Overseas-Chinese Banking Corp. Ltd. (Finance) 13,600 169,287
------------
$ 474,042
- -------------------------------------------------------------------------
Spain - 2.0%
Repsol S.A. (Oils) 6,050 $ 253,427
Telefonica de Espana (Utilities - Telephone) 11,450 330,586
------------
$ 584,013
- -------------------------------------------------------------------------
Sweden - 3.0%
Ericsson LM, "B" (Telecommunications) 8,760 $ 307,591
Sparbanken Sverige AB, "A" (Banks) 15,960 313,167
Swedish Match AB (Tobacco) 3,200 10,410
Volvo AB, "B" (Automobiles) 9,600 265,827
------------
$ 896,995
- -------------------------------------------------------------------------
19
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Switzerland - 5.2%
Ciba Specialty AG (Chemicals) 2,570 $ 243,809
Nestle AG, Registered Shares (Food and
Beverage Products) 230 286,584
Novartis AG (Pharmaceuticals) 210 285,451
Roche Holdings AG (Pharmaceuticals) 48 427,497
Winterthur (Insurance) 350 286,443
------------
$ 1,529,784
- -----------------------------------------------------------------------
United Kingdom - 14.8%
Allied Domecq PLC (Food and Beverage
Products) 32,850 $ 240,699
BAA PLC (Transportation) 33,560 291,561
British Petroleum PLC (Oil and Gas) 23,600 282,401
British Telecommunications PLC
(Telecommunications) 40,430 293,589
BTR PLC (Holding Company) 57,040 186,065
Caradon PLC (Holding Company) 7,449 11,844
Caradon PLC (Holding Company) 26,397 90,867
Carlton Communications PLC (Broadcasting) 31,620 273,152
General Accident PLC (Insurance) 13,180 194,658
Glaxo Wellcome PLC (Pharmaceuticals) 14,460 289,649
Granada Group PLC (Leisure) 10,960 155,942
Inchcape PLC (Commercial Services) 85,470 403,495
Land Securities PLC (Real Estate) 9,350 140,697
Lloyds TSB Group PLC (Banks and Credit Cos.) 29,620 298,480
National Westminster (Finance) 9,000 110,203
Sainsbury (J.) PLC (Retail) 30,550 175,772
Smith (W.H.) Group PLC (Retail) 38,200 264,245
Storehouse PLC (Retail) 50,400 179,689
Tesco PLC (Retail) 32,580 200,269
Unilever PLC (Consumer Goods) 10,200 273,369
------------
$ 4,356,646
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $20,959,241) $23,774,992
- -----------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------
France
Eaux (Cie General) (Utilities - Water) 1,150 $ 789
Sweden
Volvo AB, "B" (Automobiles) 9,600 2,565
- -----------------------------------------------------------------------
Total Warrants (Identified Cost, $0) $ 3,354
- -----------------------------------------------------------------------
Bonds - 13.2%
- -----------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------
Australia - 2.0%
Commonwealth of Australia,
8.75s, 2001 AUD 170 $ 138,620
Commonwealth of Australia,
9.75s, 2002 365 310,680
Commonwealth of Australia,
10s, 2002 165 142,516
-----------
$ 591,816
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 6s, 1999 DKK 518 $ 82,584
Kingdom of Denmark, 8s, 2001 482 82,436
Kingdom of Denmark, 7s, 2007 526 83,357
Nykredit, 8s, 2026 522 82,442
-----------
$ 330,819
- -----------------------------------------------------------------------
France - 0.8%
Government of France, 7s, 2000 FRF 1,286 $ 241,921
- -----------------------------------------------------------------------
Greece - 0.7%
Hellenic Republic, 12.6s, 2003 GRD 20,500 $ 79,306
Hellenic Republic, 13.4s, 2003 10,000 38,227
Hellenic Republic, 14.8s, 2003 20,000 76,528
-----------
$ 194,061
- -----------------------------------------------------------------------
Ireland - 1.2%
Republic of Ireland, 6.25s, 1999 IEP 60 $ 91,044
Republic of Ireland, 8s, 2000 50 80,012
Republic of Ireland, 6.5s, 2001 110 169,258
-----------
$ 340,314
- -----------------------------------------------------------------------
Italy - 2.6%
Republic of Italy, 9.5s, 1999 ITL 625,000 $ 385,503
Republic of Italy, 9.5s, 2001 605,000 387,880
-----------
$ 773,383
- -----------------------------------------------------------------------
New Zealand - 1.0%
Government of New Zealand,
8s, 2001 NZD 420 $ 296,411
- -----------------------------------------------------------------------
Spain - 2.0%
Government of Spain, 6.75s, 2000 ESP 19,700 $ 141,459
Government of Spain, 8.4s, 2001 17,330 131,820
Government of Spain, 10.5s, 2003 16,180 136,952
Government of Spain, 7.35s, 2007 25,380 183,809
-----------
$ 594,040
- -----------------------------------------------------------------------
Sweden - 0.6%
Kingdom of Sweden, 10.25s, 2000 SEK 1,100 $ 159,837
- -----------------------------------------------------------------------
United Kingdom - 1.2%
United Kingdom Treasury,
7s, 2001 GBP 210 $ 343,156
- -----------------------------------------------------------------------
Total Bonds (Identified Cost, $4,001,187) $3,865,758
- -----------------------------------------------------------------------
Short-Term Obligation - 5.9%
- -----------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/02/97, at Amortized Cost $1,720 $1,719,735
- -----------------------------------------------------------------------
20
<PAGE>
Portfolio of Investments - continued
Call Options Purchased
- ---------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ---------------------------------------------------------------------------
Canadian Dollars
June/1.365 CAD $ 524 $ 50
Deutsche Marks/British Pounds
July/2.7 DEM 538 910
Japanese Government Bonds
June/117.226 JPY 48,000 96
June/117.622 115,000 115
July/114.635 29,000 116
Swiss Francs
August/1.350 CHF 894 6,012
- ---------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $28,209) $7,299
- ---------------------------------------------------------------------------
Put Options Purchased
- ------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ------------------------------------------------------------------------------
Deutsche Marks
June/1.72 (Premium Paid,
$2,736) DEM 1,034 $ 991
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $26,711,108) $ 29,372,129
- ------------------------------------------------------------------------------
Put Options Written - (0.1)%
- ------------------------------------------------------------------------------
British Pounds
July/1.65 GBP 371 $ (3,823)
Japanese Government Bonds
June/117.226 JPY 48,000 (5,472)
July/114.635 29,000 (6,989)
- ------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $6,589) $ (16,284)
- ------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.1% $ 54,211
- ------------------------------------------------------------------------------
Net Assets - 100.0% $ 29,410,056
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
21
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International
Lipper International Growth Fund -- Consumer Price MSCI
Funds Index Class A Index -- U.S. EAFE
-------------------- --------------------- -------------- ----
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10613 10214 10836
5/31/97 12940 10838 10465 11687
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth Fund (Class A) including 4.75% sales charge
(SEC results) - 2.70% + 5.15%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class A) at net asset value + 2.13% + 8.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) with CDSC (SEC results) - 2.44% + 5.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) at net asset value + 1.56% + 7.80%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) with CDSC (SEC results) + 0.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) at net asset value + 1.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class I) at net asset value + 2.31% + 8.52%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE+ + 7.88% +10.23%
- ---------------------------------------------------------------------------------------------------------
Lipper International Funds Index++ +15.56% +17.68%
- ---------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
22
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
23
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 24.6%
Japan 23.1%
UK 14.0%
Germany 6.4%
France 5.9%
Netherlands 5.5%
Switzerland 5.3%
Hong Kong 5.0%
Brazil 3.9%
Sweden 3.5%
Australia 2.8%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 11.9%
Telecommunications 8.9%
Banks, Retail 8.2%
Engineering 6.4%
Diversified Industries 6.3%
Top 10 Holdings
TDK Corp.
Japanese manufacturer of audio and
video products
Telecomunicacoes Brasileiras
Leading Brazilian telecommunications company
Capral Aluminum
Australian aluminum company
Taipei Fund
Closed-end Taiwan country fund
Volkswagen AG
German automobile and truck manufacturer
Cheung Kong
Hong Kong property development and investment
company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
Kyocera Corp.
Japanese component manufacturer
Stork NV
Dutch machinery and tool manufacturer
Portfolio Structure (% of Net Assets)
Stocks 98.2%
Cash 1.8%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 82% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 10.3% of its ordinary income.
24
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Stocks - 98.2%
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Argentina - 0.7%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 3,287 $ 86,284
Perez Companc S.A. (Oils) 23,159 177,255
Siderar S.A.I.C., ADR (Steel)*## 2,900 97,875
Telecom Argentina Stet - France Telecom
S.A. (Telecommunications) 1,800 96,075
Telefonica de Argentina, ADR
(Uitlities - Telephone) 2,600 94,250
Transportadora de Gas del Sur, S.A. (TGS)
(Pipelines) 7,500 94,687
YPF Sociedad Anonima, ADR (Oils) 8,150 244,500
-------------
$ 890,926
- -------------------------------------------------------------------------------
Australia - 2.8%
Capral Aluminum Ltd. (Metals) 406,269 $ 1,468,561
Futuris Corp. Ltd. (Commercial Services) 695,738 1,090,681
Western Mining (Holding Company) 134,478 868,848
-------------
$ 3,428,090
- -------------------------------------------------------------------------------
Austria - 0.4%
OMV AG (Oil and Gas) 3,440 $ 436,502
- -------------------------------------------------------------------------------
Belgium - 0.5%
Generale de Banque (Finance) 1,560 $ 616,658
- -------------------------------------------------------------------------------
Brazil - 3.9%
Centrais Eletricas Brasile, ADR
(Utilities - Electric) 38,980 $ 916,030
Companhia Energetica S.A., ADR
(Utilities - Electric) 4,650 206,344
Companhia Paranaense de Energia -
COPEL, "B", Preferred (Electrical) 13,900 205,195
Itausa Investimentos Itau S.A. (Conglomerate) 200,000 166,308
Lojas Americanas S.A., ADR (Retail) 7,800 105,300
Petroleo Brasileiro S.A., Preferred (Oils) 4,110,000 983,051
Telecomunicacoes Braileiras S.A.
(Utilities - Telephone) 1,500,000 195,492
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 12,900 1,767,300
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 18,300 201,300
-------------
$ 4,746,320
- -------------------------------------------------------------------------------
Canada - 0.1%
Super Sol Ltd. (Supermarkets) 32,500 $ 107,605
- -------------------------------------------------------------------------------
China - 0.4%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 10,200 $ 244,800
Qingling Motors Co. "H" (Automotive) 308,000 170,935
Yizheng Chemical Fibre Co., Ltd. (Textiles) 452,000 88,673
-------------
$ 504,408
- -------------------------------------------------------------------------------
Colombia - 0.5%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 5,900 $ 225,675
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 11,500 202,687
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Colombia - continued
Cementos Diamante S.A., ADR
(Construction)## 11,100 $ 174,825
-------------
$ 603,187
- -------------------------------------------------------------------------------
Egypt - 0.3%
Commercial International Bank (Banks and
Credit Cos.)## 10,500 $ 204,750
South Cairo Flour Mills (Food Products) 3,250 63,285
Torah For Cement (Construction) 3,500 88,805
-------------
$ 356,840
- -------------------------------------------------------------------------------
Finland - 0.2%
Oy Tamro AB (Pharmaceuticals)## 34,660 $ 230,438
- -------------------------------------------------------------------------------
France - 5.9%
Accor (Lodging) 5,620 $ 780,962
Compagnie de St. Gobain (Building Materials) 5,800 802,953
Dexia France (Finance) 6,980 653,503
Filipacchi Medias (Publishing) 1,600 346,292
Guilbert S.A. (Distributing) 2,895 430,956
Lafarge S.A., Bearer Shares (Building Materials) 2,200 141,011
Lafarge S.A., Bearer Shares (Building Materials) 4,700 301,251
Michelin, "B" (Tires) 15,800 865,336
Seb S.A. (Household Goods) 2,800 479,555
Societe Nationale Elf Aquitaine (Oils) 8,060 807,820
Strafor-Facom S.A. (Office Equipment) 3,600 248,880
TOTAL S.A., "B" (Oils)* 10,350 949,244
Union des Assurances Federales S.A.
(Insurance) 3,500 425,569
- -------------------------------------------------------------------------------
$ 7,233,332
- -------------------------------------------------------------------------------
Germany - 6.4%
Bayer AG (Chemicals) 12,500 $ 485,562
Buderus AG (Manufacturing) 1,403 715,690
Deutsche Bank AG (Banks) 11,140 618,562
Deutsche Telekom AG
(Utilities - Telephone) 44,545 989,889
Fresenius AG (Medical Supplies) 311 67,652
Fresenius AG (Medical Supplies) 2,800 620,581
Mannesmann AG (Diversified Machinery) 2,000 813,838
Moebel Walther AG (Furniture) 10,500 560,246
Siemens AG (Electrical Equipment) 15,580 879,989
VEBA AG (Oil and Gas) 14,400 815,620
Volkswagen AG (Automotive) 1,900 1,229,903
-------------
$ 7,797,532
- -------------------------------------------------------------------------------
Greece - 0.5%
Ergo Bank (Banks and Credit Cos.) 2,100 $ 148,376
Hellenic Telecommunication Organization
S.A. (Telecommunications) 6,500 162,232
Intracom (Telecommunications) 2,300 112,109
Titan Cement Co (Building Materials) 1,350 134,826
-------------
$ 557,543
- -------------------------------------------------------------------------------
25
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Hong Kong - 5.0%
Associated International Hotels (Lodging) 747,000 $ 501,342
Bank of East Asia Ltd. (Banks and Credit
Cos.) 42,000 152,865
Chen Hsong Holdings (Machines) 1,034,000 607,215
Cheung Kong Holdings Ltd. (Real Estate) 118,000 1,206,957
Citic Pacific Ltd. (Conglomerates) 19,000 108,635
HSBC Holdings PLC (Finance) 34,200 1,037,300
Li & Fung Ltd. (Wholesale) 1,120,000 1,113,061
New World Development Co. (Real Estate) 40,000 254,001
Swire Pacific Air Ltd., "A" (Transportation) 61,500 515,940
Wharf Holdings Ltd. (Real Estate) 136,000 609,086
-------------
$ 6,106,402
- --------------------------------------------------------------------------------
India - 1.8%
Bajaj Auto Ltd. (Automotive) 250 $ 6,033
Eih Ltd. (Consumer Goods and Services) 18,000 207,741
Hindustan Lever Ltd. (Consumer Goods
and Services) 11,500 358,892
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 20,000 238,522
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 109,000 279,976
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 41,000 327,701
State Bank of India (Banks and Credit Cos.) 47,000 403,618
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 800 8,847
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 19,910 410,146
-------------
$ 2,241,476
- --------------------------------------------------------------------------------
Israel - 0.5%
Israel Chemicals Ltd. (Chemicals) 90,000 $ 110,391
Makhteshim Chemical Works Ltd.
(Chemicals)* 17,000 110,066
NICE Systems Ltd., ADR
(Telecommunications) 2,100 64,050
Tadiran Telecommunications Ltd.
(Telecommunications) 5,000 90,625
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 3,800 228,000
-------------
$ 603,132
- --------------------------------------------------------------------------------
Italy - 2.0%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 179,480 $ 527,820
Industrie Natuzzi S.p.A., ADR (Consumer
Goods and Services) 42,620 1,076,155
Telecom Italia S.p.A. (Telecommunications
Services) 287,000 792,222
-------------
$ 2,396,197
- --------------------------------------------------------------------------------
Japan - 23.1%
Aeon Credit Service Co. Ltd. (Financial Services) 10,800 $ 667,045
Aiphone Co. Ltd. (Telecommunications) 30,000 467,097
ALBIS Co. Ltd. (Food) 36,000 359,226
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Japan - continued
Ariake Japan Co. Ltd. (Food) 13,200 $ 433,755
Canon, Inc. (Consumer Goods) 40,000 1,015,054
Chofu Seisakusho Co. (Machines) 18,700 337,806
Daimei Telecom Engineer Corp.
(Telecommunications) 46,000 415,484
Daiwa Industries Co. Ltd. (Distributor) 41,000 352,335
DDI Corp. (Telecommunications) 93 695,200
Diamond Computer Service Co.
(Computers-Software) 23,000 387,785
Exedy Corp. (Automotive Parts) 23,700 285,419
Fuji Photo Film Co. (Photographic Products) 15,000 581,935
Fujisawa Pharmaceuticals (Pharmaceuticals) 100,000 946,237
Fukuda Denshi (Electronics) 24,000 466,581
Hitachi Zosen Tomioka (Automotive) 120,000 459,355
Homac Corp. (Retail) 21,300 324,310
Ito-Yokado Co. Ltd. (Retail) 20,000 1,142,366
Keyence Corp. (Electronics) 7,700 1,112,774
Kyocera Corp. (Electronics) 16,000 1,154,753
Mandom (Cosmetics) 40,700 483,148
Marubeni Corp. (Distribution/Wholesale) 216,000 919,742
Matsuda Sangyo Co. Ltd. (Food) 24,000 454,193
Matsushita Electric Industrial Co.
(Electrical Equipment) 56,000 1,054,968
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 130,000 937,118
Miura Co. (Machines) 24,000 334,452
NAC Co. Ltd. (Commercial Services) 30,240 395,396
NEC Corp. (Computers) 72,000 1,003,355
Nichiha (Building and Construction) 40,000 633,118
NKK Corp. (Steel) 392,000 772,198
Oi Electric Co. (Electronics) 31,000 274,667
Omron Corp. (Electronics) 58,000 1,167,484
Pioneer Electronic Corp. (Electronics) 48,000 1,189,161
Ricoh Co. Ltd. (Office/Business Equipment) 77,000 1,013,419
Ryohin Keikaku Co. Ltd. (Retail) 6,500 492,602
Sanshin Electronics Co. Ltd. (Electronics) 37,000 677,935
Sato Corp. (Machines) 19,536 329,381
Sawako Corp. (Engineering/Construction) 23,200 363,217
TDK Corp. (Special Products and Services) 38,000 2,922,323
TKC Corp. (Computer Software and Services) 23,600 560,310
Tokyo Broadcasting System (Broadcasting) 18,000 328,258
Yoshinoya D&C Co. Ltd. (Retail) 28 325,161
-------------
$ 28,236,123
- --------------------------------------------------------------------------------
Malaysia - 1.8%
Genting Berhad (Entertainment) 21,000 $ 109,492
Malayan Banking Berhad (Finance) 10,000 105,473
Malaysian Industrial Development Finance
Berhad (Finance) 229,000 331,765
Petronas Gas Berhad (Oil and Gas)*## 226,000 818,547
Resorts World Berhad (Entertainment) 27,000 90,269
Tenaga Nasional Berhad (Utilities - Electric) 104,000 476,020
United Engineers Berhad (Engineering) 33,000 266,627
-------------
$ 2,198,193
- --------------------------------------------------------------------------------
26
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Mexico - 2.1%
Cemex S.A., "B" (Construction) 66,000 $ 246,979
Corporacion GEO, S.A. de C.V., "B"
(Real Estate) 21,000 100,752
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 13,000 188,500
Fomento Economico Mexicano S.A., "B"
(Beverage) 36,950 196,195
Gruma S.A. (Food Products) 73,666 349,238
Grupo Carso S.A. de C.V. (Conglomerates) 52,800 188,238
Grupo Carso, "A1" (Conglomerates) 52,800 299,712
Grupo Financiero Banamex, "B" (Finance) 58,000 125,532
Grupo Financiero Inbursa S.A. de C.V.
(Finance) 1,842 6,392
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 30,000 103,919
Telefonos de Mexico S.A.
(Utilities - Telephone) 201,000 446,723
Tubos de Acero de Mexico S.A.
(Iron/Steel)* 17,340 305,149
-------------
$ 2,557,329
- ----------------------------------------------------------------------------
Morocco - 0.4%
Banque Marocaine du Commerce (Banks
and Credit Co.)## 5,300 $ 105,735
Brasserica du Maroc (Consumer Goods
and Services) 530 92,612
Credit Eqdom (Financial Institutions) 750 75,845
ONA S.A. (Conglomerate) 1,500 121,415
Societe Nationale d'Investissement
(Conglomerate) 1,350 100,382
-------------
$ 495,989
- ----------------------------------------------------------------------------
Netherlands - 5.5%
ABN Amro Holdings N.V. (Finance) 52,000 $ 962,110
Ahrend Groep N.V. (Furniture and
Home Appliances) 13,248 838,918
Akzo Nobel (Chemicals) 6,200 826,257
Hagemeyer (Distributing) 18,020 885,644
Royal Dutch Petroleum Co. (Oils) 600 116,047
Stork NV (Machinery) 25,965 1,150,271
Vendex International N.V. (Retail) 19,000 1,067,494
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 41,300 934,185
-------------
$ 6,780,926
- ----------------------------------------------------------------------------
Pakistan - 0.6%
Hub Power Co. Ltd., GDR (Utilities - Electric)* 20,000 $ 462,000
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 4,800 297,600
-------------
$ 759,600
- ----------------------------------------------------------------------------
Peru - 1.4%
Alicorp S.A. (Consumer Goods and Services) 136,000 $ 236,966
Compania de Minas Buenaventura S.A.
(Mining) 33,507 308,269
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Peru - continued
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 238,080 $ 609,728
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 23,328 527,796
-------------
$ 1,682,759
- ----------------------------------------------------------------------------
Poland - 0.6%
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 56,500 $ 504,969
Stomil Olsztyn S.A. (Tires and Rubber) 22,500 281,250
-------------
$ 786,219
- ----------------------------------------------------------------------------
Portugal - 1.0%
Cimentos de Portugal S.A. (Building Materials) 7,326 $ 161,155
Inparsa - Industria e Participacoes, SGPS,
S.A. (Building Materials) 3,500 29,771
Jeronimo Martins & Filho S.A. (Retail) 1,866 126,849
Portugal Telecom S.A. (Utilities - Telephone) 7,400 284,131
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 7,000 262,814
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 5,418 416,468
-------------
$ 1,281,188
- ----------------------------------------------------------------------------
Russia - 1.2%
Lukoil Oil Co., ADR (Oils) 13,800 $ 822,825
Mosenergo, ADR (Utilities - Electric)## 9,900 374,220
Rostelecom (Telecommunications)## 8 303,200
-------------
$ 1,500,245
- ----------------------------------------------------------------------------
Singapore - 1.9%
City Developments Ltd. (Real Estate) 44,000 $ 409,231
Development Bank of Singapore Ltd. (Banks) 59,000 738,531
Overseas-Chinese Banking Corp. Ltd. (Finance) 21,400 266,378
Wing Tai Holdings Ltd. (Holding Company) 300,000 893,706
-------------
$ 2,307,846
- ----------------------------------------------------------------------------
South Africa - 1.0%
Anglo American Corp. of South Africa
Ltd. (Mining) 2,400 $ 140,529
De Beers Centenary AG (Diamonds -
Precious Stones) 5,500 192,734
Liberty Life Association of Africa Ltd.
(Insurance) 7,250 202,922
Nedcor Ltd. (Financial Services) 10,539 205,305
Sappi (Paper Products) 7,000 64,263
Sasol Ltd. (Oils) 18,500 226,797
South African Breweries Ltd. (Brewery) 7,350 206,544
-------------
$ 1,239,094
- ----------------------------------------------------------------------------
Spain - 1.4%
BCO Intercont (Banks) 2,200 $ 372,277
Cristaleria Espanola S.A. (Glass Products) 3,700 295,119
Repsol S.A. (Oils) 10,600 444,021
Telefonica de Espana (Utilities - Telephone) 21,100 609,202
-------------
$ 1,720,619
- ----------------------------------------------------------------------------
27
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Sweden - 3.5%
Autoliv AB (Automotive) 9,280 $ 351,606
Enator AB (Computer Services) 9,600 187,132
Ericsson LM, "B" (Telecommunications) 25,500 895,384
Munksjo AB (Forest and Paper Products) 59,700 578,010
Nobel Biocare AB (Medical and Health Products) 26,280 305,329
PLM AB (Packaging and Containers) 11,400 207,503
Sparbanken Sverige AB, "A" (Banks) 43,680 857,090
Volvo AB, "B" (Automobiles) 31,160 862,829
-------------
$ 4,244,883
- -------------------------------------------------------------------------------
Switzerland - 5.3%
Ciba Specialty AG (Chemicals) 6,720 $ 637,508
Fotolabo S.A. (Leisure) 1,300 423,363
Kuoni Reisen Holdings AG (Transportation) 300 998,230
Lindt & Spruengli AG (Food) 40 795,752
Logitech International (Electrical Equipment) 5,220 901,720
Nestle AG, Registered Shares (Food and
Beverage Products) 750 934,513
Novartis AG (Pharmaceuticals) 560 761,204
Roche Holdings AG (Pharmaceuticals) 112 997,494
-------------
$ 6,449,784
- -------------------------------------------------------------------------------
Taiwan - 1.1%
Taipei Fund (Finance) 125 $ 1,362,500
- -------------------------------------------------------------------------------
Turkey - 0.1%
Adana Cimento Sanayii (Building
Materials) 1,363,600 $ 89,869
- -------------------------------------------------------------------------------
United Kingdom - 14.0%
ASDA Property Holdings PLC (Real Estate) 157,600 $ 392,674
BAA PLC (Transportation) 121,780 1,057,995
Blick PLC (Electrical) 51,200 234,996
British Petroleum PLC (Oil and Gas) 65,540 784,262
British Telecommunications PLC
(Telecommunications) 108,940 791,084
BTR PLC (Holding Company) 169,520 552,975
Bullough PLC (Manufacturing) 275,900 547,229
Carlton Communications PLC (Broadcasting) 104,640 903,941
Close Brothers Group PLC (Banks) 71,800 556,695
David Brown Group PLC
(Engineering/Construction) 88,400 315,893
Devro International PLC (Food) 96,300 513,028
Fine Art Developments PLC (Retail) 66,600 324,237
Forth Ports PLC (Harbor Transportation
Services) 21,000 206,539
Glaxo Wellcome PLC (Pharmaceuticals) 45,880 919,023
Hazlewood Foods PLC (Food) 280,800 464,890
Inchcape PLC (Commercial Services) 54,150 255,636
Independent Insurance Group PLC (Insurance) 46,300 610,954
Lloyds TSB Group PLC (Banks and Credit Cos.) 105,800 1,066,144
Marley PLC (Building Materials) 193,900 400,479
Midland Independent Newspapers PLC
(Publishing) 138,000 334,790
National Westminster (Finance) 20,900 255,917
Roxboro Group PLC (Manufacturing) 89,700 313,187
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
United Kingdom - continued
Sainsbury (J.) PLC (Retail) 36,800 $ 211,732
Serco Group PLC (Commercial Services) 24,500 284,135
Seton Healthcare Group PLC (Medical Supplies) 39,000 303,662
SIG PLC (Building Materials) 105,940 541,531
Storehouse PLC (Retail) 170,460 607,734
T & S Stores PLC (Retail) 119,400 346,425
Tesco PLC (Retail) 114,000 700,758
Triplex Lloyd PLC (Hardware) 121,600 324,902
Unilever PLC (Consumer Goods) 33,580 899,974
Vardon PLC (Entertainment) 197,050 361,765
VCI PLC (Leisure) 58,000 239,585
Walker Greenbank PLC (Maufacturing) 247,300 235,117
Wardle Storeys PLC (Chemicals) 32,500 223,751
-------------
$ 17,083,639
- -------------------------------------------------------------------------------
Venezuela - 0.3%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 10,000 $ 371,250
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $107,428,950) $120,004,643
- -------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------
Sweden
Volvo AB, "B" (Automobiles)
(Identified Cost, $0) $ 31,160 $ 8,327
- -------------------------------------------------------------------------------
Short-Term Obligations - 0.5%
- -------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/23/97 $ 450 $ 448,493
General Electric Capital Corp., due
6/02/97 205 204,968
- -------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 653,461
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $108,082,411) $120,666,431
Other Assets, Less Liabilities - 1.3% 1,583,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $122,249,901
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio Footnotes:
*Non-income producing security.
##SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs GRD = Greek Drachmas
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Netherlands Guilders
ESP = Spanish Pesetas NZD = New Zealand Dollars
FRF = French Francs SEK = Swedish Kronor
28
<PAGE>
Financial Statements
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
May 31, 1997 Equity and Income Growth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $76,343,323, $26,711,108, and
$108,082,411,respectively) $89,854,857 $29,372,129 $120,666,431
Cash -- -- 44,183
Foreign currency, at value (identified cost, $651,563, $13,658, and $482,608,
respectively) 651,681 13,586 483,169
Net receivable for forward foreign currency exchange contract sold -- 283,017 958,593
Net receivable for master netting agreements and closed foreign currency exchange
contracts purchased -- 74,704 --
Net receivable for forward foreign currency exchange contracts purchased -- 111,737 131,216
Receivable for Fund shares sold 1,133,639 286,428 774,640
Receivable for investments sold -- 280,112 --
Interest and dividends receivable 319,469 226,451 498,231
Deferred organization expenses 20,691 18,385 19,115
----------- ----------- ------------
Total assets $91,980,337 $30,666,549 $123,575,578
----------- ----------- ------------
Liabilities:
Cash overdraft $ 2,136 $ 555,757 $ --
Payable for Fund shares reacquired 50,712 39,749 237,117
Payable for investments purchased 229,460 563,801 892,412
Written options outstanding, at value (premiums received $0, $6,589, and $0,
respectively) -- 16,284 --
Payable to affiliates -
Management fee 6,191 1,579 6,554
Administrative fee 74 24 101
Shareholder servicing agent fee 644 211 874
Distribution fee 42,423 14,110 58,398
Accrued expenses and other liabilities 131,058 64,978 130,221
----------- ----------- ------------
Total liabilities $ 462,698 $ 1,256,493 $ 1,325,677
----------- ----------- ------------
Net assets $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Net assets consist of:
Paid-in capital $80,593,249 $27,843,519 $114,182,502
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 13,408,306 3,116,858 13,675,208
Accumulated net realized loss on investments and foreign currency transactions (2,016,103) (1,182,827) (4,780,289)
Accumulated net investment loss (467,813) (367,494) (827,520)
----------- ----------- ------------
Total $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Shares of beneficial interest outstanding 4,838,654 1,805,209 7,251,124
=========== =========== ============
Class A shares:
Net asset value per share
(net assets of $37,539,578, $13,425,340, and $56,810,289 [divided by] 1,979,873,
822,833, and 3,361,154 shares of beneficial interest outstanding, respectively) $18.96 $16.32 $16.90
====== ====== ======
Offering price per share (100 - 95.25 of net asset value per share) $19.91 $17.13 $17.74
====== ====== ======
Class B shares:
Net asset value and offering price per share
(net assets of $51,019,984, $15,748,793, and $62,958,124 [divided by] 2,701,302,
967,802, and 3,741,995 shares of beneficial interest outstanding, respectively) $18.89 $16.27 $16.82
====== ====== ======
Class C shares:
Net asset value and offering price per share
(net assets of $2,658,810, $235,453, and $2,397,128 [divided by] 141,725, 14,545,
and 142,994 shares of beneficial interest outstanding, respectively) $18.76 $16.19 $16.76
====== ====== ======
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $299,267, $470.34, and $84,360 [divided by] 15,754, 28.825, and
4,981 shares of beneficial interest outstanding, respectively) $19.00 $16.32 $16.94
====== ====== ======
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
29
<PAGE>
kl.
Financial Statements - continued
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
Year Ended May 31, 1997 Equity and Income Growth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Interest $ 202,857 $ 459,577 $ 403,067
Dividends 1,028,372 475,670 2,092,771
Foreign taxes withheld (63,610) (59,180) (233,349)
------------ ------------ ------------
Total investment income $ 1,167,619 $ 876,067 $ 2,262,489
------------ ------------ ------------
Expenses -
Management fee $ 687,535 $ 277,086 $ 1,049,705
Trustees' compensation 6,458 6,892 11,015
Administrative fee 3,019 1,100 4,467
Shareholder servicing agent fee 37,906 15,593 62,315
Shareholder servicing agent fee (Class A) 18,926 11,517 42,410
Shareholder servicing agent fee (Class B) 28,770 19,201 68,426
Shareholder servicing agent fee (Class C) 223 24 525
Distribution and service fee (Class A) 128,054 66,872 252,648
Distribution and service fee (Class B) 284,900 149,349 559,606
Distribution and service fee (Class C) 8,454 1,034 11,524
Custodian fee 66,789 53,394 116,586
Registration fees 58,565 49,349 34,241
Printing 47,823 22,734 69,269
Postage 37,403 9,202 24,397
Auditing fees 32,111 26,826 38,272
Legal fees 9,916 10,794 10,649
Amortization of organization expenses 5,197 5,197 5,197
Miscellaneous 41,506 33,494 79,131
------------ ------------ ------------
Total expenses $ 1,503,555 $ 759,658 $ 2,440,383
Fees paid indirectly (4,573) (7,370) (7,957)
Refund of expenses to investment adviser 25,887 -- --
------------ ------------ ------------
Net expenses $ 1,524,869 $ 752,288 $ 2,432,426
------------ ------------ ------------
Net investment income (loss) $ (357,250) $ 123,779 $ (169,937)
------------ ------------ ------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,983,312) $ (1,254,793) $(4,497,196)
Written option transactions -- 7,796 --
Foreign currency transactions (83,420) (430,595) (441,519)
------------ ------------ ------------
Net realized loss on investments and foreign currency transactions $(2,066,732) $ (1,677,592) $(4,938,715)
------------ ------------ ------------
Change in unrealized appreciation (depreciation) -
Investments (net of applicable deferred foreign taxes of $103,099, $0, and $1,118,
respectively) $11,949,720 $ 1,748,881 $ 7,102,874
Written options -- (32,094) --
Translation of assets and liabilities in foreign currencies 2,504 589,842 1,120,254
------------ ------------ ------------
Net unrealized gain on investments and foreign currency translation $11,952,224 $ 2,306,629 $ 8,223,128
------------ ------------ ------------
Net realized and unrealized gain on investments and foreign currency $ 9,885,492 $ 629,037 $ 3,284,413
------------ ------------ ------------
Increase in net assets from operations $ 9,528,242 $ 752,816 $ 3,114,476
============ ============= ============
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity International Growth and Income
------------------------------ --------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
- --------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (357,250) $ 13,002 $ 123,779 $ 81,065
Net realized gain (loss) on investments and foreign
currency transactions (2,066,732) 502,931 (1,677,592) 87,073
Net unrealized gain on investments and foreign
currency translation 11,952,224 1,456,082 2,306,629 810,229
-------------- ------------- -------------- -------------
Increase in net assets from operations $ 9,528,242 $ 1,972,015 $ 752,816 $ 978,367
-------------- ------------- -------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (8,868) $ (68,626) $ (12,226)
From net investment income (Class B) -- -- -- (7,299)
From net investment income (Class C) -- -- (575) --
From net realized gain on investments and foreign
currency transactions (Class A) (309,984) -- (35,996) --
From net realized gain on investments and foreign
currency transactions (Class B) (238,475) -- (39,731) --
From net realized gain on investments and foreign
currency transactions (Class C) (11,143) -- (193) --
In excess of net investment income (Class B) -- (3,354) -- --
-------------- ------------- -------------- -------------
Total distributions declared to shareholders $ (559,602) $ (12,222) $ (145,121) $ (19,525)
-------------- ------------- -------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 92,886,375 $ 46,419,714 $ 14,540,133 $ 27,711,754
Net asset value of shares issued to shareholders in
reinvestment of distributions 500,512 12,183 128,054 15,767
Cost of shares reacquired (50,719,552) (8,510,026) (11,456,699) (3,095,490)
-------------- ------------- -------------- -------------
Increase in net assets from Fund share
transactions $ 42,667,335 $ 37,921,871 $ 3,211,488 $ 24,632,031
-------------- ------------- -------------- -------------
Total increase in net assets $ 51,635,975 $ 39,881,664 $ 3,819,183 $ 25,590,873
Net assets:
At beginning of period 39,881,664 -- 25,590,873 --
-------------- ------------- -------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 91,517,639 $ 39,881,664 $ 29,410,056 $ 25,590,873
============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
International Growth
--------------------------------
Year Ended Period Ended
May 31, 1997 May 31, 1996*
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (169,937) $ (4,270)
Net realized gain (loss) on investments and foreign
currency transactions (4,938,715) 334,764
Net unrealized gain on investments and foreign
currency translation 8,223,128 5,452,080
-------------- -------------
Increase in net assets from operations $ 3,114,476 $ 5,782,574
-------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (6,653)
From net investment income (Class B) -- --
From net investment income (Class C) -- --
From net realized gain on investments and foreign
currency transactions (Class A) (469,661) --
From net realized gain on investments and foreign
currency transactions (Class B) (305,586) --
From net realized gain on investments and foreign
currency transactions (Class C) (14,849) --
In excess of net investment income (Class B) -- --
-------------- -------------
Total distributions declared to shareholders $ (790,096) $ (6,653)
-------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 129,496,667 $ 84,291,229
Net asset value of shares issued to shareholders in
reinvestment of distributions 830,061 5,219
Cost of shares reacquired (95,147,991) (5,325,585)
-------------- -------------
Increase in net assets from Fund share
transactions $ 35,178,737 $ 78,970,863
-------------- -------------
Total increase in net assets $ 37,503,117 $ 84,746,784
Net assets:
At beginning of period 84,746,784 --
-------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 122,249,901 $ 84,746,784
============== =============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996
See notes to financial statements.
31
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity
----------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
---------------- --------------- -------------- ---------------
Class A Class B
- -------------------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.52 $ 15.00 $ 16.47 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ (0.07) $ 0.04 $ (0.15) $ (0.02)
Net realized and unrealized gain on
investments and foreign currency
transactions 2.74 1.50 2.73 1.50
------- ------- ------- -------
Total from investment operations $ 2.67 $ 1.54 $ 2.58 $ 1.48
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.02) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.23) -- (0.16) --
In excess of net investment income -- -- -- (0.01)
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.23) $ (0.02) $ (0.16) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 18.96 $ 16.52 $ 18.89 $ 16.47
------- ------- ------- -------
Total return+++ 16.43% 10.24%++ 15.87% 9.85%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 2.51% 2.48%+ 3.04% 3.06%+
Net investment income (loss) (0.42)% 0.35%+ (0.87)% (0.19)%+
Portfolio turnover 47% 22% 47% 22%
Average commission rate $0.0019 $0.0136 $0.0019 $0.0136
Net assets at end of period (000 omitted) $37,540 $19,861 $51,020 $20,021
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets Equity
- ---------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
---------------- ----------------
Class C Class I
- ---------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.77 $ 16.47
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.08) $ 0.10
Net realized and unrealized gain on
investments and foreign currency
transactions 2.36 2.43
------- -------
Total from investment operations $ 2.28 $ 2.53
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.29) --
In excess of net investment income -- --
------- -------
Total distributions declared to
shareholders $ (0.29) $ --
-------- -------
Net asset value - end of period $ 18.76 $ 19.00
-------- -------
Total return+++ 13.89%++ 15.36%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 3.00%+ 2.01%+
Net investment income (loss) (0.48)%+ 1.14%+
Portfolio turnover 47% 47%
Average commission rate $0.0019 $0.0019
Net assets at end of period (000 omitted) $2,659 $299
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
+++Total returns for Class A shares do not include the applicable sales charge.
If the sales charge had been included, the results would have been lower.
ss.For the year ended May 31, 1997, the Adviser voluntarily agreed to bear,
subject to reimbursement by the Fund, expenses of each class of shares of the
Fund such that expenses, exclusive of management, distribution, service fees,
and certain other expenses, of the Fund's Class A shares, Class B shares,
Class C shares, and Class I shares do not exceed 0.75%, respectively, of the
Fund's average daily net assets on an annualized basis. For the period ended
May 31, 1996, the Adviser voluntarily agreed to maintain total expenses of
the Fund at not more than 2.50%, 3.07%, and 3.00% of average daily net assets
for Class A, Class B, and Class C shares, respectively. To the extent actual
expenses were over/under these limitations, the net investment income (loss)
per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $(0.06) $ 0.02 $ (0.14) $ (0.08) $ (0.07) $ 0.10
Ratios (to average net assets):
Expenses 2.45% 2.73%+ 2.98% 3.30%+ 2.97%+ 1.99%+
Net investment income (loss) (0.37)% 0.10%+ (0.82)% (0.44)%+ (0.39)%+ 1.14%+
</TABLE>
See notes to financial statements
32
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth and Income
--------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
------------------------------ ------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.98 $ 15.00 $ 15.94 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.11 $ 0.11 $ 0.03 $ 0.05
Net realized and unrealized gain on
investments and foreign currency
transactions 0.35 0.90 0.34 0.90
------- ------- ------- -------
Total from investment operations $ 0.46 $ 1.01 $ 0.37 $ 0.95
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.08) $ (0.03) $ -- $ (0.01)
From net realized gain on investments and
foreign currency transactions (0.04) -- (0.04) --
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.12) $ (0.03) $ (0.04) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 16.32 $ 15.98 $ 16.27 $ 15.94
======= ======= ======= =======
Total return[dbldag] 2.88% 6.71%++ 2.33% 6.37%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.39% 2.52%+ 2.94% 3.11%+
Net investment income 0.72% 1.04%+ 0.18% 0.49%+
Portfolio turnover 89% 29% 89% 29%
Average commission rate $0.0197 $0.0291 $0.0197 $0.0291
Net assets at end of period (000 omitted) $13,425 $11,950 $15,749 $13,641
</TABLE>
<TABLE>
<CAPTION>
International Growth and Income
- -------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
-------------------------------
Class C Class I
-------------- ---------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.02 $15.71
------- ------
Income from investment operations# -
Net investment income $ 0.12 $ 0.16
Net realized and unrealized gain on
investments and foreign currency
transactions 0.21 0.45
------- ------
Total from investment operations $ 0.33 $ 0.61
------- ------
Less distributions declared to shareholders -
From net investment income $ (0.12) $ --
From net realized gain on investments and
foreign currency transactions (0.04) --
------- ------
Total distributions declared to
shareholders $ (0.16) $ --
------- ------
Net asset value - end of period $ 16.19 $16.32
------- ------
Total return[dbldag] 2.09%++ 3.88%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.64%+ 1.89%+
Net investment income 0.80%+ 2.33%+
Portfolio turnover 89% 89%
Average commission rate $0.0197 $0.0197
Net assets at end of period (000 omitted) $235 $--
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares,
January 2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
33
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth
-------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
-------------- ------------- ------------ --------------
Class A Class B
- ----------------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.71 $ 15.00 $ 16.66 $ 15.00
------ ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ 0.02 $ 0.03 $ (0.07) $ (0.03)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.32 1.69 0.31 1.69
------ ------- ------- -------
Total from investment operations $ 0.34 $ 1.72 $ 0.24 $ 1.66
------ ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.01) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.15) -- (0.08) --
------ ------- ------- -------
Total distributions declared to
shareholders $(0.15) $ (0.01) $ (0.08) --
------ ------- ------- -------
Net asset value - end of period $16.90 $ 16.71 $ 16.82 $ 16.66
====== ======= ======= =======
Total return[dbldag] 2.13% 11.43%++ 1.56% 11.07%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 1.99% 2.24%+ 2.53% 2.85%+
Net investment income (loss) 0.13% 0.24%+ (0.42)% (0.31)%+
Portfolio turnover 53% 11% 53% 11%
Average commission rate $0.0069 $0.0107 $0.0069 $0.0107
Net assets at end of period (000 omitted) $56,810 $41,483 $62,958 $43,264
</TABLE>
<TABLE>
<CAPTION>
International Growth
---------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
--------------- ----------------
Class C Class I
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.83 $ 15.90
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.04) $ 0.11
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.15 0.93
------- -------
Total from investment operations $ 0.11 $ 1.04
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.18) --
------- -------
Total distributions declared to
shareholders $ (0.18) $ --
------- -------
Net asset value - end of period $ 16.76 $ 16.94
======= =======
Total return[dbldag] 0.79%++ 6.54%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.50%+ 1.52%+
Net investment income (loss) (0.27)%+ 1.40%+
Portfolio turnover 53% 53%
Average commission rate $0.0069 $0.0069
Net assets at end of period (000 omitted) $2,397 $84
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
34
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS/Foreign & Colonial Emerging Markets Equity Fund (Emerging Market Equity),
MFS/Foreign & Colonial International Growth and Income Fund (International
Growth and Income), and MFS/Foreign & Colonial International Growth Fund
(International Growth) (the Funds) are each a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed
issues and forward contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the base
currency and translated into U.S. dollars at the closing daily exchange rate.
Future contracts, options, and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices. Over-the-counter
options are valued by brokers through the use of a pricing model which takes
into account closing bond valuations, implied volatility, and short-term
repurchase rates. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Repurchase Agreements - The Funds may enter into repurchase agreements with
institutions that the Funds' investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Funds require
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Funds to obtain those securities
in the event of a default under the repurchase agreement. The Funds monitor, on
a daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each repurchase
agreement is greater than amounts owed to the Funds under each such repurchase
agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
and losses. That portion of both realized and unrealized gains and losses on
investments that results from fluctuations in foreign currency exchange rates
is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Funds in connection with
their organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of operations of the Funds.
Written Options - The Funds may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Funds. The Funds, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bear the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to
35
<PAGE>
Notes to Financial Statements - continued
the extent of the premium received. Written options may also be used as part of
an income-producing strategy reflecting the view of the Funds' management on
the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Funds may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Funds will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Funds may enter into contracts to deliver or receive foreign
currency they will receive from or require for their normal investment
activities. They may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Funds may enter into
contracts with the intent of changing the relative exposures of the Funds'
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly - The Funds' custodian bank calculates its fee based on
the Funds' average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Funds. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Funds' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Funds file a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Funds' tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that reported
to shareholders on Form 1099-DIV. Foreign taxes have been provided for on
interest and dividend income earned on foreign investments in accordance with
the applicable country's tax rates and to the extent unrecoverable are recorded
as a reduction of investment income. Distributions to shareholders are recorded
on the ex-dividend date.
The 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 May 31, 1997, the following amounts were
reclassified due to differences between book and tax accounting for currency
transactions. These changes had no effect on the net assets or net asset value
per share.
Emerging International
Markets Growth and International
Equity Income Growth
------------- -------------- --------------
Increase (decrease):
Paid-in-capital ............ $ 4,043 $ -- $ 32,902
Accumulated undistributed net
realized gain on investments
and foreign currency
transactions ............... 83,420 545,761 404,453
Accumulated undistributed net
investment income ......... (87,463) (545,761) (437,355)
Multiple Classes of Shares of Beneficial Interest - The Funds offer Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in
their respective distribution and service fees. All shareholders bear the
common expenses of each Fund pro rata based on average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
difference in per share dividend rates are generally due to differences in
separate class expenses.
36
<PAGE>
Notes to Financial Statements - continued
(3) Transactions with Affiliates
Investment Adviser - Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
of 0.975% of average daily net assets for the International Growth Fund and the
International Growth and Income Fund, and 1.25% of average daily net assets for
the Emerging Markets Equity Fund The advisory agreements permit the adviser to
engage one or more sub-advisers and the adviser, MFS, has engaged Foreign &
Colonial Management Ltd., an England and Wales Company, to assist in the
performance of its services.
Under a temporary expense reimbursement agreement, MFS has voluntarily agreed
to pay all of the Emerging Markets Equity Fund's operating expenses, exclusive
of management, distribution, and service fees. The Emerging Markets Equity Fund
in turn will pay MFS an expense reimbursement fee not greater than 0.75% of
average daily net assets for Class A, Class B, and Class C shares. To the
extent that the expense reimbursement fee exceeds the Emerging Markets Equity
Fund's actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At May 31, 1997, the aggregate unreimbursed expenses owed to MFS
by the Emerging Markets Equity Fund amounted to $38,092.
Administrator - Effective March 1, 1997, each Fund has an administrative
services agreement with MFS to provide each Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, each Fund pays
MFS an administrative fee up to 0.015% per annum of each Fund's average daily
net assets, provided that the administrative fee is not assessed on Fund assets
that exceed $3 billion.
The Funds pay no compensation directly to their Trustees who are officers of
the investment adviser, or to officers of the Funds, all of whom receive
remuneration for their services to the Funds from MFS. Certain of the officers
and Trustees of the Funds are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). Each of the
Funds has an unfunded defined benefit plan for all of its independent Trustees
and Mr. Bailey. Included in Trustees' compensation are net periodic pension
expenses of $1,701, $1,701, and $1,701 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$44,930, $18,575, and $79,525 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997, as its portion of the sales
charge on sales of Class A shares of each Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares of each Fund pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
Each Fund's distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A in order that
MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each
securities dealer that enters into a sales agreement with MFD of up to 0.25%
per annum of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers, and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for
accounts not attributable to a securities dealer which amounted to $15,111,
$6,002, and $28,940 for the Emerging Markets Equity Fund, International Growth
and Income Fund, and International Growth Fund, respectively, for the year
ended May 31, 1997. Fees incurred under each Fund's distribution plan during
the year ended May 31, 1997, were 0.50% of average daily net assets
attributable to Class A shares on an annualized basis.
Each Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and Class
C shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class
C shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $1,469, $1,835, and $5,117 for Class B
shares of the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively, for the year ended May 31,
1997 and $2, $0, and $26 for Class C shares of the Emerging Markets Equity
Fund, International Growth and Income Fund, and Interna-
37
<PAGE>
Notes to Financial Statements - continued
tional Growth Fund, respectively, for the period ended May 31, 1997. Fees
incurred under each Fund's distribution plan during the year ended May 31,
1997, were 1.00% of the Fund's average daily net assets attributable to Class B
and Class C shares, respectively, on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption with six years of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges for Class A shares imposed
during the year ended May 31, 1997, were $48, $11, and $1,254 for the Emerging
Markets Equity Fund, International Growth and Income Fund, and International
Growth Fund, respectively. Contingent deferred sales charges for Class B shares
imposed during the period ended May 31, 1997, were $43,118, $32,134, and
$103,091 for the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively. Contingent deferred sales
charges for Class C shares imposed during the period ended May 31, 1997, were
$1,252, $213, and $3,733 for the Emerging Markets Equity Fund, International
Growth and Income Fund, and International Growth Fund, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of each 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 of each Fund at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated $62,033,984
and $24,482,588, $27,162,926 and $22,901,788, and $90,622,329 and $25,759,078
for the Emerging Markets Equity Fund, International Growth and Income Fund, and
International Growth Fund, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
---------------- -------------------- -------------
<S> <C> <C> <C>
Aggregate cost $ 76,343,323 $ 26,735,821 $ 108,082,411
============= ============ =============
Gross unrealized appreciation $ 15,430,144 $ 3,339,321 $ 17,283,458
Gross unrealized depreciation (1,918,610) (703,013) (4,699,438)
------------- ------------ -------------
Net unrealized appreciation $ 13,511,534 $ 2,636,308 $ 12,584,020
============= ============ =============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares ------------------------------- ------------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- ------------------------------------ -------------- ---------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,277,472 $ 39,713,990 365,309 $ 5,792,690 3,428,135 $ 55,431,605
Shares issued to shareholders
in reinvestment of distributions 17,927 287,543 5,771 90,897 36,196 576,007
Transfer to Class I (1,982) (32,637) -- -- (1,308) (20,795)
Shares reacquired (1,516,023) (26,385,091) (296,169) (4,680,979) (2,584,373) (41,727,368)
----------- -------------- ---------- -------------- ----------- --------------
Net increase 777,394 $ 13,583,805 74,911 $ 1,202,608 878,650 $ 14,259,449
=========== ============== ========== ============== =========== ==============
</TABLE>
38
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares - continued ------------------------------- ------------------------------ -----------------------------
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- ------------------------------------------------- ---------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,490,414 $ 23,464,680 793,963 $ 12,142,184 2,712,981 $ 42,075,064
Shares issued to shareholders
in reinvestment of distributions 514 7,966 658 10,210 367 5,219
Shares reacquired (288,449) (4,694,661) (46,699) (723,607) (230,844) (3,729,818)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,202,479 $ 18,777,985 747,922 $ 11,428,787 2,482,504 $ 38,350,465
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class B Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,844,356 $ 50,086,036 462,559 $ 7,367,431 4,424,042 $ 71,166,884
Shares issued to shareholders in
reinvestment of distributions 12,630 202,215 2,318 36,552 15,231 240,644
Shares reacquired (1,371,122) (23,955,353) (352,648) (5,601,722) (3,294,305) (52,883,159)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,485,864 $ 26,332,898 112,229 $ 1,802,261 1,144,968 $ 18,524,369
=========== ============== ========= ============== =========== ==============
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- -------------- ----------- --------------
Shares sold 1,451,675 $ 22,955,034 1,009,636 $ 15,569,570 2,695,977 $ 42,216,165
Shares issued to shareholders in -- --
reinvestment of distributions 268 4,217 358 5,557
Shares reacquired (236,505) (3,815,365) (154,421) (2,371,883) (98,950) (1,595,767)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,215,438 $ 19,143,886 855,573 $ 13,203,244 2,597,027 $ 40,620,398
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class C Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997** Shares Amount Shares Amount Shares Amount
- ----------------------------------------------- -------------- --------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 160,074 $ 2,796,205 89,056 $ 1,379,569 174,418 $ 2,818,920
Shares issued to shareholders in
reinvestment of distributions 676 10,754 39 605 852 13,410
Shares reacquired (19,025) (339,707) (74,550) (1,173,998) (32,276) (516,669)
----------- -------------- --------- -------------- ----------- --------------
Net increase 141,725 $ 2,467,252 14,545 $ 206,176 142,994 $ 2,315,661
=========== ============= ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class I Shares Equity Fund and Income Fund Growth Fund
---------------------------- ----------------------------- ----------------------------
Period Ended May 31, 1997*** Shares Amount Shares Amount Shares Amount
- ----------------------------------------- -------------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 14,138 $ 257,507 29 $ 443 3,673 $ 58,463
Transfer from Class A 1,982 32,637 -- -- 1,308 20,795
Shares reacquired (366) (6,764) -- -- -- --
----------- -------------- --------- -------------- ----------- -------------
Net increase 15,754 $ 283,380 29 $ 443 4,981 $ 79,258
=========== ============== ========= ============== =========== ==============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997, for the Emerging Markets Equity Fund. For the period
from the commencement of offering of Class C shares, July 1, 1996, to May 31,
1997, for the International Growth and Income Fund and the International
Growth Fund.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 31, 1997.
(6) Line of Credit
The Funds entered into agreements which enable them to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fees allocated to the Funds for the year ended May 31,
1997, were $0, $283, and $1,198 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively.
39
<PAGE>
Notes to Financial Statements - continued
(7) Financial Instruments
The Funds trade financial instruments with off-balance sheet risk in the normal
course of their investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Funds have in particular classes of financial
instruments and do not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
International Growth and Income Fund
Written Option Transactions
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
---------------------------------- ---------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
------------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Canadian Dollars -- $ -- 1,457 $ 3,828
Deutsche Marks 1,499 6,983 -- --
Deutsche Marks/British Pounds 1,386 4,209 -- --
Italian Lire/Deutsche Marks 2,817,989 20,484 -- --
Japanese Yen -- -- 122,808 7,290
Spanish Pesetas/Deutsche Marks -- -- 63,527 1,575
Options written -
Australian Dollars 147 993 -- --
British Pounds -- -- 371 2,800
Deutsche Marks 1,325 6,313 1,545 3,143
Deutsche Marks/British Pounds 1,819 7,202 728 9,382
Japanese Yen 219,563 19,049 282,000 17,466
Swiss Francs/Deutsche Marks 477 1,447 1,059 13,071
Options terminated in closing transactions -
Australian Dollars (147) (993) -- --
Deutsche Marks (2,824) (13,296) (1,545) (3,143)
Deutsche Marks/British Pounds (1,386) (4,209) (728) (9,382)
Italian Lire/Deutsche Marks (2,817,989) (20,484) -- --
Japanese Yen (219,563) (19,049) (205,000) (13,677)
Swiss Francs/Deutsche Marks -- -- (1,059) (13,071)
Options expired -
Canadian Dollars (1,457) (3,828)
Deutsche Marks/British Pounds (1,819) (7,202) -- --
Japanese Yen -- -- (122,808) (7,290)
Spanish Pesetas/Deutsche Marks -- -- (63,527) (1,575)
Swiss Francs/Deutsche Marks (477) (1,447) -- --
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
Options outstanding at end of period consist of:
British Pounds -- $ -- 371 $ 2,800
Japanese Yen -- -- 77,000 3,789
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
40
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts
International Growth and Income Fund
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
=================== ============================ ================= ============ ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 8/26/97 AUD 400,387 $ 310,670 $ 304,877 $ 5,793
6/30/97 BEF 12,095,412 376,125 343,957 32,168
8/26/97 CHF 88,335 62,423 63,218 (795)
8/26/97-10/14/97 DEM 4,413,501 2,704,813 2,607,501 97,312
9/30/97 ESP 13,746,758 95,400 95,375 25
10/14/97 FRF 6,200,000 1,180,728 1,085,825 94,903
9/30/97 GBP 39,621 64,860 64,782 78
6/30/97 ITL 305,660,812 180,124 180,646 (522)
10/14/97 JPY 239,000,000 2,143,210 2,096,030 47,180
6/30/97 SEK 520,009 74,073 67,198 6,875
----------- ----------- --------
$7,192,426 $6,909,409 $283,017
=========== =========== ========
Purchases 9/30/97 CAD 433,166 $ 314,490 $ 316,682 $ 2,192
8/26/97 CHF 935,115 640,200 669,230 29,030
9/30/97 DEM 161,159 95,400 95,311 (89)
6/30/97-8/26/97 ESP 38,703,652 270,694 268,111 (2,583)
6/30/97-8/26/97 JPY 217,948,304 1,797,772 1,884,856 87,084
8/26/97 NLG 1,148,588 606,000 602,103 (3,897)
----------- ----------- --------
$3,724,556 $3,836,293 $111,737
=========== =========== ========
</TABLE>
At May 31, 1997, forward foreign currency exchange contract purchases and sales
under master netting arrangements and closed forward foreign currency exchange
contracts excluded above for the International Growth and Income Fund amounted
to a net receivable of $74,704. At May 31, 1997, the Fund had sufficient cash
and/or securities to cover any commitments under these contracts.
Forward Foreign Currency Exchange Contracts
International Growth Fund
<TABLE>
<CAPTION>
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Appreciation
================= =============================== ================= ============= ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 10/14/97 DEM 6,400,000 $ 4,114,618 $ 3,789,018 $325,600
10/14/97 FRF 20,500,000 3,904,018 3,590,227 313,791
10/14/97 JPY 1,617,000,000 14,500,292 14,181,090 319,202
------------ ------------ ---------
$22,518,928 $21,560,335 $958,593
============ ============ =========
Purchases 10/14/97 JPY 808,500,000 $ 6,959,329 $ 7,090,545 $131,216
============ ============ =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
41
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Trustees of MFS Series Trust X and Shareholders of MFS/Foreign &
Colonial International Funds:
We have audited the accompanying statements of assets and liabilities of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund, ("the Funds") including the schedules of portfolio investments, as
of May 31, 1997, and the related statements of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
the year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of May 31, 1997, by correspondence with the
custodian and brokers or other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund at May 31, 1997, the results of their operations for the year then
ended, and the changes in their net assets and financial highlights for the
year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 1, 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.
42
<PAGE>
It's Easy to Contact Us
[PHONE GRAPHIC] MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Investment Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[QUESTION MARK GRAPHIC] MFS Personal Service
Account Service/Literature:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA Service:
Call 1-800-637-1255 any business day
from 9 a.m. to 5 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[LETTER GRAPHIC] MFS Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
World Wide Web:
www.mfs.com
43
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
Stock
- ----------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Value Fund
Stock and Bond
- ----------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- ----------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- ----------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- ----------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International
Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland,
Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia, West
Virginia
Money Market
- ----------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
44
<PAGE>
MFS/Foreign & Colonial International Funds
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer,
Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University
Graduate School of Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director
and Secretary, Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management
Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
Arnab Kumar Banerji
Jeff Chowdhry
Richard O. Hawkins*
June Scott
Ian K. Wright
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Ernst & Young LLP
Investor Information
For MFS stock and bond market outlooks, call toll free:
1-800-637-4458 anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any
business day from 8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free:
1-800-637-6576 any business day from 9 a.m. to 5 p.m.
Eastern time. (To use this service, your phone must be
equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll
free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
World Wide Web
www.mfs.com
[DALBAR GRAPHIC]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The
firm achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey.
A total of 110 firms responded, offering input on the quality of service they
received from 29 mutual fund companies nationwide. The survey contained
questions about service quality in 15 categories, including "knowledge of
phone service contracts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
45
<PAGE>
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[DALBAR GRAPHIC]
500 Boylston Street
Boston, MA 02116-3741
[MFS LOGO]
Bulk Rate
U.S. Postage
Paid
MFS
(C) 1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
85/285/385/885
86/286/386/886
87/287/387/887
MFC-2 7/97 48M
<PAGE> 160
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
SUPPLEMENT TO THE OCTOBER 1, 1997 PROSPECTUS AND STATEMENT
OF ADDITIONAL INFORMATION (AS REVISED NOVEMBER 1, 1997)
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED OCTOBER 1,
1997 (AS REVISED NOVEMBER 1, 1997), AND CONTAINS A DESCRIPTION OF CLASS I
SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I SHARES
--------------
<S> <C>
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 (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fees.............................................................. 1.25%
Rule 12b-1 Fees.............................................................. None
Other Expenses (1)(2)........................................................ 0.75%
----
Total Operating Expenses .................................................... 2.00%
</TABLE>
- ------------------
(1) "Other Expenses" is based on Class A expenses incurred during the period
ended May 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:
<TABLE>
<CAPTION>
PERIOD CLASS I SHARES
------ --------------
<S> <C>
1 year..................................... $20
3 years.................................... 63
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. 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.
-1-
<PAGE> 161
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 Ernst
& Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997*
-------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.47
-------
Income from investment operations# -
Net investment income $ 0.10
Net realized and unrealized gain
on investments and foreign currency transactions 2.43
-------
Total from investment operations $ 2.53
-------
Less distributions declared to shareholders -
From net investment income $ --
From net realized gain (loss) on investments --
-------
Total distributions declared to shareholders $ --
-------
Net asset value - end of period $ 19.00
-------
Total return 15.36%####
Ratios (to average net assets)/Supplemental data:**
Expenses## 2.00%###
Net investment income 1.14%###
Portfolio turnover 47%
Average commission rate $0.0019
Net assets at end of period (000 omitted) $ 299
</TABLE>
- --------------------------
* For the period from the commencement of offering of Class I shares,
January 2, 1997 to May 31, 1997.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### Annualized.
#### Not annualized.
** The investment adviser voluntarily agreed to maintain the expenses,
excluding the management fee, of the Fund at not more than 0.75% of the
Fund's average daily net assets. Absent this arrangement, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $0.10
Ratios (to average net assets):
Expenses## 1.99%###
Net investment income 1.14%###
</TABLE>
ELIGIBLE PURCHASERS
Class I shares of the Fund are available for purchase only by the following
purchasers ("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept
-2-
<PAGE> 162
purchases from smaller plans, endowments or foundations or in smaller
amounts if it believes, in its sole discretion, that such entity's
aggregate assets will equal or exceed $100 million, or that such entity
will make additional investments which will cause its total investment to
equal or exceed $10 million, within a reasonable period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS OCTOBER 1, 1997
(AS REVISED NOVEMBER 1, 1997)
-3-
<PAGE> 163
<TABLE>
<S> <C>
PROSPECTUS
MFS(R)/FOREIGN & October 1, 1997 (As revised November 1, 1997)
COLONIAL EMERGING Class A Shares of Beneficial Interest
MARKETS EQUITY FUND Class B Shares of Beneficial Interest
(A Member of the MFS Family of Funds(R)) Class C Shares of Beneficial Interest
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary............................................................................... 2
2. Condensed Financial Information............................................................... 4
3. The Fund...................................................................................... 5
4. Investment Objective and Policies............................................................. 5
5. Certain Securities and Investment Techniques.................................................. 6
6. Risk Factors.................................................................................. 13
7. Management of the Fund........................................................................ 16
8. Information Concerning Shares of the Fund..................................................... 18
Purchases................................................................................ 18
Exchanges................................................................................ 24
Redemptions and Repurchases.............................................................. 25
Distribution Plan........................................................................ 27
Distributions............................................................................ 29
Tax Status............................................................................... 29
Net Asset Value.......................................................................... 30
Description of Shares, Voting Rights and Liabilities..................................... 30
Performance Information.................................................................. 30
Expenses................................................................................. 31
9. Shareholder Services.......................................................................... 31
Appendix A -- Waivers of Sales Charges........................................................ A-1
Appendix B -- Description of Bond Ratings..................................................... B-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND (the "Fund") -- The
investment objective of the Emerging Markets Equity Fund is capital
appreciation. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 65% of its total assets in equity
securities of issuers whose principal activities are located in emerging market
countries.
No assurance can be given that the investment objective of the Emerging Markets
Equity Fund (hereinafter referred to as the "Fund") will be achieved. The Fund
is a diversified series of MFS Series Trust X (the "Trust"), an open-end
management investment company. The minimum initial investment generally is
$1,000 per account (see "Purchases").
THE FUND IS INTENDED FOR INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THE
RISKS ENTAILED IN SEEKING CAPITAL APPRECIATION AND IN INVESTING IN FOREIGN
SECURITIES.
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. The Emerging Markets Equity Fund also has retained as its
sub-advisers Foreign & Colonial Management Ltd. and Foreign & Colonial Emerging
Markets Limited (collectively, the "Sub-Adviser"), both of which are located at
Exchange House, Primrose Street, London EC2A 2NY, United Kingdom.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information, dated October 1, 1997 (as revised
November 1, 1997), as amended or supplemented from time to time (the "SAI"),
which contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 33 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 the Prospectus and the SAI, and other information
regarding the Fund. This Prospectus is available on the Adviser's Internet World
Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 164
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)......... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable)............................................. See Below(1) 4.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE DAILY NET ASSETS):
<S> <C> <C> <C>
Management Fees........................................... 1.25% 1.25% 1.25%
Rule 12b-1 Fees(2)........................................ 0.50% 1.00%(4) 1.00%(4)
Other Expenses(3)......................................... 0.75% 0.75% 0.75%
Total Operating Expenses.................................. 2.50% 3.00% 3.00%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) 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)
0.50% per annum of the average daily net assets attributable to the Fund's
Class A shares. Distribution expenses paid under the Plan with respect to
Class A shares, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(3) 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."
(4) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to the Fund's Class B and Class C
shares, respectively, under the Distribution Plan (see "Distribution Plan"
below). Distribution expenses paid under the Plan with respect to Class B
and Class C shares, together with any CDSC payable upon redemption of Class
B and Class C shares, may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge.
2
<PAGE> 165
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(1) (1)
1 year................................................ $ 72 $ 71 $ 31 $ 40 $ 30
3 years............................................... 122 124 94 $ 93 $ 93
5 years............................................... 174 180 160 158 158
10 years............................................... 318 323(2) 323(2) 332 332
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately 8 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 --
"Management of the Fund"; and (iv) Rule 12b-1 (i.e., distribution plan) fees
- --"Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE> 166
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Funds' Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended Period Ended Year Ended Period Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996* May 31, 1997**
------------ ------------- ------------ ------------- --------------
Class A Class B Class C
---------------------------- ---------------------------- --------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA (FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
Net asset value -- beginning of period... $ 16.52 $ 15.00 $ 16.47 $ 15.00 $ 16.77
------- ------- ------- ------- -------
Income from investment operations# --
Net investment income (loss)........... $ (0.07) $ 0.04 $ (0.15) $ (0.02) $ (0.08)
Net realized and unrealized gain on
investments and foreign currency
transactions......................... 2.74 1.50 2.73 1.50 2.36
------- ------- ------- ------- -------
Total from investment operations... $ 2.67 $ 1.54 $ 2.58 $ 1.48 $ 2.28
------- ------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income............... $ -- $ (0.02) $ -- $ -- $ --
From net realized gain on investments and
foreign currency transactions.......... (0.23) -- (0.16) -- (0.29)
In excess of net investment income....... -- -- -- (0.01) --
------- ------- ------- ------- -------
Total distributions declared to
shareholders..................... $ (0.23) $ (0.02) $ (0.16) $ (0.01) $ (0.29)
Net asset value -- end of period......... $ 18.96 $ 16.52 $ 18.89 $ 16.47 $ 18.76
------- ------- ------- ------- -------
Total return++........................... 16.43% 10.24%++ 15.87% 9.85%++ 13.89%++
RATIOS (TO AVERAGE DAILY NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses##............................... 2.50% 2.48%+ 3.04% 3.06%+ 3.00%+
Net investment income (loss)............. (0.42)% 0.35%+ (0.87)% (0.19)%+ (0.48)%+
PORTFOLIO TURNOVER......................... 47% 22% 47% 22% 47%
AVERAGE COMMISSION RATE.................... $0.0019 $0.0136 $0.0019 $0.0136 $0.0019
NET ASSETS AT END OF PERIOD (000
OMITTED)................................. $37,540 $19,861 $51,020 $20,021 $ 2,659
</TABLE>
- ---------------
* For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
** For the period from the commencement of offering of Class C shares,
June 27, 1996, to May 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.
++ Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
sec. For the year ended May 31, 1997, MFS voluntarily agreed to bear, subject
to reimbursement by the Fund, expenses of each class of shares of the
Fund such that expenses, exclusive of management, distribution, service
fees, and certain expenses, of the Fund's Class A, Class B, Class C, and
Class I shares do not exceed 0.75%, respectively, of the Fund's average
daily net assets on an annualized basis. For the period ended May 31,
1996, MFS voluntarily agreed to maintain, subject to reimbursement by the
Fund, total expenses of the Fund at not more than 2.50%, 3.07%, and 3.00%
of average daily net assets for Class A, Class B, and Class C shares,
respectively. To the extent actual expenses were over/under these
limitations, the net investment income (loss) per share and the ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income (loss)............... $ (0.06) $ 0.02 $ (0.14) $ (0.08) $ (0.07)
RATIOS (TO AVERAGE NET ASSETS):
Expenses................................. 2.45% 2.73%+ 2.98% 3.30%+ 2.97%+
Net investment income (loss)............. (0.37)% 0.10%+ (0.82)% (0.44)%+ (0.39)%+
</TABLE>
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<PAGE> 167
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. This Prospectus relates to the Fund. Shares of the other series of
the Trust, MFS International Growth Fund, MFS International Growth and Income
Fund and MFS Government Mortgage Fund, are offered and sold pursuant to separate
prospectuses and statements of additional information. Shares of the Fund are
sold continuously to the public and the Fund then uses the proceeds to buy
securities for its portfolio. Three classes of shares of the Fund currently are
offered to the general public. Class A shares are offered at net asset value
plus an initial sales charge up to a maximum of 4.75% of the offering price (or
a CDSC of 1.00% upon redemption during the first year in the case of certain
purchases of $1 million or more and certain purchases by retirement plans) and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares will
convert to Class A shares approximately eight years after purchase. Class C
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption of 1.00% during the first year and an annual
distribution fee and service fee up to a maximum of 1.00% per annum. Class C
shares do not convert to any other class of shares of the Fund. In addition, the
Fund offers an additional class of shares, Class I shares, exclusively to
certain institutional investors. Class I shares are made available by means of a
separate Prospectus Supplement provided to institutional investors eligible to
purchase Class I shares and are offered at net asset value without an initial
sales charge or CDSC upon redemption and without an annual distribution and
service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets
(including supervision of the Sub-Adviser) and the officers of the Trust are
responsible for the operations of the Fund. The Adviser manages each portfolio
from day to day in accordance with the Fund's investment objective and policies.
A majority of the Trustees are not affiliated with the Adviser or the
Sub-Adviser. The Trust also offers to buy back (redeem) shares of the Fund from
shareholders at any time at net asset value, less any applicable CDSC.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund has a different investment objective which it pursues through separate
investment policies, as described below. The differences in objectives and
policies among the Funds can be expected to affect the market and financial risk
to which the Fund is subject and the performance of the Fund. The investment
objective and policies of the Fund may, unless otherwise specifically stated, be
changed by the Trustees of the Trust without a vote of the shareholders. A
change in a Fund's objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund. Any investment involves risk
and there is no assurance that the investment objective of the Fund will be
achieved.
The Fund's investment objective is to seek capital appreciation. The Fund seeks
to achieve its objective by investing, under normal market conditions, at least
65% of its total assets in equity securities of issuers whose principal
activities are located in emerging market countries. The Adviser and the
Sub-Adviser expect to take a global approach to portfolio management by
weighting the Fund's investments towards countries in Latin America, Asia,
Africa, the Middle East and the developing countries of Europe, primarily in
Eastern Europe. See "Certain Securities and Investment Techniques -- Emerging
Market Securities" below. The selection of securities is made solely on the
basis of potential for capital appreciation. Dividend and interest income from
portfolio securities, if any, is incidental to the Fund's investment objective
of capital appreciation.
While the Fund intends to invest primarily in equity securities, the Fund may
also invest less than 35% of its net assets in fixed income securities of
government, government-related, supranational and corporate issuers whose
principal activities are outside
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<PAGE> 168
the U.S., rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB
or lower by Standard & Poor's Ratings Services ("S&P"), Fitch Investors Service,
Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff & Phelps") and
comparable unrated securities. See "Risk Factors -- Lower Rated Fixed Income
Securities" below. The Adviser and the Sub-Adviser consider a variety of factors
in selecting fixed income securities to achieve capital appreciation, including
the creditworthiness of issuers, interest rates and currency exchange rates.
The Fund does not intend to emphasize any particular country or region in making
its investments, but under normal market conditions, the Fund will be invested
in at least three countries (outside the U.S.) and will not invest more than 50%
of its net assets in issuers whose principal activities are located in a single
country. See "Risk Factors -- Investments in One or a Limited Number of
Countries" below. Currently, the Fund does not expect to invest more than 25% of
its net assets in issuers whose principal activities are located in a single
country. The Fund will seek to reduce risk by investing its assets in a number
of markets and issuers, performing credit analyses of potential investments and
monitoring current developments and trends in both the international economy and
financial markets.
The Adviser and the Sub-Adviser determine where an issuer's principal activities
are located by considering such factors as its country of organization, the
principal trading market for its securities and the source of its revenues and
location of its assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country.
For temporary defensive reasons, such as during times of international political
or economic uncertainty or turmoil, most or all of the Fund's investments may be
in cash (U.S. dollars, foreign currencies or multinational currency units)
and/or securities that are denominated in U.S. dollars or whose issuers are
domiciled in the U.S. The Fund is not restricted as to the portions of its
assets which may be invested in securities denominated in a particular currency
and up to 100% of the Fund's net assets may be invested in securities
denominated in foreign currencies and multinational currency units.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
CONSISTENT WITH THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, THE FUND MAY
ENGAGE IN THE FOLLOWING SECURITIES TRANSACTIONS AND INVESTMENT TECHNIQUES, MANY
OF WHICH ARE DESCRIBED MORE FULLY IN THE SAI. SEE "INVESTMENT POLICIES AND
RESTRICTIONS" IN THE SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized markets.
FOREIGN GROWTH SECURITIES: The Fund may invest in securities of foreign growth
companies, including established foreign companies, whose rates of earnings
growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Risk Factors" below. It is anticipated that these
companies will primarily be in nations with more developed securities markets,
such as Japan, Australia, Canada, New Zealand and most Western European
countries, including Great Britain.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser and the Sub-Adviser to have an emerging market
economy, taking into account a number of factors, including
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<PAGE> 169
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser and the Sub-Adviser determine
whether an issuer's principal activities are located in an emerging market
country by considering such factors as its country of organization, the
principal trading market for its securities and the source of its revenues and
location of its assets. The issuer's principal activities generally are deemed
to be located in a particular country if: (a) the security is issued or
guaranteed by the government of that country or any of its agencies, authorities
or instrumentalities; (b) the issuer is organized under the laws of, and
maintains a principal office in, that country; (c) the issuer has its principal
securities trading market in that country; (d) the issuer derives 50% or more of
its total revenues from goods sold or services performed in that country; or (e)
the issuer has 50% or more of its assets in that country. See "Risk Factors --
Emerging Markets" below.
FIXED INCOME SECURITIES: Fixed income securities in which the Fund may invest
include all types of long- or short-term debt obligations, such as bonds, notes,
bills, debentures, loans, loan assignments and commercial paper. The Fund may
invest in emerging market fixed income securities, which, in addition to the
securities identified above, may take the form of interests issued by entities
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by emerging market country issuers. Fixed
income securities in which the Fund may invest include securities in the lower
rating categories of recognized rating agencies and comparable unrated
securities. See "Risk Factors" below. The Fund will not invest 35% or more of
its net assets, in fixed income securities rated Ba or lower by Moody's or BB or
lower by S&P or Fitch and comparable unrated securities. See "Risk Factors --
Lower Rated Fixed Income Securities" below. However, because most foreign fixed
income securities are not rated, the Fund will invest in foreign fixed income
securities primarily based on the Adviser's or the Sub-Adviser's credit analysis
without relying on published ratings.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund may invest in other
investment companies to the extent permitted by the 1940 Act and applicable
state securities laws (i) as a means by which the Fund may invest in securities
of certain countries which do not otherwise permit investment, (ii) as a means
to purchase thinly traded securities of emerging market companies, or (iii) when
the Adviser or the Sub-Adviser believes such investments may be more
advantageous to the Fund than a direct market purchase of securities. If the
Fund invests in such investment companies, the Fund's shareholders will bear not
only their proportionate share of the expenses of the Fund (including operating
expenses and the fees of the Adviser) but also will indirectly bear similar
expenses of the underlying investment companies.
PRIVATIZATIONS: The governments in some countries, including emerging market
countries, have been engaged in programs of selling part or all of their stakes
in government owned or controlled enterprises ("privatizations"). The Fund may
invest in privatizations. In certain countries, the ability of foreign entities
to participate in privatizations may be limited by local law and the terms on
which the foreign entities may be permitted to participate may be less
advantageous than those afforded local investors.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs") and other types of depositary
receipts. ADRs are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. GDRs and other types of depositary
receipts are typically issued by foreign banks or trust companies and evidence
ownership of underlying securities issued by either a foreign or a U.S. company.
Generally, ADRs are in registered form and are designed for use in U.S.
securities markets and GDRs are in bearer form and are designed for use in
foreign securities markets. For the purposes of the Fund's policy to invest a
certain percentage of its assets in foreign securities, the investments of the
Fund in ADRs, GDRs and other types of depositary receipts are deemed to be
investments in the underlying securities.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
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<PAGE> 170
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, Panama, the Philippines, Peru, Poland, Slovenia, Uruguay and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In light of the residual risk of Brady
Bonds and the history of defaults of countries issuing Brady Bonds with respect
to commercial bank loans by public and private entities, investments in Brady
bonds may be viewed as speculative.
STRUCTURED SECURITIES: The Fund may invest a portion of its assets in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of sovereign debt obligations. This type of restructuring
involves the deposit with, or purchase by, an entity, such as a corporation or
trust, of specified instruments (such as commercial bank loans or Brady Bonds)
and the issuance by that entity of one or more classes of securities
("Structured Securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which the Fund anticipates it will invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments. The Fund is permitted to invest in a class of Structured
Securities that is either subordinated or unsubordinated to the right of payment
of another class. Subordinated Structured Securities typically have higher
yields and present greater risks than unsubordinated Structured Securities.
Structured Securities are typically sold in private placement transactions, and
there currently is no active trading market for Structured Securities.
REPURCHASE AGREEMENTS: 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. Foreign repurchase agreements may be less well secured than U.S.
repurchase agreements, and may be denominated in foreign currencies. They may
also involve greater risk of loss if the counterparty defaults. Some
counterparties in these transactions may be less creditworthy than those in U.S.
markets.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors 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
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<PAGE> 171
accrual, may require the liquidation of other portfolio securities under
disadvantageous circumstances to satisfy the Fund's distribution obligations.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) or
interest rates rise or fall according to changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of the principal amount of the instrument.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion of its assets
in loans. By purchasing a loan, the Fund acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate, government or
other borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. The Fund may also purchase trade or other claims against
companies, which generally represent money owed by the company to a supplier of
goods and services. These claims may also be purchased at a time when the
company is in default. Certain of the loans acquired by the Fund may involve
revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
For a further discussion of loans and the risks related to transactions therein,
see the SAI.
RESTRICTED SECURITIES: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is illiquid and thus subject to the Fund's
limitations on investing not more than 15% of its net assets in illiquid
investments. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring liquidity of restricted
securities. The Board, however, 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's portfolio to the extent that qualified institutional buyers become for a
time uninterested in purchasing Rule 144A securities held in the Fund's
portfolio. Subject to the Fund's 15% limitation on investments in illiquid
investments, the Fund may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the Fund might
not be able to sell these securities when the Adviser or Sub-Adviser wishes to
do so, or might have to sell them at less than fair value. In addition, market
quotations are less readily available. Therefore, judgment may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC. Such loans
will usually be made only to member banks of the Federal Reserve System and
member firms (and subsidiaries thereof) of the New York Stock Exchange, and
would be required to be secured continuously by collateral in cash, irrevocable
letters of credit or U.S. Government securities maintained on a current basis at
an amount at least equal to the market value of the securities loaned. As with
other extensions of credit there are risks of delay in recovery or even loss of
rights in the collateral should the
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<PAGE> 172
borrower of the securities fail financially. However, the loans would be made
only to entities deemed by the Adviser or the Sub-Adviser to be of good
standing, and when, in the judgment of the Adviser or the Sub-Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Adviser or the Sub-Adviser determines to
make securities loans, it is intended that the value of the securities loaned
would not exceed 30% of the value of the Fund's total assets.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to 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 a Fund is not
limited to the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 10% of its assets to such purchases. The Fund does not
pay for the securities until received or start earning interest on them until
the contractual settlement date. In order to invest its assets immediately,
while awaiting delivery of securities purchased on such basis, the Fund will
hold liquid assets in a segregated account to pay for the commitment. Although
the Fund does not intend to make such purchases for speculative purposes,
purchases of securities on such bases may involve more risk than other types of
purchases. For additional information concerning these securities, see the SAI.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options on securities that are
traded on foreign and U.S. securities exchanges and over the counter. The Fund
will write such Options for the purpose of increasing its return and/or
protecting the value of its portfolio. The Fund may also write combinations of
put and call Options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk. The Fund may purchase put or call Options in anticipation of declines in
the value of portfolio securities or increases in the value of securities to be
acquired. However, the writing of Options constitute only a partial hedge, up to
the amount of the premium, less any transaction costs.
The Fund may purchase and sell options that are traded on foreign and U.S.
exchanges, and Options traded over-the-counter with broker-dealers who deal in
these Options. The ability to terminate over-the-counter Options is more limited
than with exchange-traded Options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. 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, including foreign dealers, and will treat the assets used
to cover these options as illiquid.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options the yield curve option is based on the difference between the yields
of designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the SAI.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put Options
and purchase call and put Options on foreign and domestic stock indices
("Options on Stock Indices"). The Fund may write such options for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In
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<PAGE> 173
addition, if the value of an underlying index moves adversely to the Fund's
option position, the option may be exercised, and the Fund will experience a
loss which may only be partially offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of contracts based on indices of securities as such
instruments become available for trading or fixed income securities or foreign
currencies ("Futures Contracts"). Such transactions will be entered into for
hedging purposes, in order to protect the Fund's current or intended investments
from the effects of changes in interest or exchange rates, or for non-hedging
purposes to the extent permitted by applicable law. For example, in the event
that an anticipated decrease in the value of portfolio securities occurs as a
result of a decline in the dollar value of foreign currencies in which portfolio
securities are denominated or a general increase in interest rates, the adverse
effects of such changes may be offset, in whole or in part, by gains on Futures
Contracts sold by the Fund. Conversely, the adverse effects of an increase in
the cost of portfolio securities to be acquired, occurring as a result of a rise
in the dollar value of securities denominated in foreign currencies or a decline
in interest rates, may be offset, in whole or in part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and will be required to maintain margin
deposits. In addition, Futures Contracts entail risks. Although the Fund
believes that use of such contracts will benefit the Fund, if its investment
judgment about the general direction of interest or exchange rates is incorrect,
the Fund's overall performance may be poorer than if it had not entered into any
such contract and the Fund may realize a loss. Transactions entered into for
non-hedging purposes involve greater risk including the risk of losses which are
not offset by gains on other portfolio assets. The Fund will not enter into any
Futures Contract if immediately thereafter the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options on futures
contracts ("Options on Futures Contracts") in order to protect against declines
in the values of portfolio securities or against increases in the cost of
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the Fund's portfolio than the purchase or sale of the
underlying Futures Contracts since the potential loss is limited to the amount
of the premium plus related transaction costs, although it may be necessary to
exercise the option to realize any profit, which results in the establishment of
a futures position. The writing of Options on Futures Contracts, however, does
not present less risk than the trading of Futures Contracts and will constitute
only a partial hedge, up to the amount of the premium received. In addition, if
an option is exercised, the Fund may suffer a loss on the transaction. Options
on Futures Contracts may also be entered into for non-hedging purposes, to the
extent permitted under applicable law, which involves greater risks and could
result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of foreign portfolio securities
and against increases in the dollar cost of foreign securities to be acquired.
As in the case of other types of options, however, the writing of an Option on
Foreign Currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund may be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an Option on Foreign Currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the premium
paid for the Option plus related transaction costs. Options on Foreign
Currencies to be written or purchased by the Fund will be traded on foreign and
U.S. exchanges or over-the-counter.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date at a price set at the time of the contract ("Forward Contracts").
The Fund may
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enter into Forward Contracts for hedging purposes as well as for the non-hedging
purpose of increasing the Fund's current income. By entering into transactions
in Forward Contracts, however, the Fund may be required to forego the benefits
of advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, the Fund may sustain losses which will
reduce its gross income. Such transactions, therefore, could be considered
speculative. Forward Contracts are traded over-the-counter, and not on organized
commodities or securities exchanges. As a result, such contracts operate in a
manner distinct from exchange-traded instruments, and their use involves certain
risks beyond those associated with transactions in Futures Contracts or options
traded on exchanges. The Fund may also enter into a Forward Contract on one
currency in order to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the judgment
of the Adviser or the Sub-Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies. The Fund has
established procedures which require the use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indices, currencies and other prices
or rates, such as the value of mortgage prepayment rates. For example, in the
typical interest rate swap, the Fund might exchange a sequence of cash payments
based on a floating rate index for cash payments based on a fixed rate. Payments
made by both parties to a swap transaction are based on a notional principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI for more information on, and the risks involved in,
these activities.
PORTFOLIO TRADING: The primary consideration in placing portfolio security
transactions is execution at the most favorable prices. Consistent with the
foregoing primary consideration, the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser and the Sub-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.
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While it is not generally the Fund's policy to invest or trade for short-term
profits, the Fund may dispose of a portfolio security whenever the Adviser or
the Sub-Adviser is of the opinion that such security no longer has an
appropriate appreciation potential or when another security appears to offer
relatively greater appreciation potential. Portfolio changes are made without
regard to the length of time a security has been held, or whether a sale would
result in a profit or loss. Therefore, the rate of portfolio turnover is not a
limiting factor when a change in the portfolio is otherwise appropriate.
Transaction costs incurred by the Fund and realized capital gains and losses of
the Fund may be greater than that of a fund with a lesser portfolio turnover
rate.
6. RISK FACTORS
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. The Fund may invest up
to 100% of its assets in foreign securities which are not traded on a U.S.
exchange. Special considerations may also include more limited information about
foreign issuers, higher brokerage and custody costs, different or less stringent
accounting standards and thinner trading markets. Foreign securities markets may
also be less liquid, more volatile and less subject to government supervision
than in the U.S. Investments in foreign countries could be affected by other
factors including expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods.
EMERGING MARKETS: The risks of investing in foreign securities may be
intensified in the case of investments in emerging markets. Securities in
emerging markets may be less liquid and more volatile in price than securities
of comparable domestic issuers. Emerging markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, in possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions against
repatriation of assets, and may have less protection of property rights than
more developed countries. The economies of countries with emerging markets may
be predominantly based on only a few industries, may be highly vulnerable to
changes in local or global trade conditions, and may suffer from extreme and
volatile debt burdens or inflation rates. Local securities markets may trade a
small number of securities and may be unable to respond effectively to increases
in trading volume, potentially making prompt liquidation of substantial holdings
difficult or impossible at times. Securities of issuers located in countries
with emerging markets may have limited marketability and may be subject to more
abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by a delay in obtaining a grant of, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
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Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund. See the SAI for a further discussion of
emerging markets securities as well as the associated risks.
ALLOCATION AMONG EMERGING MARKETS: Each Fund may allocate all or a portion of
its investments in emerging market securities among the emerging markets of
Latin America, Asia, Africa, the Middle East and the developing countries of
Europe, primarily in Eastern Europe. The Fund will allocate its investments
among these emerging markets in accordance with the Adviser's and the
Sub-Adviser's determination as to the allocation most appropriate with respect
to the Fund's investment objective and policies. The Fund may invest its assets
allocated to investment in emerging markets without limitation in any particular
region, and, in accordance with the Adviser's and the Sub-Adviser's investment
discretion, at times may invest all of its assets allocated to investment in
emerging markets in securities of emerging market issuers located in a single
region (e.g., Latin America). To the extent that the Fund's investments are
concentrated in one or a few emerging market regions, the Fund's investment
performance correspondingly will be more dependent upon the economic, political
and social conditions and changes in those regions. The ability of the Fund to
allocate its investments among emerging market regions without restriction may
have the effect of increasing the volatility of the Fund, as compared to the
fund which limits such allocations.
INVESTMENTS IN ONE OR A LIMITED NUMBER OF COUNTRIES: The Fund will seek to
reduce risk by investing its assets in a number of markets and issuers. However,
the Fund may invest up to 50% of its net assets in issuers located in a single
country. To the extent that the Fund invests a significant portion of its assets
in a single or limited number of countries, the Fund's investment performance
correspondingly will be more dependent upon the economic, political and social
conditions and changes in that country or countries, and the risks associated
with investments in such country or countries will be particularly significant.
The ability of the Fund to focus its investments in one or a limited number of
countries may have the effect of increasing the volatility of the Fund.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
companies, including established companies. Investing in emerging growth
companies involves greater risk than is customarily associated with investing in
more established companies. Emerging growth companies often have limited product
lines, markets or financial resources, and they may be dependent on one-person
management. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk than would established
growth stocks.
FOREIGN CURRENCIES: Because the Fund may invest up to 100% of its asset in
securities denominated in currencies other than the U.S. dollar, and because the
Fund may hold foreign currencies, the value of the Fund's investments, and the
value of dividends and interest earned by the Fund, may be significantly
affected by changes in currency exchange rates. Some foreign currency values may
be volatile, and there is the possibility of governmental controls on currency
exchange or governmental intervention in currency markets, which could adversely
affect the Fund. Although the Adviser and Sub-Adviser may attempt to manage
currency exchange rate risks, there is no assurance that the Adviser and
Sub-Adviser will do so at an appropriate time or that the Adviser and
Sub-Adviser will be able to predict exchange rates accurately. For example, if
the Adviser and Sub-Adviser hedge the Fund's exposure to a foreign currency, and
that currency's value rises, the Fund will lose the opportunity to participate
in the currency's appreciation. The Fund may hold foreign currency received in
connection with investments in foreign securities, and enter into Forward
Contracts, Futures Contracts and Options on Foreign Currencies when, in the
judgment of the Adviser or Sub-Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rates. While the holding of foreign currencies will permit the
Fund to take advantage of favorable movements in the applicable exchange rate,
it also exposes the Fund to risk of loss if such rates move in a direction
adverse to the Fund's position. Such losses could also adversely affect the
Fund's hedging strategies. See the SAI for further discussion of the holding of
foreign currencies as well as the associated risks.
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FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund is subject
to no restrictions on the maturities of the fixed income securities it holds.
The Fund's investments in fixed income securities with longer terms to maturity
are subject to greater volatility than the Fund's shorter-term obligations.
LOWER RATED FIXED INCOME SECURITIES: Fixed income securities in which the Fund
may invest may be rated Baa by Moody's or BBB by S&P or Fitch (and comparable
unrated securities). For a description of these and other rating categories, see
Appendix B. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade fixed income
securities.
The Fund may also invest in fixed income securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch (and comparable unrated securities). No minimum
rating standard is required by the Fund. These securities are considered
speculative and, while generally providing greater yield than investments in
higher rated securities, will involve greater risk of principal and income
(including the possibility of default or bankruptcy of the issuers of such
securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and because yields vary over time, no specific level of income can
ever be assured. These lower rated high yielding fixed income securities
generally tend to be affected by economic changes (and the outlook for economic
growth), short-term corporate and industry developments and the market's
perception of their credit quality (especially during times of adverse
publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described below). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on
the Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, the Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's and the Sub-Adviser's judgment
may at times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.
While the Adviser and the Sub-Adviser may refer to ratings issued by established
credit rating agencies, it is not the Fund's policy to rely exclusively on
ratings issued by these rating agencies, but rather to supplement such ratings
with the Adviser's and the Sub-Adviser's own independent and ongoing review of
credit quality. The Fund's achievement of its investment objective may be more
dependent on the Adviser's and the Sub-Adviser's own credit analysis than in the
case of an investment company primarily investing in higher quality fixed income
securities.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of shares of the
Fund will vary as the aggregate value of the portfolio securities of the Fund
increases or decreases. However, changes in the value of securities subsequent
to their acquisition will not affect cash or yield to maturity to the Fund.
TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the
Fund may enter into transactions in Options, Options on Stock Indices, Forward
Contracts, Futures Contracts, Options on Futures Contracts and Options on
Foreign
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Currencies for hedging purposes, such transactions nevertheless involve certain
risks. For example, a lack of correlation between the instrument underlying an
option or futures contract and the assets being hedged, or unexpected adverse
price movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. The Fund also may enter into transactions in Options, Options
on Stock Indices, Forward Contracts, Futures Contracts and Options on Futures
Contracts for other than hedging purposes, to the extent permitted by applicable
law, which involves greater risk. In particular, such transactions may result in
losses for 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, Options on Stock Indices, Futures Contracts, Options on
Futures Contracts, Forward Contracts and Options on Foreign Currencies, and
includes a discussion of the risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities underlying
Options and Futures Contracts traded by the Fund will include U.S. Government
securities as well as foreign securities.
------------------------
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless otherwise indicated. See "Investment Policies and
Restrictions" in the SAI.
Except with respect to the Fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated September 1, 1995 (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 an annual management fee computed and paid
monthly, in an amount equal to 1.25% of the average daily net assets of the
Fund.
For the fiscal year ended May 31, 1997, MFS received management fees under the
Advisory Agreement of $687,535 (equivalent on an annualized basis to 1.25%, of
the Fund's average daily net assets) for the Fund.
This management fee is greater than the fee paid by most funds, but is
comparable to fees paid by funds having similar investment objectives and
policies. MFS also serves as investment adviser to each of the other funds in
the MFS Family of Funds (the "MFS Funds"), and to MFS(R) Municipal Income Trust,
MFS Multimarket Income Trust, MFS Government Markets Income Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value Trust,
MFS Union Standard Trust, MFS Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
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MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $67.1
billion on behalf of approximately 2.6 million investor accounts as of September
30, 1997. As of such date, the MFS organization managed approximately $43.2
billion of assets in equity securities, approximately $20.4 billion of assets
invested in fixed income funds and fixed income portfolios and approximately
$4.4 billion of assets in foreign securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), which is 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, Donald A. Stewart, Arnold D. Scott and John D. McNeil. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. 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 of MFS, is also the Chairman and President of the
Trust. W. Thomas London, Stephen E. Cavan, James O. Yost, Ellen M. Moynihan,
Mark E. Bradley and James R. Bordewick, Jr., all of whom are officers of MFS,
are officers of the Trust.
FCM -- The Advisory Agreement permits the Adviser from time to time to engage
one or more sub-advisers to assist in the performance of its services. Pursuant
to the Advisory Agreement, the Adviser has engaged Foreign & Colonial Management
Ltd., a company incorporated under the laws of England and Wales ("FCM"),
located at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, as
sub-adviser to render advisory services to the Fund with respect to the Fund's
investments in emerging markets securities. FCM is a wholly owned subsidiary of
Hypo Foreign & Colonial Management (Holdings) Ltd. ("Hypo F&C"). Sixty-Five
percent of the outstanding voting securities of Hypo F&C is owned by Hypo (U.K.)
Holdings Ltd., which is a wholly owned subsidiary of HYPO-BANK (Bayerische
Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and fifth largest,
commercial bank in Germany, founded in 1835. The remaining 35% of the
outstanding voting securities of Hypo F&C is owned by four closed-end publicly
listed investment Trusts managed by FCM including Foreign & Colonial Investment
Trust PLC. FCM has a history of money management dating from 1868 and the
establishment of the world's oldest closed-end fund, Foreign & Colonial
Investment Trust PLC. As of May 31, 1997, FCM managed approximately U.S. $45.64
billion of assets, including approximately U.S. $35.85 billion of assets in
equity securities and approximately U.S. $9.79 billion of assets in fixed income
securities.
Under a separate Sub-Advisory Agreement between the Adviser and FCM, dated
September 1, 1995 (the "Sub-Advisory Agreement"), the Adviser may delegate to
FCM the authority to make investment decisions for the Fund. For its services,
the Adviser pays FCM a management fee, computed and paid monthly, in an amount
equal to 1.00% of the average daily net assets of the Fund on an annualized
basis. Effective September 8, 1997, FCM has voluntarily agreed to waive for an
indefinite period of time, a portion of the sub-investment advisory fee it
receives from the Adviser from 1.00% to 0.65% of the average daily net assets of
the Fund managed by FCM on an annualized basis.
FCEM -- The Sub-Advisory Agreement for the Fund permits FCM from time to time to
engage one or more sub-advisers to assist in the performance of its services.
Pursuant to the Sub-Advisory Agreement, FCM has engaged Foreign & Colonial
Emerging Markets Limited, a company incorporated under the laws of England and
Wales ("FCEM"), located at Exchange House, Primrose Street, London EC2A 2NY,
United Kingdom, as sub-adviser to render advisory services to the Fund. FCEM is
a wholly owned subsidiary of FCM. FCEM serves as the investment adviser to
public closed-end and open-end funds and segregated accounts specializing in
emerging markets. As of May 31, 1997, FCEM managed approximately U.S. $4.92
billion of assets invested in emerging markets.
Under a separate Sub-Advisory Agreement between FCM and FCEM, dated September 1,
1995, FCM may delegate to FCEM the authority to make investment decisions for
the Fund. It is presently intended that FCEM will provide portfolio management
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services for the portion of the assets of the Fund invested in emerging markets
securities. For its services, FCM pays FCEM a management fee, computed and paid
monthly, in an amount equal to 1.00% of the average daily net assets managed by
FCEM of the Fund on an annualized basis. Effective September 8, 1997 with
respect to the Fund, FCEM has voluntarily agreed to waive for an indefinite
period of time, a portion of the sub-investment advisory fee it receives from
the Adviser from 1.00 to 0.65% of the average daily net assets of the Fund
managed by FCEM on an annualized basis.
For the fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser fees
under the Sub-Advisory Agreement of $546,167 in connection with its services for
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 or clients of FCM.
Some simultaneous transactions are inevitable when several clients receive
investment advice from MFS and FCM, particularly when the same security is
suitable for more than one client. While in some cases this arrangement could
have a detrimental effect on the price or availability of the security as far as
the Fund is concerned, in other cases it may produce increased investment
opportunities for the Fund.
PORTFOLIO MANAGERS -- Dr. Arnab Kumar Banerji, Chief Investment Officer of FCEM,
has been the Fund's portfolio manager since September, 1997. Dr. Banerji has
been employed by FCEM as a portfolio manager since 1993 before which he served
as Joint Head of Emerging Markets for Citibank Global Asset Management since
1989. Jeffery Chowdhry has been a portfolio manager of the Fund since February
1, 1997. Mr. Chowdhry, a Director of FCEM, has been employed by FCEM as a
portfolio manager since 1994. Prior to 1994, Mr. Chowdhry was a portfolio
manager at BZW Investment Management.
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 May 31, 1997, MFS received fees under the Administrative
Services Agreement of $3,019 (equivalent on an annualized basis to 0.0055% of
the Fund's average daily net assets) for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer. As used in the Prospectus and any appendices thereto the term "dealer"
includes any broker, dealer, bank (including bank trust departments), registered
investment adviser, financial planner and any other financial institutions
having a selling agreement or other similar agreement with MFD. Dealers may also
charge their customers fees relating to investments in the Fund.
This prospectus offers three classes of shares to the general public (Class A,
Class B and Class C shares) which bear sales charges and distribution fees in
different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
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PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares of the Fund are
offered at net asset value plus an initial sales charge as follows:
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<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SALES CHARGE* AS PERCENTAGE OF: DEALER
------------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED 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**
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above (see the
SAI).
**A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the Funds in the MFS Funds would be in an
aggregate amount of at least $250,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the time
of purchase, a market value of $500,000 or more invested in shares of any
class or classes of the MFS Funds. THE RETIREMENT PLAN WILL QUALIFY UNDER
THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION INFORMS THE
SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE
19
<PAGE> 182
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 such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------- --------------------------
<S> <C>
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
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(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 or partially terminated under ERISA or
is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
20
<PAGE> 183
CLASS B SHARES: Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC upon redemption as
follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under 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 each Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under each Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a
21
<PAGE> 184
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares then in the sub-account will also convert to Class
A shares. The portion will be determined by the ratio that the shareholder's
Class B shares not acquired through reinvestment of dividends and distributions
that are converting to Class A shares bear to the shareholder's total Class B
shares not acquired through reinvestment. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that such conversion will not
constitute a taxable event for federal tax purposes. There can be no assurance
that such ruling or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of each class of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
22
<PAGE> 185
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS / MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, 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. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Family
of Funds may have different and/or more restrictive policies with respect to
market timers than the Fund. These policies are disclosed in the prospectuses of
these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B and/or Class C shares of certain specified MFS Funds sold by such dealer
during a specified sales period. In addition, from time to time, MFD, at its
expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell shares of 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.
23
<PAGE> 186
------------------------
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 in this
paragraph above.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
New York Stock Exchange (generally, 4:00 p.m., Eastern time) (the "Exchange"),
the exchange will occur on that day if all the requirements set forth above have
been complied with at that time and subject to the Fund's right to reject
purchase orders. No more than five exchanges may be made in any one Exchange
Request by telephone. Additional information concerning this exchange privilege
and prospectuses for any of the other MFS Funds may be obtained from dealers or
the Shareholder Servicing Agent. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged and,
therefore, an exchange could result in a gain or loss to the shareholder making
the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts.
24
<PAGE> 187
For further information regarding exchanges by telephone, see "Redemptions by
Telephone." The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations, including certain
restrictions on purchases by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared. See "Tax Status" below.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be responsible for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE
25
<PAGE> 188
SAME DAY, THE SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT
DAY, REDUCED BY THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B or Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares) or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class C shares and Class B shares of any MFS Fund purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all transactions
made during a calendar month, regardless of when during the month they have
occurred, will age one year at the close of business on the last day of such
month in the following calendar year and each subsequent year. For Class B
shares of any MFS Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
each class of 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 each Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
Any distribution in-kind of portfolio securities may include foreign
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securities, including securities of issuers in emerging markets. Such securities
may be subject to risks not typically associated with the risks of U.S.
securities. See "Risk Factors -- Foreign Securities" and " -- Emerging Markets."
INVOLUNTARY REDEMPTIONS / SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares of the Fund pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plan"), after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are common to each class of Shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A, Class B or Class C
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expenses incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval,
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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 of the Fund are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.25% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund (e.g., MFD pays commissions to dealers with respect to purchases
of $1 million or more and purchases by certain retirement plans of Class A
shares which are sold at net asset value but which are subject to a 1% CDSC for
one year after purchase). Distribution fee payments under the Distribution Plan
may be used by MFD to pay securities dealers a distribution fee in an amount
equal on an annual basis to 0.25% per annum of the Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors for whom that securities
dealer is the holder or dealer of record. See "Purchases -- Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Distribution Plan does not exceed 0.50% per annum of the
average daily net assets of the Fund attributable to Class A shares, the Fund is
permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B SHARES. Class B shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class B
Shares" above. MFD will advance to dealers the first year service fee described
above at a rate equal to 0.25% of the purchase price of such shares and, as
compensation therefore, MFD may retain the service fee paid by the Fund with
respect to such shares for the first year after purchase. Dealers will become
eligible to receive the ongoing 0.25% per annum service fee with respect to such
shares commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares of the Fund are offered at net asset value
without an initial sales charge but subject to a CDSC. See "Purchases -- Class C
shares" above. MFD will pay a commission to dealers of 1.00% of the purchase
price of Class C shares purchased through dealers at the time of purchase. In
compensation for this 1.00% commission paid by MFD to dealers, MFD will retain
the 1.00% per annum Class C distribution and service fees paid by the Fund with
respect to such shares for the first year after purchase, and dealers will
become eligible to receive from MFD the ongoing 1.00% per annum distribution and
service fees paid by the Fund to MFD with respect to such shares commencing in
the thirteenth month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee paid to
MFD under the Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's distribution/service
fee for its current fiscal year is equal to 0.50%, 1.00% and 1.00% per annum of
the average daily net assets attributable to the Fund's Class A shares, Class B
shares and Class C shares, respectively.
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DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income as
dividends on an annual basis. In determining the net investment income available
for distributions, 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 same class with respect to which a distribution is made. See "Tax Status"
and "Shareholder Services -- Distribution Options" below. Distributions paid by
the Fund with respect to Class A shares will generally be greater than those
paid with respect to Class B and Class C shares because expenses attributable to
Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the 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 federal income or excise taxes, although
the Fund's foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes (and any
state or local taxes) on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. Shortly after
the end of each calendar year, each shareholder will be sent a statement setting
forth the federal income tax status of all dividends and distributions for that
year, including the portion taxable as ordinary income, the portion taxable as
long-term capital gain, the portion, if any, representing a return of capital
(which is free of current taxes but results in a basis reduction) and the
amount, if any, of federal income tax withheld. In certain circumstances, the
Fund may also elect to "pass through" to shareholders foreign income taxes paid
by the Fund. Under those circumstances, the Fund will notify shareholders of
their pro rata portion of the foreign income taxes paid by the Fund;
shareholders may be eligible for foreign tax credits or deductions with respect
to those taxes, but will be required to treat the amount of the taxes as an
amount distributed to them and thus includible in their gross income for federal
income tax purposes.
The Fund's distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on 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.
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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
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without par
value). The Fund also has a class of shares which it offers exclusively to
certain institutional investors entitled Class I Shares. The Trust has reserved
the right to create and issue additional classes and series of shares, in which
case each class of shares of a series would participate equally in the earnings,
dividends and assets attributable to that class of that particular series.
Shareholders are entitled to one vote for each share held and shares of each
series are entitled to vote separately to approve investment advisory agreements
or changes in investment restrictions, but shares of all series vote together in
the election of Trustees and selection of accountants. Additionally, each class
of shares of a series will vote separately on any material increases in the fees
under the Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's Declaration of Trust provides that a
Trustee may be removed from office in certain instances. See "Description of
Shares, Voting Rights and Liabilities" in the SAI.
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation, and Wiesenberger Investment Companies Service. 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 the shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B and Class C shares. Such total rate of return
quotations may be accompanied by quotations which do not reflect the reduction
in value of the initial investment due to the sales charge or the deduction of a
CDSC, and which will thus be higher.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of
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the Fund is based both on (i) the performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public. See the SAI for further information on the calculation of total rate of
return for share classes initially offered for sale to the public on different
dates.
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.
Yield calculations for Class B and Class C shares assume no CDSC is paid.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as stated. 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 total rate of
return and yield, see the SAI. In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time make a
list of all or a portion of its holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of each Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Trust's Custodian, for all services to the Fund,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Fund; and
expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Fund and the preparation,
printing and mailing of prospectuses are borne by the Fund except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series of the Trust are allocated among the series in a manner
believed by management of the Trust to be fair and equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the expenses of the Fund such that the Fund's "Other Expenses" which are
defined to include all expenses of the Fund except for management fees, Rule
12b-1 fees, taxes, extraordinary expenses, brokerage and transaction costs and
class specific expenses, do not exceed 0.75% per annum of the Fund's average
daily net assets (the "Maximum Percentage"). The obligation of MFS to bear these
expenses terminates on the last day of the Fund's fiscal year in which FEM's
"Other Expenses" are less than or equal to the Maximum Percentage. The payments
made by MFS on behalf of the Fund under this arrangement are subject to
reimbursement by the Fund to MFS, which will be accomplished by the payment of
an expense reimbursement fee by the Fund to MFS computed and paid monthly at a
percentage of its average daily net assets for its then current fiscal year,
with a limitation that immediately after such payment, the Fund's "Other
Expenses" will not exceed the Maximum Percentage. This expense reimbursement by
the Fund to MFS terminates on the earlier of the date on which payments made by
the Fund equal the prior payment of such reimbursable expenses by MFS or
December 31, 2005.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
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ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares;
this option will be assigned if no other option is specified.
-- Dividends in cash; capital gain distributions reinvested in additional
shares.
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of 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 of the classes of other
MFS Funds or MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and not subject to any CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and not subject to any CDSC) in
shares of the same class of another MFS Fund, if shares of such MFS Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments, as designated on the account application, and based upon the value of
his account. Each payment under a Systematic Withdrawal Plan (a "SWP") must be
at least $100, except in certain limited circumstances. The aggregate
withdrawals of Class B and Class C shares in any year pursuant to a SWP will not
be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
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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 participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated October 1, 1997 (as revised November 1, 1997), as amended
or supplemented from time to time, contains more detailed information about the
Fund, including information related to (i) the Fund's investment policies and
restrictions, including the purchase and sale of Options, Options on Stock
Indices, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies; (ii) the Trustees, officers, Investment Adviser
and Sub-Adviser; (iii) portfolio trading; (iv) the shares, including rights and
liabilities of shareholders; (v) tax status of dividends and distributions; (vi)
the Distribution Plan; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFS Fund Distributors, Inc. ("MFD").
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets
of other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares acquired by:
- Officers, eligible directors, employees (including retired employees)
and agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of America ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the shares;
and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and
Repurchases -- General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
A-1
<PAGE> 197
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRA'S")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the
401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by
the 401(a) or ESP Plan in shares of the MFS Funds (excluding the
reinvestment of distributions) during the prior four years equals 50% or
more of the total value of the 401(a) or ESP Plan's assets in the MFS
Funds, in which case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- 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).
A-2
<PAGE> 198
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemption of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
- 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
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRA'S
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- 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"
A-3
<PAGE> 199
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 AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per
year (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
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted
to the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRA'S, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules;
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 200
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
B-1
<PAGE> 201
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated AAA has the highest rating assigned by S & P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-2
<PAGE> 202
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA.' Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where ratings may be
lowered, FitchAlert is relatively short-term, and should be resolved within 12
months.
B-3
<PAGE> 203
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1 +'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics, which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
B-4
<PAGE> 204
THE MFS FAMILY OF FUNDS(R)
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund(1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund(2)
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity Fund
MFS(R) Value Fund
STOCK AND BOND
- --------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
BOND
- --------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- --------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
WORLD
- --------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/International Growth Fund(3)
MFS(R)/International Growth and Income Fund(4)
MFS(R) World Asset Allocation Fund(sm)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 205
<TABLE>
<S> <C>
Investment Adviser [MFS LOGO]
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Sub-Adviser MFS(R)/FOREIGN & COLONIAL EMERGING
Foreign & Colonial Management Ltd. MARKETS EQUITY FUND
Exchange House
Primrose Street Prospectus
London EC2A 2NY
United Kingdom OCTOBER 1, 1997
(As revised November 1, 1997)
Distributor
M F S Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA02116
[MFS LOGO]
MFS(R)/FOREIGN & COLONIAL EMERGING
MARKETS EQUITY FUND
500 Boylston Street
Boston, MA 02116
</TABLE>
FEM-1-11/97/58M
<PAGE> 206
[MFS INVESTMENT MANAGEMENT LOGO]
<TABLE>
<S> <C>
STATEMENT OF
MFS(R)/FOREIGN & COLONIAL ADDITIONAL INFORMATION
EMERGING MARKETS EQUITY FUND
October 1, 1997
(Members of the MFS Family of Funds(R)) (As revised November 1, 1997)
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions..................................................................................... 2
2. Investment Policies and Restrictions............................................................ 2
3. Management of the Fund.......................................................................... 15
Trustees........................................................................................ 15
Officers........................................................................................ 15
Trustee Compensation Table...................................................................... 17
Investment Adviser.............................................................................. 17
Administrator................................................................................... 17
FCM............................................................................................. 18
FCEM............................................................................................ 18
Custodian....................................................................................... 19
Shareholder Servicing Agent..................................................................... 19
Distributor..................................................................................... 19
4. Portfolio Transactions and Brokerage Commissions................................................ 20
5. Shareholder Services............................................................................ 21
Investment and Withdrawal Programs.............................................................. 21
Exchange Privilege.............................................................................. 24
Tax-Deferred Retirement Plans................................................................... 25
6. Tax Status...................................................................................... 25
7. Distribution Plan............................................................................... 26
8. Determination of Net Asset Value and Performance................................................ 27
9. Description of Shares, Voting Rights and Liabilities............................................ 30
10. Independent Auditors and Financial Statements................................................... 31
Appendix A -- Performance Information........................................................... A-1
</TABLE>
MFS(R)/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
A series of MFS Series Trust X
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Funds' Prospectus dated
October 1, 1997 (as revised November 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> 207
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS/Foreign & Colonial
Emerging Markets Equity
Fund, a diversified series
of the Trust.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a
Delaware corporation.
"Sub-Adviser" -- Foreign & Colonial Manage-
ment Ltd., a company
incorporated under the laws
of England and Wales
("FCM") and Foreign &
Colonial Emerging Markets
Limited, a company
incorporated under the laws
of England and Wales
("FCEM").
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund,
dated October 1, 1997 (as
revised November 1, 1997),
as amended or supplemented
from time to time.
"Trust" -- MFS Series Trust X, a
Massachusetts business
Trust. The Trust has
changed its name several
times during the past five
years. The Trust was
previously known as MFS
Government Mortgage Fund
(prior to June 2, 1995),
MFS Government Income Plus
Fund (prior to March 1,
1993), MFS Government
Income Plus Trust (prior to
August 3, 1992) and MFS
Government Securities Trust
(after December 7, 1990).
</TABLE>
2. INVESTMENT POLICIES AND RESTRICTIONS
INVESTMENT POLICIES: The investment policies of the Fund are described in the
Prospectus and below. The following discussion of the Fund's investment policies
and restrictions supplements and should be read in conjunction with the
information set forth in the "Investment Objective and Policies" section of the
Prospectus.
FOREIGN SECURITIES: The Fund may invest up to 100% of its assets in foreign
securities as discussed in the Prospectus. Investments in foreign issues involve
considerations and possible risks not typically associated with investments in
securities issued by domestic companies or with debt securities issued by
foreign governments. There may be less publicly available information about a
foreign company than about a domestic company, and many foreign companies are
not subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject. Foreign
securities markets, while growing in volume, have substantially less volume than
U.S. markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. Fixed
brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the U.S. There is also less government
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the U.S.
EMERGING MARKETS: The Fund may invest in securities of government,
government-related, supranational and corporate issuers located in emerging
markets. Such investments entail significant risks as described in the
Prospectus under the caption "Risk Factors" and as more fully described below.
COMPANY DEBT -- Governments of many emerging market countries have
exercised and continue to exercise substantial influence over many aspects of
the private sector through the ownership or control of many companies, including
some of the largest in any given country. As a result, government actions in the
future could have a significant effect on economic conditions in emerging
markets, which in turn, may adversely affect companies in the private sector,
general market conditions and prices and yields of certain of the securities in
the Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
SOVEREIGN DEBT -- Investment in sovereign debt can involve a high degree of
risk. The governmental entity that controls the repayment of sovereign debt may
not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
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parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate
in the rescheduling of such debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
The ability of emerging market governmental issuers to make timely payments on
their obligations is likely to be influenced strongly by the issuer's balance of
payments, including export performance, and its access to international credits
and investments. An emerging market whose exports are concentrated in a few
commodities could be vulnerable to a decline in the international prices of one
or more of those commodities. Increased protectionism on the part of an emerging
market's trading partners could also adversely affect the country's exports and
tarnish its trade account surplus, if any. To the extent that emerging markets
receive payment for their exports in currencies other than dollars or
non-emerging market currencies, its ability to make debt payments denominated in
dollars or non-emerging market currencies could be affected.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and on inflows of foreign investment. The access of emerging markets to these
forms of external funding may not be certain, and a withdrawal of external
funding could adversely affect the capacity of emerging market country
governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
LIQUIDITY; TRADING VOLUME; REGULATORY OVERSIGHT -- The securities markets
of emerging market countries are substantially smaller, less developed, less
liquid and more volatile than the major securities markets in the U.S.
Disclosure and regulatory standards are in many respects less stringent than
U.S. standards. Furthermore, there is a lower level of monitoring and regulation
of the markets and the activities of investors in such markets.
The limited size of many emerging market securities markets and limited trading
volume in the securities of emerging market issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets, as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's securities in such markets may
not be readily available. The Trust may suspend redemption of its shares for any
period during which an emergency exists, as determined by the Securities and
Exchange Commission (the "SEC"). Accordingly, if the Fund believes that
appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Board of Trustees.
DEFAULT; LEGAL RECOURSE -- The Fund may have limited legal recourse in the
event of a default with respect to certain debt obligations it may hold. If the
issuer of a fixed-income security owned by the Fund defaults, the Fund may incur
additional expenses to seek recovery. Debt obligations issued by emerging market
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
The Fund's ability to enforce its rights against private issuers may be limited.
The ability to attach assets to enforce a judgment may be limited. Legal
recourse is therefore somewhat diminished. Bankruptcy, moratorium and other
similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt
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obligations in the event of default under commercial bank loan agreements.
INFLATION -- Many emerging markets have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
WITHHOLDING -- Income from securities held by a Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Adviser and the
Sub-Adviser will consider the cost of any taxes in determining whether to
acquire any particular investments, but can provide no assurance that the taxes
will not be subject to change.
FOREIGN CURRENCIES -- The Fund may invest up to 100% of its assets in
securities denominated in foreign currencies. Accordingly, changes in the value
of these currencies against the U.S. dollar may result in corresponding changes
in the U.S. dollar value of the Fund's assets denominated in those currencies.
The Fund may attempt to minimize the impact of these changes to the U.S. dollar
value of the Fund's portfolio by engaging in certain hedging practices, such as
entering into Futures Contracts and Options on Foreign Securities as described
below.
Some emerging market countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
emerging market countries may restrict the free conversion of their currencies
into other currencies. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
INVESTMENT IN OTHER INVESTMENT COMPANIES: The Fund's investment in other
investment companies, as described in the Prospectus, is limited in amount by
the Investment Company Act of 1940, as amended (the "1940 Act"), and applicable
state securities laws. Such investment may also involve the payment of
substantial premiums above the value of such investment companies' portfolio
securities, and the total return on such investment will be reduced by the
operating expenses and fees of such other investment companies, including
advisory fees.
REPURCHASE AGREEMENTS: 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"), members of the Federal Reserve System, recognized
domestic or foreign securities dealers or institutions which the Adviser or the
Sub-Adviser has determined to be of comparable creditworthiness. The securities
that the Fund purchases and holds have values which are equal to or greater than
the repurchase price agreed to be paid by the seller. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a standard
rate due to the Fund together with the repurchase price on repurchase.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, 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 or the Sub-Adviser has
determined that the seller is creditworthy, and the Adviser or the Sub-Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the Fund
has the right to make margin calls at any time if the value of the securities
falls below the agreed upon margin.
DEPOSITARY RECEIPTS: The Fund may invest in American Depositary Receipts
("ADRs") which are certificates issued by a U.S. depository (usually a bank) and
represent a specified quantity of shares of an underlying non-U.S. stock on
deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary
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receipts in the United States can reduce costs and delays as well as potential
currency exchange and other difficulties. The Fund may purchase securities in
local markets and direct delivery of these ordinary shares to the local
depository of an ADR agent bank in the foreign country. Simultaneously, the ADR
agents create a certificate which settles at the Fund's custodian in five days.
The Fund may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to the
same reporting requirements in the United States as a domestic issuer.
Accordingly, information available to a U.S. investor will be limited to the
information the foreign issuer is required to disclose in its own country and
the market value of an ADR may not reflect undisclosed material information
concerning the issuer of the underlying security. ADRs may also be subject to
exchange rate risks if the underlying foreign securities are denominated in a
foreign currency. The Fund may also invest in Global Depositary Receipts
("GDRs") and other types of depositary receipts. GDRs and other types of
depositary receipts are typically issued by foreign banks or trust companies and
evidence ownership of underlying securities issued by either a foreign or U.S.
company.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loans and other
direct claims against an issuer of emerging market debt instruments (a
"borrower"). In purchasing a loan, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate, governmental or
other borrower. Many such loans are secured, although some may be unsecured.
Such loans may be in default at the time of purchase. Loans that are fully
secured offer the Fund more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
Certain of the loans acquired by the Fund may involve revolving credit
facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may have the
effect of requiring the Fund to increase its investment in a company at a time
when the Fund might not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such amounts will be
repaid). To the extent that the Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account liquid assets in
an amount sufficient to meet such commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. Direct indebtedness of developing countries involves
the risk that the governmental entities responsible for the repayment of the
note may be unable, or unwilling, to pay interest and repay principal where due.
In selecting the loans and other direct investments which the Fund will
purchase, the Adviser will rely upon its (and not that of the original lending
institution's) own credit analysis of the borrower. As the Fund may be required
to rely upon another lending institution to collect and pass on to the Fund
amounts payable with respect to the loan and to enforce the Fund's rights under
the loan, an insolvency, bankruptcy or reorganization of the lending institution
may delay or prevent the Fund from receiving such amounts. In such cases, the
Fund will evaluate as well the creditworthiness of the lending institution and
will treat both the borrower and the lending institution as an "issuer" of the
loan for purposes of certain investment restrictions pertaining to the
diversification of the Fund's portfolio investments. The highly leveraged nature
of many such loans may make such loans especially vulnerable to adverse changes
in economic or market conditions. Investments in such loans may involve
additional risks to the Fund.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES:When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the SEC concerning
such purchases. Since that policy currently recommends that an amount of the
Fund's assets equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, the Fund will always have liquid assets
sufficient to cover any commitments or to limit any potential risk. However,
although the Fund does not intend to make such purchases for speculative
purposes and intends to adhere to the provisions of the SEC policy, purchases of
securities on such bases may involve more risk than other types of purchases.
For example, the Fund may have to sell assets which have been set aside in order
to meet redemptions. Also, if the Fund determines it necessary to sell the
"when-issued" or "forward delivery" securities before delivery, it may incur a
loss because of market fluctuations since the time the commitment to purchase
such securities was made.
LENDING OF SECURITIES: The Fund may seek to increase its income by lending
portfolio securities to entities deemed creditworthy by the Adviser or the
Sub-Adviser. Such loans would be required to be secured continuously by
collateral in cash, irrevocable letters of credit or U.S. Government securities
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of the cash collateral or a fee. The Fund would not, however, have
the right to vote any securities having voting rights during the existence of
the loan, but would call the loan in anticipation of an important vote to be
taken among holders of the securities or of the giving or withholding of their
consent on a material
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matter affecting the investment. As with other extensions of credit there are
risks of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser and the Sub-Adviser to be of good standing,
and when, in the judgment of the Adviser or the Sub-Adviser, the consideration
which could be earned currently from securities loans of this type justifies the
attendant risk. If the Adviser or the Sub-Adviser determines to make securities
loans, it is not intended that the value of the securities loaned would exceed
30% of the value of the Fund's total assets.
WARRANTS: The Fund will not invest more than 10% of its net assets, taken at
market value, in warrants not acquired in a unit transaction. Warrants are
securities that give the Fund the right to purchase equity securities from the
issuer at a specific price (the "strike price") for a limited period of time.
The strike price of warrants typically is much lower than the current market
price of the underlying securities, yet they are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying securities and may offer greater potential for capital appreciation
as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect to
the underlying securities and do not represent any rights in the assets of the
issuing company. Also, the value of the warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have value if it
is not exercised prior to the expiration date. These factors can make warrants
more speculative than other types of investments.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. An Option provides the
purchaser, or "holder", with the right, but not the obligation, to purchase, in
the case of a "call" Option, or sell, in the case of a "put" Option, the
security or securities in connection with which the Option was written, for a
fixed exercise price up to a stated expiration date or, in the case of certain
options, on such date. The holder pays a non-refundable purchase price for the
Option, known as the "premium." The maximum amount of risk the purchaser of the
Option assumes is equal to the premium plus related transaction costs, although
this entire amount may be lost. The risk of the seller, or "writer", however, is
potentially unlimited, unless the Option is "covered." A call option written by
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
security and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Fund in liquid assets in a segregated
account with its custodian. A put option written by the Fund is "covered" if the
Fund maintains liquid assets with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is (a) equal to or greater than the exercise price of the put
written or (b) is less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian. Put and call options written by the Fund may also be covered
in such other manner as may be in accordance with the requirements of the
exchange on which, or the counter party with which the option is traded, and
applicable laws and regulations. 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 the purpose of increasing its return and 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.
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
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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 solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. 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 15% of
the Fund's assets. 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 15%
test imposed by the SEC staff. The Fund may also write over-the-counter Options
with non-primary dealers, including foreign dealers, and will treat the assets
used to cover these Options as illiquid for purposes of such 15% test.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, the Fund may write (sell)
covered call and put options and purchase call and put options on stock indices
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser or the
Sub-Adviser, are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. Where the Fund covers a call option on a stock
index through ownership of securities, such securities may not match the
composition of the index and, in that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. The Fund may also cover call options on stock indices by
holding a call on the same index and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in liquid assets
in a segregated account with its custodian. The Fund may cover put options on
stock indices by maintaining liquid assets in a segregated account with its
custodian, or else by holding a put on the same security and in the same
principal amount as the put written where the exercise price of the put held (a)
is equal to or greater than the exercise price of the put written or (b) is less
than the exercise price of the put written if the difference is maintained by
the Fund in liquid assets in a segregated account with its custodian. Put and
call options on stock indices may also be covered in such other manner as may be
in accordance with the rules of
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the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investments. By writing a put option, the Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indices will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indices of securities as such instruments become available
for trading ("Futures Contracts"). This investment technique is designed to
hedge (i.e., to protect) against anticipated future changes in interest or
exchange rates which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of long-term bonds or other
securities which the Fund intends to purchase at a later date. Futures Contracts
may also be entered into for non-hedging purposes to the extent permitted by
applicable law. A "sale" of a Futures Contract means a contractual obligation to
deliver the securities or foreign currency called for by the contract at a fixed
price at a specified time in the future. A "purchase" of a Futures Contract
means a contractual obligation to acquire the securities or foreign currency at
a fixed price at a specified time in the future.
While Futures Contracts provide for the delivery of securities or currencies,
such deliveries are very seldom made. Generally, a Futures Contract is
terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
One purpose of the purchase or sale of a Futures Contract, for hedging purposes
in the case of a portfolio holding long-term debt securities, is to protect the
Fund from fluctuations in interest rates without actually buying or selling
long-term debt securities. For example, if the Fund owned long-term bonds and
interest rates were expected to increase, the Fund might enter into Futures
Contracts for the sale of debt securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Fund's Futures Contracts should increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling bonds
with long maturities and investing in bonds with short maturities when interest
rates are expected to increase or by buying bonds with long maturities and
selling bonds with short maturities when interest rates are expected to decline.
However, since the futures market is more liquid than the cash market, the use
of Futures Contracts as an investment technique allows the Fund to maintain a
defensive position without having to sell its portfolio securities. Transactions
entered into for non-hedging purposes have greater risk, including the risk of
losses which are not offset by gains on other portfolio assets.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of
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new shares of the Fund could have the effect of diluting dividend earnings. To
the extent the Fund enters into Futures Contracts for this purpose, the assets
in the segregated asset account maintained to cover the Fund's obligations with
respect to such Futures Contracts will consist of liquid assets from the
portfolio of the Fund in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
Futures Contracts, thereby assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The index underlying a Futures Contract is a broad based index of fixed-
income securities designed to reflect movements in the relevant market as a
whole.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase Options to buy or
sell Futures Contracts ("Options on Futures Contracts") for hedging purposes.
The Fund may also enter into transactions in Options on Futures Contracts for
non-hedging purposes to the extent permitted by applicable law. The purchase of
a call Option on a Futures Contract is similar in some respects to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the price of the Futures Contract upon which it is
based or the price of the underlying debt securities, it may or may not be less
risky than ownership of the Futures Contract or underlying securities. As with
the purchase of Futures Contracts, when the Fund is not fully invested it may
purchase a call Option on a Futures Contract to hedge against a market advance
due to declining interest rates.
The writing of a call Option on a Futures Contract constitutes a partial hedge
against declining prices of the 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 constitutes a partial hedge against increasing prices of the security
underlying the Futures Contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any increase in the price of securities which the Fund intends to
purchase. If a put or call option 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 purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, or a decline in the dollar value of
foreign currencies in which portfolio securities are denominated, 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 rise in the dollar value of foreign
currencies in which securities to be acquired are denominated, 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 amount of risk the Fund assumes when it purchases an Option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments. It
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
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
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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 Contact, subject to regulation by the
CFTC and the performance guarantee of the exchange clearing house. Options on
Futures Contracts, as noted in the Prospectus, are also traded on foreign
exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may also
enter into Forward Contracts for "cross-hedging" as noted in the Prospectus. The
Fund may enter into Forward Contracts for hedging purposes as well as for
non-hedging purposes. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of fixed income securities denominated in
a foreign currency or protecting the dollar equivalent of interest or dividends
to be paid on such securities. By entering into such transactions, however, the
Fund may be required to forego the benefits of advantageous changes in exchange
rates. The Fund may also enter into transactions in Forward Contracts for other
than hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser or the Sub-Adviser believes that the
value of a particular foreign currency will increase or decrease relative to the
value of the U.S. dollar, the Fund may purchase or sell such currency,
respectively, through a Forward Contract. If the expected changes in the value
of the currency occur, the Fund will realize profits which will increase its
gross income. Where exchange rates do not move in the direction or to the extent
anticipated, however, the Fund may sustain losses which will reduce its gross
income. Such transactions, therefore, could be considered speculative.
The Fund has established procedures which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which a Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission (the "CFTC"), the CFTC may in the future assert authority to regulate
Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options, which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for hedging purposes in a
manner similar to the way Forward Contracts will be utilized. For example, where
the Fund anticipates a decline in the dollar value of foreign-denominated
securities due to adverse fluctuations in exchange rates it may, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurred, the option would most likely not be exercised, and
the diminution in value of portfolio securities would be
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offset by the amount of the premium received less related transaction costs.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, less transaction costs, and only if rates
move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of Options on Foreign Currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
All call and put options written on foreign currencies will be covered. A call
option written on foreign currencies by the Fund is "covered" if the Fund owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian. A put option written 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 (a) is equal
to or greater than the exercise price of the put written or (b) is less than the
exercise price of the put written if the difference is maintained by the Fund in
liquid assets in a segregated account with its custodian. Call and put options
on foreign currencies may also be covered in such other manner as may be in
accordance with the requirements of the exchange on which, or the counterparty
with which, the option is traded and applicable rules and regulations.
ADDITIONAL RISKS OF INVESTING IN OPTIONS ON SECURITIES, OPTIONS ON STOCK
INDICES, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: Unlike transactions entered into by the Fund in
Futures Contracts, Options on Foreign Currencies and Forward Contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on securities and on
stock indices may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option writer and a trader of Forward Contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
The Fund's ability effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, and Forward Contracts will
depend on the degree to which price movements in the underlying instruments
correlate with price movements in the relevant portion of the Fund's portfolio.
If the values of fixed income portfolio securities being hedged do not move in
the same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, 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, Futures
Contract or Forward Contract traded and the portfolio securities being hedged,
which could result in losses both on the hedging transaction and the portfolio
securities. In such instances, 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. Where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
The correlation between prices of securities and prices of Options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the Option, Futures
Contract and Forward Contract markets. The trading of Options on Futures
Contracts also entails the
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risk that changes in the value of the underlying Futures Contract will not be
fully reflected in the value of the option. The risk of imperfect correlation,
however, generally tends to diminish as the maturity or termination date of the
Option, Futures Contract or Forward Contract approaches.
The trading of Options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's or the Sub-Adviser's judgment as to the general
direction of exchange rates is incorrect, the Fund's overall performance may be
poorer than if it had not entered into any such contract.
It should be noted that the Fund may purchase and write Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes to the extent permitted by
applicable law for the purpose of increasing its return. As a result, the Fund
will incur the risk that losses on such transactions will not be offset by
corresponding increases in the value of portfolio securities or decreases in the
cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a position in an exchange-traded Option, Futures Contract, Option on
a Futures Contract or Option on a Foreign Currency can only be terminated by
entering into a closing purchase or sale transaction, which requires a secondary
market for such instruments on the exchange on which the initial transaction was
entered into. If no such market exists, it may not be possible to close out a
position, and 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.
OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of an
Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON U.S. EXCHANGES: The available information on which the Fund
will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
24-hour market, and the markets for foreign securities as well as markets in
foreign countries may be operating during non-business hours in the U.S., events
could occur in such markets which would not be reflected until the following
day, thereby rendering it more difficult for the Fund to respond in a timely
manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on U.S. exchanges, and may be subject to
different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or CFTC has jurisdiction
over the trading in the U.S. of many types of over-the-counter and foreign
instruments, and such agencies could adopt regulations or interpretations which
would make it difficult or impossible for the Fund to enter into the trading
strategies identified herein or to liquidate existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
The Fund may also be required to receive delivery of the foreign currencies
underlying Options on Foreign Currencies or Forward Contracts it has entered
into. This could occur, for example, if an option written by the Fund is
exercised or the Fund is unable to close out a Forward Contract it has entered
into. In addition, the Fund may elect to take
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delivery of such currencies. Under certain circumstances, such as where the
Adviser or the Sub-Adviser believes that the applicable exchange rate is
unfavorable at the time the currencies are received or the Adviser or the
Sub-Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, such strategy also exposes
the Fund to risk of loss if exchange rates move in a direction adverse to the
Fund's position. Such losses could reduce any profits or increase any losses
sustained by the Fund from the sale or redemption of securities and could reduce
the dollar value of interest or dividend payments received.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and Options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
Options 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 ensuring that the leveraging effect of such Futures
Contract is minimized.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, indices, currencies, or other financial
indicators. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity (i.e., principal value) or coupon rate is
determined by reference to a specific instrument or statistic. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their value may decline
substantially if the issuer's creditworthiness deteriorates.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount of the Fund
is entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser or the Sub-Adviser is incorrect in its forecasts of such factors, the
investment performance of the Fund would be less than what it would have been if
these investment techniques had not been used. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counter-party's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Fund's risk of loss consists of
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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.
------------------------------------
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS: The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or the Fund or class, as applicable, or
(ii) 67% or more of the outstanding shares of the Trust or the Fund or class, as
applicable, present at a meeting at which holders of more than 50% of the
outstanding shares of the Trust or the Fund or class, as applicable, are
represented in person or by proxy). Except with respect to the Fund's policy on
borrowing and investing in illiquid securities, these investment restrictions
and policies are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate, mineral leases,
commodities or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and any other
type of option, Futures Contracts, any other type of futures contract, and
Forward Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of option (including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), any type of swap agreement,
Forward Contracts, Futures Contracts, any other type of futures contract, and
collateral arrangements with respect to initial and variation margin are not
deemed to be the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, or the investment of the
Fund's assets in repurchase agreements, shall not be considered the making of
a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its assets would be invested in securities of issuers
whose principal business activities are in the same industry (except
obligations issued or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements collateralized by such
obligations).
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists), if more than 15% of the Fund's
net assets (taken at market value) would be invested in such securities.
Repurchase agreements maturing in more than seven days will be deemed to be
illiquid for purposes of the Fund's limitation on investment in illiquid
securities. Securities that are not registered under the Securities Act of
1933, as amended, and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% limitation;
(2) invest more than 10% of the value of the Fund's net assets, valued at
the lower of cost or market, in warrants. Included within such amount may be
warrants which are not listed on the New York or American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities may be deemed
to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund,
or is an officer or a director of the investment adviser or a sub-adviser of
the Fund, if one or more of such persons also owns beneficially more than 0.5%
of the securities of such issuer, and such
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persons owning more than 0.5% of such securities together own beneficially
more than 5% of such securities;
(6) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option (including Options on Futures
Contracts, Options, Options on Stock Indices and Options on Foreign
Currencies), any type of swap agreement, any type of futures contract
(including Futures Contracts) and Forward Contracts;
(7) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(8) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(9) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), any type of swap
agreement, any type of futures contract (including Futures Contracts), Forward
Contracts and payments of initial and variation margin in connection
therewith, are not considered a pledge of assets;
(10) borrow, except as a temporary measure for extraordinary or emergency
purposes;
(11) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities, (ii) put or call options or combinations thereof with
respect to securities or indexes of securities or (iii) Options on Foreign
Currencies, any type of swap agreement or any type of futures contract
(including Futures Contracts) or (b) the purchase, ownership, holding or sale
of contracts for the future delivery of securities or currencies; or
(12) Invest 25% or more of the market value of its total assets in
securities of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of the
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private investor; Massachusetts Financial Services Company, former Chairman and
Director (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 and
Secretary
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 (from August 1990 to September 1992)
Address: Weston, Massachusetts
DAVID B. STONE (born 9/2/27)
North American Management Corp. (investment adviser), Chairman and Director;
Eastern Enterprises, 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
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
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JAMES O. YOST,* Assistant Treasurer; (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of the non-interested Trustees and Mr. Bailey
(who currently receive a fee per Fund of $250 per year plus $25 per meeting and
$20 per committee meeting attended, together with such Trustee's out-of-pocket
expenses), and have adopted a retirement plan for non-interested Trustees and
Mr. Bailey. Under this plan, a Trustee will retire upon reaching age 73 and if
the Trustee has completed at least 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 73 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. The Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth below is certain information concerning the cash compensation
estimated to be paid by the Fund to the Trustees, and benefits accrued and
estimated benefits payable, under the retirement plan.
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<PAGE> 222
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED
TRUSTEE FEES ACCRUED AS CREDITED TOTAL TRUSTEE FEES
FROM THE PART OF FUND YEARS FROM FUND AND
TRUSTEE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------- ------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
Richard B. Bailey............................... $519 $ 56 5 $247,168
A. Keith Brodkin................................ N/A N/A N/A N/A
Peter G. Harwood................................ 599 64 5 105,995
J. Atwood Ives.................................. 559 58 13 98,750
Lawrence T. Perera.............................. 614 58 12 98,310
William J. Poorvu............................... 574 62 12 102,840
Charles W. Schmidt.............................. 599 64 5 105,995
Arnold D. Scott................................. N/A N/A N/A N/A
Jeffrey L. Shames............................... N/A N/A N/A N/A
Elaine R. Smith................................. 574 64 23 105,995
David B. Stone.................................. 619 66 5 108,710
</TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE -------------------------------------
TRUSTEE FEES 3 5 7 10 OR MORE
------------ ---- ---- ---- ----------
<S> <C> <C> <C> <C>
$467 $ 70 $117 $163 $234
510 76 127 178 255
553 83 138 193 276
595 89 149 208 298
638 96 160 223 319
681 102 170 238 340
</TABLE>
- ---------------
(1) For the fiscal year ending May 31, 1997.
(2) Based upon normal retirement age (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) Information provided is 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 $21.1
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).
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of June 30, 1997, the Trustees and officers as a group owned less than 1% of
the Fund's shares outstanding on that date.
As of June 30, 1997, Merrill Lynch Pierce Fenner & Smith, Jacksonville, Florida
32232-5286 was the record owner of 5.62% of the outstanding Class B shares of
the Fund. As of June 30, 1997, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services, 500 Boylston Street, Boston, MA 02116-3740 was
the record owner of approximately 99.97% of Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Trust or its shareholders, it is determined that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER -- MFS and its predecessor organizations have a history of
money management dating from 1924. MFS is a subsidiary of Sun Life of Canada
(U.S.), which in turn is an indirect wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life").
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
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<PAGE> 223
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 May 31, 1997, MFS received fees under the
Administrative Services Agreement of $3,019 (equivalent on an annualized basis
to 0.0055%, of the Fund's average daily net assets) of the Fund.
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages the Fund pursuant to an
Investment Advisory Agreement, dated as of September 1, 1995 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, in an amount equal to 1.25% of the average daily net assets of
the Fund.
For the period from commencement of investment operation, October 24, 1995, to
May 31, 1996, MFS received management fees under the Advisory Agreement of
$182,020 (equivalent on an annualized basis to 1.25% of the Fund's average daily
net assets) for the Fund. For the fiscal year ended May 31, 1997, MFS received
management fees under the Advisory Agreement of $687,535 (equivalent on an
annualized basis to 1.25% of the Fund's average daily net assets) for the Fund.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 1998
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment Policies and Restrictions") and, in
either case, by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party. The Advisory Agreement
terminates automatically if it is assigned and may be terminated without penalty
by vote of a majority of the Fund's shares (as defined in "Investment Policies
and Restrictions"), or by either party on not more than 60 days' nor less than
30 days' written notice. The Advisory Agreement provides that if MFS ceases to
serve as the Adviser to the Fund, the Fund will change its name so as to delete
the initials "MFS" and that MFS may render services to others and may permit
other fund clients to use the initials "MFS" in their names. The Advisory
Agreement also provides that neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution and management of
the Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Advisory Agreement.
FCM -- FCM serves as the Fund's sub-adviser pursuant to a Sub-Advisory
Agreement, dated September 1, 1995 between the Adviser and FCM (the "FCM
Sub-Advisory Agreement"). The FCM Sub-Advisory Agreement provides that the
Adviser may delegate to FCM the authority to make investment decisions for the
Fund. It is presently intended that FCM will provide portfolio management
services for the Fund. For these services, the Adviser pays FCM an annual fee
computed and paid monthly in an amount equal to 1.00% of the average daily net
assets of the Emerging Markets Equity Fund. Effective September 8, 1997 with
respect to the Fund, FCM has voluntarily agreed to waive for an indefinite
period of time, a portion of the sub-investment advisory fee it receives from
the Adviser from 1.00% to 0.65% of the average daily net assets of the Fund
managed by FCM of the Fund, on an annualized basis.
FCEM -- FCEM serves as the Fund's sub-adviser pursuant to a Sub-Advisory
Agreement, dated September 1, 1995 between FCM and FCEM (the "FCEM Sub-Advisory
Agreement" and together with the FCM Sub-Advisory Agreements, the "Sub-Advisory
Agreement"). The FCEM Sub-Advisory Agreement provides that FCM may delegate to
FCEM the authority to make investment decisions for the Fund. It is presently
intended that FCEM will provide portfolio management services for the portion of
the assets invested in emerging markets securities with respect to the Fund. For
these services, FCM pays FCEM an annual fee computed and paid monthly in an
amount equal to 1.00% of the average daily net assets of the Fund managed by
FCEM. Effective September 8, 1997 with respect to the Fund, FCEM has voluntarily
agreed to waive for an indefinite period of time, a portion of the
sub-investment advisory fee it receives from the Adviser from 1.00% to 0.65% of
the average daily net assets of the Fund managed by FCEM on an annualized basis.
SUB-ADVISORY AGREEMENT -- The Sub-Advisory Agreements 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 the vote of a majority of the Fund's outstanding shares, and, in either
case, by a majority of the Trustees who are not parties to the Sub-Advisory
Agreements or interested persons of any such party. The FCM Sub-Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by the Trustees, by vote of a majority of the Fund's outstanding
shares, by the Adviser on not less than 30 days' nor more than 60 days' written
notice or by FCM, on not less than 60 days' nor more than 90 days' written
notice. The FCEM Sub-Advisory Agreement terminates automatically if it is
assigned and may be terminated without penalty by the Trustees, by vote of a
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<PAGE> 224
majority of the Fund's outstanding shares, by the Adviser or FCM on not less
than 30 days' nor more than 60 days' written notice or by FCEM on not less than
60 days' nor more than 90 days' written notice.
The FCM Sub-Advisory Agreement provides that if FCM ceases to serve as the
sub-adviser to the Fund, the Fund will change its name so as to delete the words
"Foreign & Colonial" and that FCM may render services to others and may permit
other fund clients to use the words "Foreign & Colonial" in their names. The
Sub-Advisory Agreements specifically provides that neither FCM or FCEM, as the
case may be, nor its personnel shall be liable for any error of judgment or
mistake of law or for any loss arising out of any investment or for any act or
omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Sub-Advisory Agreements.
For the period from commencement of investment operations, October 24, 1995, to
May 31, 1996, the Adviser paid the Sub-Adviser fees under the Sub-Advisory
Agreements of $144,524 in connection with its services for the Fund. For the
fiscal year ended May 31, 1997, the Adviser paid the Sub-Adviser fees under the
Sub-Advisory Agreements of $546,167 in connection with its services for the
Fund.
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 each Fund or decide which securities each
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement dated December 19, 1985, as modified, (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by each Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. State Street Bank and Trust Company, the dividend and
distribution disbursing agent of the Fund, has contracted with the Shareholder
Servicing Agent to perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement with the
Trust dated as of September 1, 1995.
CLASS A SHARES: MFD acts as agent in selling Class A shares of 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
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or a Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
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<PAGE> 225
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B shares,
Class C shares and Class I shares of the Fund. The public offering price of
Class B, Class C and Class I shares is their net asset value next computed after
the sale (see "Purchases" in the Prospectus and the Prospectus Supplement 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 period from the commencement of operations, October 24, 1995, to May
31, 1996 and the fiscal year ended May 31, 1997, for the Fund, MFD and dealers
and certain other financial institutions received sales charges of $29,368 and
$279,555 and $44,930 and $224,517, respectively (as their concession on gross
sales charges of $308,923 and $269,447, respectively), for selling Class A
shares. The Fund received $11,518,725 and $11,227,785, respectively,
representing the aggregate net asset value of such shares.
During the fiscal year ended May 31, 1997, the CDSC paid on Class A shares for
the Emerging Growth Fund was $48. During the period from the commencement of
operations, October 24, 1995, to May 31, 1996 and the fiscal year ended May 31,
1997, the CDSC paid on Class B shares for the Fund was $4,930 and $43,118,
respectively. During the fiscal year ended May 31, 1997, the CDSC paid on Class
C shares for the Fund was $1,252. During the period from the commencement of
operations, October 24, 1995 to May 31, 1996, there were no CDSC paid on Class A
shares for the Fund.
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 Trust's shares (as defined in "Investment Policies and
Restrictions -- Investment Restrictions") and in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or interested
persons of any such party. The Distribution Agreement terminates automatically
if it is assigned and may be terminated without penalty by either party on not
more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser or the Sub-Adviser. Any such person may
serve other clients of the Adviser or the Sub-Adviser, or any subsidiary of the
Adviser or the Sub-Adviser in a similar capacity. Changes in the Fund's
investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser or the Sub-Adviser has
complete freedom as to the markets in and broker-dealers through which it seeks
this result. In the U.S. and in some other countries debt securities are traded
principally in the over-the-counter market on a net basis through dealers acting
for their own account and not as brokers. In other countries both debt and
equity securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser or the
Sub-Adviser normally seeks to deal directly with the primary market makers or on
major exchanges unless, in its opinion, better prices are available elsewhere.
Subject to the requirement of seeking execution at the best available price,
securities may, as authorized by an Advisory Agreement or a Sub-Advisory
Agreement, be bought from or sold to dealers who have furnished statistical,
research and other information or services to the Adviser or the Sub-Adviser. At
present no arrangements for the recapture of commission payments are in effect.
Consistent with the foregoing primary consideration, the Conduct Rules of the
National Association of Securities Dealers (the "NASD") and such other policies
as the Trustees may determine, the Adviser or the Sub-Adviser may consider sales
of shares of the Fund and of the other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
Under an Advisory Agreement or a Sub-Advisory Agreement and as permitted by
Section 28(e) of the Securities Exchange Act of 1934, the Adviser may cause a
Fund to pay a broker-dealer which provides brokerage and research services to
the Adviser or the Sub-Adviser, an amount of commission for effecting a
securities transaction for the Fund in excess of the amount other broker-dealers
would have charged for the transaction, if the Adviser or the Sub-Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or their
respective overall responsibilities to the Fund or to their other clients. Not
all of such services are useful or of value in advising the Fund.
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The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser or the Sub-Adviser, be reasonable in relation to the value of the
brokerage services provided, commissions exceeding those which another broker
might charge may be paid to broker-dealers who were selected to execute
transactions on behalf of the Fund and the Adviser's or the Sub-Adviser's other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto, such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser or the Sub-Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold from time to time through such broker-dealers, on behalf of
the Fund. The Trustees (together with the Trustees of the other MFS Funds) have
directed the Adviser to allocate a total of $39,100 of commission business from
the MFS Funds to the Pershing Division of Donaldson Lufkin & Jenrette as
consideration for the annual renewal of certain publications provided by Lipper
Analytical Securities Corporation (which provides information useful to the
Trustees in reviewing the relationship between the Fund and the Adviser and the
Sub-Adviser).
The Adviser's and the Sub-Adviser's investment management personnel attempt to
evaluate the quality of Research provided by brokers. The Adviser or the
Sub-Adviser sometimes uses evaluations resulting from this effort as a
consideration in the selection of brokers to execute portfolio transactions.
The management fee of the Adviser or the Sub-Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research service. To the
extent the Fund's portfolio transactions are used to obtain brokerage and
research services, the brokerage commissions paid by the Fund will exceed those
that might otherwise be paid for such portfolio transactions, or for such
portfolio transactions and research, by an amount which cannot be presently
determined. Such services would be useful and of value to the Adviser or the
Sub-Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients would
be useful to the Adviser or the Sub-Adviser in carrying out its obligations to
the Fund. While such services are not expected to reduce the expenses of the
Adviser or the Sub-Adviser, the Adviser or the Sub-Adviser would, through use of
the services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff.
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, any subsidiary of the Adviser or the Sub-Adviser. Investment decisions
for the Fund and for such other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Adviser to be equitable to each. It is recognized that in some cases this
system could have a detrimental effect on the price or volume of the security as
far as the Fund is concerned. In other cases, however, the Fund believes that
its ability to participate in volume transactions will produce better executions
for the Fund.
For the fiscal year ended May 31, 1997, the Emerging Markets Equity Fund paid
brokerage commissions of $303,239 on total transactions of $63,317,556.
During the fiscal year ended May 31, 1997, the Emerging Markets Equity Fund,
acquired and owned securities issued by ING Baring and General Electric Capital
Corp., broker-dealers of this Fund, in the amount of $1,030,047 and $1,059,835,
respectively as of May 31, 1997.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period, in the case of purchases of $1 million or more), the
shareholder may obtain Class A shares of the Fund at the same reduced sales
charge as though the total quantity were invested in one lump sum by completing
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the Letter of Intent section of the Account Application or filing a separate
Letter of Intent application (available from the Shareholder Servicing Agent)
within 90 days of the commencement of purchases. Subject to acceptance by MFD
and the conditions mentioned below, each purchase will be made at a public
offering price applicable to a single transaction of the dollar amount specified
in the Letter of Intent application. The shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of a Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, B and C shares
of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level. See "Purchases" in the Prospectus for
the sales charges on quantity discounts. For example, if a shareholder owns
shares with a current offering price value of $75,000 and purchases an
additional $25,000 of Class A shares of a Fund, the sales charge for the $25,000
purchase would be at the rate of 4% (the rate applicable to single transactions
of $100,000). A shareholder must provide the Shareholder Servicing Agent (or his
investment dealer must provide MFD) with information to verify that the quantity
sales charge discount is applicable at the time the investment is made.
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 will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in
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the following order: (i) any "Reinvested Shares"; (ii) to the extent necessary,
any "Free Amount"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined under "Information
Concerning Shares of the Fund -- Contingent Deferred Sales Charge" in the
Prospectus). The CDSC will be waived in the case of redemptions of Class B and
Class C shares pursuant to a SWP, but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be received in full and fractional
shares of 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
generally having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of 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 the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may participate in the Automatic Exchange Plan. The Automatic
Exchange Plan provides for automatic exchanges of funds from the shareholder's
account in an MFS Fund for investment in the same class of shares of other MFS
Funds selected by the shareholder if such MFS Fund is available for sale. Under
the Automatic Exchange Plan, transfers of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to the fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by 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
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MFS Fund to another and to withdraw from an MFS Fund, as well as a shareholder's
other rights and privileges are not affected by a shareholder's participation in
the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or within 12 months of the
initial purchase in the case of Class C shares and certain Class A shares, a
CDSC will be imposed upon redemption. Although redemptions and repurchases of
shares are taxable events, a reinvestment within a certain period of time in the
same fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of a loss realized on the original
redemption for federal income tax purposes. Please see your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e. an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale
and if the purchaser is eligible to purchase the class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS Fundamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by 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 fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
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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 (IRAs) (for individuals and their
non-employed spouses who desire to make limited contributions to a
tax-deferred retirement program and, if eligible, to receive a federal
income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended;
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
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, although the
Fund's foreign-source income may be subject to foreign withholding taxes. If the
Fund should fail to qualify as a "regulated investment company" in any year, the
Fund would incur a regular corporate federal income tax upon its taxable income
and Fund distributions would generally be taxable as ordinary dividend income to
the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 the
Fund's 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%. The 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 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.
A Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares were
held for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a redemption of shares may also
be disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of the Fund within ninety days
after their purchase followed by any purchase (including purchases by exchange
or by reinvestment) 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
25
<PAGE> 231
an economic return of capital taxable to shareholders. The Fund's investments in
zero coupon bonds, deferred interest bonds, payment in kind bonds, and certain
securities purchased at a market discount will cause the Fund to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held by
the Fund on the last business day of each taxable year will be marked to market
(i.e., treated as if closed out) on that day, and any gain or loss associated
with the positions will be treated as 60% long-term and 40% short term capital
gain or loss. Certain positions held by the Fund that substantially diminish its
risk of loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Fund will
limit its activities in options, Futures Contracts, Forward Contracts and swaps
and related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. The holding of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid a tax on the Fund. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance since the amount
of the Fund's assets to be invested within various countries is not known. If
the Fund holds more than 50% of its assets in foreign stock and securities at
the close of its taxable year, the Fund may elect to "pass through" to the
Fund's shareholders foreign income taxes paid. If the Fund so elects,
shareholders will be required to treat their pro-rata portion of the foreign
income taxes paid by the Fund as part of the amounts distributed to them by the
Fund and thus includable in their gross income for federal income tax purposes.
Shareholders who itemize deductions would then be allowed to claim a deduction
or credit (but not both) on their federal income tax returns for such amounts,
subject to certain limitations. Shareholders who do not itemize deductions would
be able (subject to such limitations) to claim a credit but not a deduction. No
deductions for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to its shareholders foreign income taxes paid by it, shareholders
will not be able to claim any deduction or credit for any part of the foreign
taxes paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons also
may be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at 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.
The Fund will not be required to pay Massachusetts income or excise taxes as
long as it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for each of the Class A, Class B
and Class C shares of the Fund (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 the Fund and each class of
shares offered by the Fund. The Distribution Plan is designed to promote sales,
thereby increasing the net assets of the Fund. Such an increase may reduce the
expense ratio to the extent the Fund's fixed costs are spread over a larger net
26
<PAGE> 232
asset base. Also, an increase in net assets may lessen the adverse effects that
could result were the Fund required to liquidate portfolio securities to meet
redemptions. There is, however, no assurance that the net assets of the Fund
will increase or that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid 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.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL PERIOD: During
the fiscal year ended May 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ------------ ------------ ------------
<S> <C> <C> <C>
Class A Shares $128,054 $ 79,138 $ 48,916
Class B Shares $284,900 $ 215,144 $ 69,756
Class C Shares $ 8,454 $ 6,343 $ 2,111
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties to
such Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide to the Trustees, and the
Trustees shall review, at least quarterly, a written report of the amounts
expended (and purposes therefor) under such Plan. The Distribution Plan may be
terminated at any time by a vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the 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 or any penalty, by
vote of a majority of the Distribution Plan Qualified Trustees or by vote of the
holders of a majority of the respective class of the 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.
8. 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 Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.)
This determination is made once each day as of the close of regular trading on
the Exchange by deducting the amount of the liabilities attributable to the
class from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Equity securities
in the Fund's portfolio are valued at the last sale price on the exchange on
which they are primarily traded or on the Nasdaq system for unlisted national
market issues, or at the last quoted bid price for listed securities in which
there were no sales during the day or for unlisted securities not reported on
the Nasdaq system. Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in 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
27
<PAGE> 233
characteristics and other market data without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Forward
Contracts will be valued using a pricing model taking into consideration market
data from an external pricing source. Use of the pricing services has been
approved by the Board of Trustees. All other securities, futures contracts and
options in the Fund's portfolio (other than short-term obligations) for which
the principal market is one or more securities or commodities exchanges (whether
domestic or foreign) will be valued at the last reported sale price or at the
settlement price prior to the determination (or if there has been no current
sale, at the closing bid price) on the primary exchange on which such
securities, futures contracts or options are traded; but if a securities
exchange is not the principal market for securities, such securities will, if
market quotations are readily available, be valued at current bid prices, unless
such securities are reported on the Nasdaq system, in which case they are valued
at the last sale price or, if no sales occurred during the day, at the last
quoted bid price. Short-term obligations in the Fund's portfolio are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer supplied valuations. Portfolio investments for which
there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of a Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD or its
agent, the Shareholder Servicing Agent, prior to the close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: 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 1% maximum for Class C
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge applicable to Class A shares (4.75% maximum) and/or (iii)
total rates of return which represent aggregate performance over a period or
year-by-year performance, and which may or may not reflect the effect of the
maximum or other sales charge or CDSC. The Fund offers multiple classes of
shares which were initially offered for sale to the public on different dates.
The calculation of total rate of return for a class of shares which initially
was offered for sale to the public subsequent to another class of shares of the
Fund is based both on (i) the Performance of the Fund's newer class from the
date it initially was offered for sale to the public and (ii) the performance of
the Fund's oldest class from the date it initially was offered for sale to the
public up to the date that the newer class initially was offered for sale to the
public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of each 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 share). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
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 hereto under the heading "Performance Results" assume an initial
investment of $10,000 in Class A shares of the Fund and cover the period from
October 24, 1995 to December 31, 1996. It has been
28
<PAGE> 234
assumed that dividend and capital gain distributions were reinvested in
additional shares. These performance results, as well as any yield or total rate
of return quotation provided by the 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. The current net asset value of shares and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8355).
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by
Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in the fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund and MFD may discuss or quote the Fund's current
portfolio manager(s) as well as other investment personnel, including such
persons' views on: various foreign and emerging market economies; securities
markets; portfolio securities and their issuers; investment philosophies,
strategies, techniques and criteria used in the selection of securities to be
purchased or sold for the Fund; the Fund's portfolio holdings; the investment
research and analysis process; the formulation and evaluation of investment
recommendations; the assessment and evaluation of credit, interest rate, market
and economic risks; and similar and related matters. In addition, from time to
time the Fund and MFD may discuss the Fund's current or anticipated allocations
of the Fund's securities by country or region. Any such allocations are subject
to change.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly. MFS FIRSTS: MFS has a long
history of innovations.
<TABLE>
<S> <C>
-- 1924 -- Massachusetts Investors Trust is
established as the first open-end mutual fund
in America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933 (the "Truth in
Securities Act" or the "Full Disclosure
Act").
-- 1936 -- Massachusetts Investors Trust is the
first mutual fund to allow shareholders to
take capital gain distributions either in
additional shares or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among
the first municipal bond funds established.
-- 1979 -- Spectrum becomes the first
combination fixed/variable annuity with no
initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is
established as America's first globally
diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is
the first open-end mutual fund to seek high
tax-free income from lower-rated municipal
securities.
</TABLE>
29
<PAGE> 235
<TABLE>
<S> <C>
-- 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(R) Union Standard Trust is the
first mutual fund to invest solely in
companies deemed to be union-friendly by an
advisory board of senior labor officials,
senior managers of companies with signifi-
cant labor contracts, academics and other
national labor leaders or experts.
</TABLE>
FCM AND FCEM ACHIEVEMENTS: FCM & FCEM have a history of achievements and
innovations.
<TABLE>
<S> <C>
-- 1868 -- Established the world's oldest
investment trust.
-- 1882 -- Invested in Japanese bonds.
-- 1884 -- Invested in the Hong Kong bond
market.
-- 1930 -- Invested in the U.S.
-- 1961 -- Invested in the Japanese stock
market.
-- 1972 -- Launched the first European
investment trust when the UK joined the EEC.
-- 1980's -- Invested in the emerging markets of
Thailand and Korea.
-- 1987 -- Launched the first Latin America fund
in the UK.
-- 1994 -- Launched The Foreign & Colonial
Emerging Middle East Fund (a closed-end fund,
shares of which are listed on the New York
Stock Exchange).
</TABLE>
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and one other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each of the four series of the Trust (Class A, Class
B, Class C and Class I shares). Each share of a class of the Fund represents an
equal proportionate interest in the assets of the Fund allocable to that class.
Upon liquidation of the Fund, shareholders of each class of the Fund are
entitled to share pro rata in the Fund's net assets allocable to such class
available for distribution to shareholders. The Trust reserves the right to
create and issue a number of series and additional classes of shares, in which
case the shares of each class of a series would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust without the affirmative vote of a majority of the Trust's outstanding
shares (as defined in "Investment Restrictions"). The Trust or any series of the
Trust may be terminated (i) upon the merger or consolidation of the Trust or any
series of the Trust with another organization or upon the sale of all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's or the affected series' outstanding shares voting as a
single class, or of the affected series of the Trust, except that if the
Trustees recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares will be sufficient, or (ii) upon liquidation and distribution of the
assets of a Fund, if approved by the vote of the holders of two-thirds of its
outstanding shares of the Trust, or (iii) by the Trustees by written notice to
its shareholders. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to
30
<PAGE> 236
circumstances in which both inadequate insurance existed and the Trust itself
was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolios of Investments and the Statements of Assets and Liabilities at
May 31, 1997, the Statements of Operations for the period from October 24, 1995
(commencement of investment operations) to May 31, 1997, the Statements of
Changes in Net Assets for the period from October 24, 1995 (commencement of
investment operations) to May 31, 1997, the Notes to Financial Statements and
the Report of Independent Auditors, each of which is included in the Annual
Report to shareholders of the Fund, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
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<PAGE> 237
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1995............................................ $ 9,828 $ 0 $ 10 $ 9,838
December 31, 1996............................................ 10,444 0 161 10,605
</TABLE>
EXPLANATORY NOTES: The results in the table assume that income dividends and
capital gain distributions were invested in additional shares. The results also
assume that the initial investment on October 24, 1995 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 May 31, 1997.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS CURRENT
------------------------------ 30-DAY DISTRIBUTION
1 YEAR LIFE OF FUND(3) YIELD RATE
------ --------------- ------ ------------
<S> <C> <C> <C> <C>
Class A shares with sales charge........................ 10.92% 13.35% N/A 0.00%
Class A shares without sales charge..................... 16.43% 16.85% N/A N/A
Class B shares with CDSC................................ 11.87% 13.95% N/A N/A
Class B shares without CDSC............................. 15.87% 16.24% N/A 0.00%
Class C shares with CDSC................................ 14.96% 16.30%(1)
Class C shares without CDSC............................. 15.97% 16.30%(1) N/A 0.00%
Class I shares.......................................... 16.67%(2) 17.00%(2) N/A N/A
</TABLE>
(1) Class C share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class C shares
on June 27, 1996 for the Fund. Sales charges, expenses and expense ratios,
and therefore performance, for Class B and Class C shares differ. Class C
share performance has been adjusted to reflect that Class C shares generally
are subject to a lower CDSC (unless the performance quotation does not give
effect to the CDSC) than Class B shares. Class C share performance has not,
however, been adjusted to reflect differences in operating expenses, which
generally are not significantly different from Class B and Class C shares.
(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the commencement of offering of Class I
shares on January 2, 1997. Sales charges, expenses and expense ratios, and
therefore performance for Class I and A shares differ. Class I share
performance has been adjusted to reflect that Class I shares are not subject
to an initial sales charge, whereas Class A shares generally are subject to
an initial sales charge. Class I share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class I shares.
(3) Start of investment operations was October 24, 1995.
A-1
<PAGE> 238
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
SUB-ADVISER
Foreign & Colonial Management Ltd.
Exchange House
Primrose Street
London EC2A 2NY, United Kingdom
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
MFS(R)/FOREIGN & COLONIAL EMERGING MARKETS EQUITY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
FEM-13-10/96/500
<PAGE> 239
[MFS logo]
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[photo of Bogota, Colombia]
MFS(R)/ Annual Report
Foreign & Colonial for Year Ended
Emerging Markets May 31, 1997
Equity Fund
MFS(R)/
Foreign & Colonial
International Growth
and Income Fund
MFS(R)/
Foreign & Colonial
International
Growth Fund
<PAGE>
Table of Contents
Letter from the Chairman ....................................... 1
MFS(R)/Foreign & Colonial International Funds Overview .......... 2
Investment Strategies .......................................... 3
Portfolio Managers' Profiles .................................... 4, 6
Fund Facts ...................................................... 9
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
Performance Summary .......................................... 10
Portfolio Concentration ....................................... 12
Tax Form Summary ................................................ 12
Portfolio of Investments ....................................... 13
MFS(R)/Foreign & Colonial International Growth and Income Fund
Performance Summary .......................................... 16
Portfolio Concentration ....................................... 18
Tax Form Summary ................................................ 18
Portfolio of Investments ....................................... 19
MFS(R)/Foreign & Colonial International Growth Fund
Performance Summary .......................................... 22
Portfolio Concentration ....................................... 24
Tax Form Summary ................................................ 24
Portfolio of Investments ....................................... 25
Financial Statements ............................................. 29
Notes to Financial Statements .................................... 35
Report of Independent Auditors ................................. 42
It's Easy to Contact Us .......................................... 43
The MFS Family of Funds(R) ..................................... 44
Trustees and Officers ............................................. 45
Cover Photo: Bogota, Colombia
Highlights
[bullet] Several emerging-country equity markets are outperforming the strong
U.S. stock market, as these countries reap the benefits of both their
own economic growth and that of developed countries.
[bullet] The renewed strength of the U.S. dollar versus the Japanese yen
resulted in a strong performance from Japanese blue-chip stocks, many
of which reached all-time highs.
[bullet] Uncertainty over monetary union continued to be a factor in European
markets, although some European stocks, such as Volkswagen, performed
well as they benefited from restructuring.
[bullet] As of May 31, 1997, assets in the three MFS/F&C funds exceeded $241
million, a 30% increase over the past six months, reflecting a growing
interest in international investing.
<PAGE>
Letter from the Chairman
[photo of A. Keith Brodkin]
Dear Shareholders:
We are pleased to report that, in their second full year of operation, the
MFS/Foreign & Colonial (F&C) International Funds continue to see a steady growth
of assets thanks to investors' renewed interest in international securities
markets, particularly the increasingly vibrant emerging markets.
In fact, in what may be one of the biggest investment stories of the past
year, some rapidly growing emerging-country equity markets are outperforming the
strong U.S. stock market. Many of these countries are not only reaping the
benefits of their own economic growth, they are also benefiting from demands for
their services and manufactured goods by developed countries. This trend is
reflected in the performance of MFS(R)/Foreign & Colonial Emerging Markets
Equity Fund, whose performance within this category has been quite favorable.
Assets for the three MFS/F&C funds have reached over $241 million -- a 30%
increase since November 1996. This growing interest in international investing
has come in spite of the continuing strength of the U.S. equity market. We
regard this as a sign of investors' understanding of the need for
diversification across a range of global markets as well as their belief that,
in time, the recent trend of underperformance by international markets will
begin to reverse itself. Before the recent upsurge in U.S. equities, many
overseas markets were outperforming the U.S. market, a situation we expect to
see again, particularly as investors continue to seek the world's highest-growth
areas.
We are pleased to report that Arnab Kumar Banerji, chief investment officer
of Foreign & Colonial Emerging Markets Ltd. and portfolio manager of MFS/Foreign
& Colonial Emerging Markets Equity Fund, has accepted the additional
responsibility of chief investment officer of Foreign & Colonial Management Ltd.
Dr. Banerji succeeds Tony Thomson, whom we thank for his contribution in helping
launch the MFS/F&C funds.
Also, we would like to remind investors using annuities for their
long-term, tax-deferred retirement investing that MFS/Foreign & Colonial
Emerging Markets Equity Series, MFS(R)/Foreign & Colonial International Growth
and Income Series, and MFS(R)/Foreign & Colonial International Growth Series are
available as part of the MFS Regatta Gold(R) annuity.
This annual report to shareholders covers all three MFS/F&C funds. Each of
these funds has varying objectives, which are outlined on page 9 of this report.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/A. Keith Brodkin
A. Keith Brodkin
Chairman and President
June 12, 1997
1
<PAGE>
MFS/Foreign & Colonial International Funds Overview
[photo of Arnab Kumar Banerji]
Dear Shareholders:
Liquidity continued to underpin international equity markets over the past
year, while disinflationary forces remained in place despite somewhat stronger
world economic growth. International markets experienced increased volatility
following the interest-rate increase by the U.S. Federal Reserve Board in
February, which also caused a setback for the bond markets.
One of the major events in international markets over this period was the
strength of the U.S. dollar versus the Japanese yen. The yen started the year
at just under 116 to the dollar and fell to a low of 127 on May 2, 1997, a fall
of just under 10%. This weakening resulted in a strong performance from
Japanese blue-chip stocks, many of which reached all-time highs. The story in
the financial services sector was somewhat different. On top of bad-debt
worries, this sector was rocked by the "sokaiya" racketeering scandal at Nomura
Securities.
In continental Europe, uncertainty over European monetary union (EMU)
remained. Slow growth in Germany raised the prospect that this key EMU member
would have to be creative with its accounting policies in order to meet the
Maastricht criteria, allowing weaker members such as Italy to join at the first
stage. However, some European stocks such as Volkswagen performed well as
restructuring gathered pace. Growth in continental Europe remained weak
relative to the United States and the United Kingdom, and there appears to be
little need for interest rates to rise in the near term.
In the United Kingdom, the strength of sterling hit some exporters,
resulting in lower profits. The economy remained robust, and interest rates we
believe are set to continue their upward trend to offset inflation. The market
is likely to experience some volatility following the new Labor Party's first
budget, which is expected to detail the proposed windfall tax on privatized
utilities.
As an asset class, emerging markets performed well over the past 12
months, although Southeast Asia severely underperformed Latin America and
Eastern Europe. Structural imbalances have led to sharp falls in markets such
as Korea and Thailand. On the other hand, markets such as Brazil, Mexico,
Russia, and Egypt, driven by significant shifts in their economic policies and
relative political stability, have moved smartly higher.
Respectfully,
/s/Arnab Kumar Banerji
Arnab Kumar Banerji
Chief Investment Officer
Foreign & Colonial Management Ltd.
2
<PAGE>
Investment Strategies
MFS/Foreign & Colonial Emerging Markets Equity Fund
[photo of Jeff Chowdhry]
Jeff Chowdhry
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 16.43%, Class B shares 15.87%, Class C shares 15.97%, and Class
I shares 16.67%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 10.90% return for the
Lipper Emerging Markets Funds Index (the Lipper Index) and to a 7.76% return
for the Morgan Stanley Capital International (MSCI) Emerging Markets Free (EMF)
Index. The Lipper mutual fund indices are unmanaged indices of the largest
qualifying mutual funds within their respective investment objectives, adjusted
for the reinvestment of capital gains distributions and income dividends, while
the MSCI EMF Index is a broad, unmanaged, market-capitalization-weighted index
of equities in emerging markets. It is not possible to invest directly in an
index.
Emerging markets have shown much better performance over the past year
after a generally poor performance in 1994 and 1995. The Fund has outperformed
the MSCI EMF Index by having above-index weightings in most of Latin America,
including Brazil, Mexico, Colombia, and Peru, and below-index weightings in
Korea and South Africa. The Fund has outperformed the Lipper Index primarily
due to its higher weightings in Brazil, Mexico, Colombia, Russia, Egypt, and
Morocco and its lower weightings in Malaysia, Indonesia, Thailand, and the
Philippines.
The Fund remains well diversified at the country level, with major
industry weightings in telecommunications, banking, electric utilities, and
food and beverages. The largest country weightings are Brazil, Mexico, Hong
Kong, and India. Within Asia, we have sold most of our investments in Thailand,
Korea, the Philippines, and Indonesia, preferring instead Hong Kong, which is
being re-rated upward as the handover to China in mid-1997 approaches. We also
remain positive on India due to improving domestic liquidity and falling
interest rates. Elsewhere in Asia, we remain cautious, given our concern that
structural imbalances in that region's economies may continue to have a
negative impact on their stock markets.
We remain, on the whole, positive on other emerging market countries. Our
largest position in Latin America remains in Brazil, where interest rates have
been easing steadily and reforms are continuing while the stock market
continues to rise on the back of strong earnings growth. We are also positive
on the smaller Latin American markets of Colombia and Peru. In Colombia,
political worries have overshadowed what we believe are an improving inflation
environment and very attractive valuations. In Peru, economic growth is among
the best in the region, while valuations remain among the lowest.
In other emerging markets, Russia, Egypt, Portugal, and Greece deserve
special mention. Russia was among the best-performing markets in the world in
1996 and continues to move strongly higher in 1997, primarily due to continued
liberalization at the political and company level. The Egyptian economy is the
strongest in the Middle East as a result of efforts by the current
administration to introduce large-scale privatization of state-run companies.
Portugal has demonstrated over the past 12 months that its management of its
economy is among the best in western Europe. This has been validated by the
MSCI, which recently announced that Portugal's stock market will be in its
developed, rather than emerging market, index series beginning in December
1997. Greece is another country that has decided on an accelerated reform
program following
3
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial Emerging Markets Equity Fund
the landslide victory by Prime Minister Simitis in September last year, which
has led to inflation and interest rates. Having been cautious on the South
African stock market for most of the past year, we are now seeing some value
there following the sharp fall of the rand and the likely peaking in inflation
and interest rates.
Looking forward, we would expect to build up positions in South Africa and
will be monitoring our underweighted position in Asia very closely for signs of
a turn. Our positive stance toward Latin America is likely to be maintained,
although some trimming back of positions may be appropriate later this year.
Respectfully,
/s/Arnab Kumar Banerji /s/Jeff Chowdhry
Arnab Kumar Banerji Jeff Chowdhry
Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
Arnab Kumar Banerji is Chief Investment Officer of Foreign & Colonial
Management Ltd. Dr. Banerji earned degrees in physiology and medicine from
Oxford University before entering the investment management business with J.
Henry Schroder Wagg in London. He left that firm to become a research
analyst and later director of Nomura Securities before moving to Citibank
Global Asset Management to set up their Emerging Markets operation, which he
headed until 1993, when he joined Foreign & Colonial.
Jeff Chowdhry is a Director and Global Funds Manager of Foreign & Colonial
Emerging Markets Ltd. Mr. Chowdhry joined Foreign & Colonial in 1994 from
BZW Investment Management in London, where he was a Director in the Emerging
Markets Division. Mr. Chowdhry is a graduate of Brunel University and has a
Master of Business Administration degree from Kingston Business School.
4
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
[photo of June Scott]
June Scott
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.88%, Class B shares 2.33%, Class C shares 2.61%, and Class I
shares 2.88%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 6.24% return for a blend (70% and
30%) of the unmanaged MSCI EAFE (Europe, Australia, Far East) Index and the
J.P. Morgan Global Bond Index (the Morgan Index). The EAFE Index is an
unmanaged index of international stocks, while the Morgan Index is an unmanaged
index of bonds issued from 13 countries with remaining maturities of at least
one year.
The major feature in international markets over the past year was the
strength of the dollar, particularly against the Japanese yen, the German mark,
and the French franc. In January, half of the yen exposure and three-quarters
of the mark and franc exposures were hedged into dollars. Stronger growth in
the United States, weakness in the Japanese economy, and uncertainties in
Europe concerning EMU supported a stronger dollar, and we expect this dollar
strength to continue.
[photo of Ian K. Wright]
Ian K. Wright
The performance of Japanese equities during this period was a good
illustration of the current three-tier market: the international "nifty fifty"
blue chips such as Canon and TDK, which outperformed the market; the heavily
sold-off cyclicals; and the underperforming financial services sector. Japanese
blue-chip stocks were the main beneficiaries of the weak Japanese currency,
with many reaching all-time highs. The Fund held several of these stocks and
benefited from this upswing. Going forward, we expect the "nifty fifty" stocks
to continue to do well.
The U.K. market performed well, and sterling remained strong despite the
prospect of a left-wing victory in the general election. Economic growth was
strong, and the interest-rate cycle has turned. However, companies with high
overseas earnings are beginning to feel the effects of the strong currency, and
profit warnings are starting to come through. We believe that the portfolio
should benefit from the mini-consumer boom likely to be generated by the
windfalls resulting from the public offerings of several building societies
(savings and loans). However, the market is likely to experience some
uncertainty following Labor's first budget in July.
[photo of Richard O. Hawkins]
Richard O. Hawkins
Economic growth and the equity markets in continental Europe continued to
be affected by fiscal restraint as member states struggled to meet the
Maastricht criteria. In France, an unexpected general election was called for
late May/early June. This was a gamble by the French President, Jacques Chirac,
in the vain hope that a right-wing government would be returned with a
sufficient majority to push through the economic policies necessary for
monetary union. In Germany, a row erupted between the government and the
Bundesbank over revaluation of gold reserves that might be used to reduce the
budget deficit. This led to accusations of financial dishonesty and increased
the chance that some of the weaker European countries, such as Italy, would be
included in the first round of EMU. The outlook for Europe remains uncertain,
with political upheavals, high unemployment, and EMU concerns on the horizon.
Asian markets have shown a mixed performance over the past year. Hong Kong
has performed well due to positive sentiment over the imminent handover to
China. Other markets, however, have not performed as well due to worries over
high valuation levels.
5
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth and Income Fund
The fixed-income portion of the Fund reflects a neutral weighting among
Europe, Japan, the United States, and the other dollar-bloc countries. U.S.
interest rates appear increasingly attractive from a global perspective. Hence,
we anticipate increasing the weighting in the dollar bloc relative to Europe
once the pickup in core European growth is confirmed and the U.S. market
adjusts to the Federal Reserve Board's tighter policy. In the meantime, we are
maintaining a defensive posture with respect to duration, or interest-rate
sensitivity, in both the dollar bloc and Europe.
The Fund remains overweighted in Australian bonds because we believe
current yield spreads reflect undue fears of a rate hike. Within Europe,
several potential developments suggest possible opportunities: the return of
the single-currency theme to the market, which would help potential entrants
such as Ireland and Spain; the likelihood of interest-rate cuts in Italy,
Spain, and possibly Sweden; and a more attractive U.K. market following the
election and moderate interest-rate hikes. Despite extremely low absolute
yields, the Japanese bond market should be well supported by accommodative
monetary policy and domestic institutional flows. Although some of the forces
pushing the dollar up are waning, we believe it should remain firm due to
capital inflows induced by favorable interest rates and moderate growth.
Respectfully,
/s/June Scott /s/Ian K. Wright /s/Richard O. Hawkins
June Scott Ian K. Wright Richard O. Hawkins
Portfolio Manager Portfolio Manager Portfolio Manager
Portfolio Managers' Profiles
June Scott is a Global Funds Manager of Foreign & Colonial Management Ltd. A
graduate of London Guildhall University, Ms. Scott joined Foreign & Colonial
in 1995 after completing her M.B.A. at the London Business School. Ms. Scott
worked previously as a Quantitative Portfolio Analyst in the Equity Research
Group at J.P. Morgan Investment Management in London.
Ian K. Wright is a Director of Foreign & Colonial Management Ltd. Mr.
Wright joined Foreign & Colonial in 1981. He heads up Foreign & Colonial's
Japanese equity investment team and is the manager of the Foreign & Colonial
Pacific Investment Trust. He is a graduate of the University of Southampton
and is an Associate of the Institute of Actuaries.
Richard O. Hawkins joined MFS in 1988 as Assistant Vice President -
Investments. A graduate of Brown University and the University of
Pennsylvania's Wharton Graduate School of Business Administration, he was
named Vice President - Investments in 1991 and Senior Vice President in
1993. On January 1, 1996, Mr. Hawkins became Director of the International
Fixed Income Department of MFS.
6
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
For the 12 months ended May 31, 1997, Class A shares of the Fund provided a
total return of 2.13%, Class B shares 1.56%, Class C shares 1.82%, and Class I
shares 2.31%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges and compare to a 15.56% return for the
Lipper International Funds Index and to a 7.88% return for the unmanaged MSCI
EAFE Index.
The Fund's exposure to smaller companies was reduced over the past 12
months, from 45% of assets to just over 30%. The money raised from this
asset-allocation shift was reinvested into blue-chip stocks. With liquidity
driving equity markets and deregulation and restructuring gathering pace, we
felt that blue chips would benefit more than smaller companies. Investors tend
to focus on larger, more liquid stocks when trying to invest large sums of
money, and restructuring tends to benefit larger companies with more room to
cut costs. During January, half of the Japanese yen exposure and three-quarters
of the German mark and French franc exposures were hedged into U.S. dollars.
Stronger growth in the United States, weakness in the Japanese economy, and
uncertainties in Europe concerning EMU all supported a strong dollar.
The Fund's weighting in Japan is similar to that of other funds in its
Lipper universe. Japanese blue-chip stocks with overseas exposure such as Canon
and TDK, both held in the Fund, continue to set all-time highs due to the yen's
weakness. The Fund's weighting in smaller Japanese companies has been reduced.
These companies continue to suffer from weak investor sentiment and, being
domestically oriented, have failed to benefit from the weak currency.
In the United Kingdom, we believe economic fundamentals remain strong,
although interest rates will almost certainly have to rise in the second or
third quarter in order to head off inflation. This, together with uncertainties
regarding the new government, the impact of a strong sterling on corporate
earnings, and volatility in the European and U.S. markets, may impact equities
in the short term. One of the best-performing sectors in the U.K. market has
been the banking sector. The Fund owns shares in Lloyds Bank, which is a
quality company with the fastest earnings growth in the sector and one of the
most profitable banks in the world. This stock is also benefiting from the
technical squeeze in the banking sector as index funds scramble to increase
their weightings in banks ahead of the public offerings of several building
societies (savings and loans).
Within continental Europe, growth remains weak relative to the United
States and the United Kingdom, and we see little need for interest rates to
rise in the near term. Worries over EMU continue, with the major concern being
whether or not it can proceed on time and in what form. Meanwhile, corporate
restructuring in Germany is beginning to gather pace. Volkswagen, a company
held in the Fund, has re-engineered its manufacturing process and can now
produce its main model, the VW Golf, in 17 hours, compared with the 34 hours it
used to take. All Volkswagen models are now produced from only four platforms,
which has significantly reduced costs.
7
<PAGE>
Investment Strategies - continued
MFS/Foreign & Colonial International Growth Fund
The Fund continues to have a sizable exposure to emerging markets, with a
tilt toward Latin America. Brazil is our favored market due to falling
inflation rates and structural changes in the telecommunications sector, in
which Telebras is a core holding. The Fund has also benefited from its exposure
to Eastern Europe, where the Russian economy, in particular, has moved sharply
upwards.
Respectfully,
/s/June Scott /s/Ian K. Wright
June Scott Ian K. Wright
Portfolio Manager Portfolio Manager
8
<PAGE>
Fund Facts
MFS/Foreign & Colonial Emerging Markets Equity Fund
Strategy: The investment objective of Emerging Markets Equity
Fund is capital appreciation. The Fund seeks to achieve
its investment objective by investing, under normal
market conditions, at least 65% of its total assets in
equity securities of issuers whose principal activities
are located in emerging market countries.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: June 27, 1996
Class I: January 2, 1997
Size: $91.5 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Strategy: The investment objective of International Growth and
Income Fund is capital appreciation and current income.
The Fund seeks to achieve its investment objective by
investing, under normal market conditions, at least 65%
of its total assets in equity securities of issuers
whose principal activities are outside the United
States.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $29.4 million net assets as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Strategy: The investment objective of International Growth Fund
is capital appreciation. The Fund seeks to achieve its
investment objective by investing, under normal market
conditions, at least 65% of its total assets in equity
securities of companies whose principal activities are
outside the United States and which are growing at
rates expected to be well above the growth rate of the
overall U.S. economy.
Commencement of
investment operations: Class A: October 24, 1995
Class B: October 24, 1995
Class C: July 1, 1996
Class I: January 2, 1997
Size: $122.2 million net assets as of May 31, 1997
9
<PAGE>
Performance Summary
MFS/Foreign & Colonial Emerging Markets Equity Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial Emerging Markets Equity 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C Emerging
Lipper Emerging Markets Equity Fund -- Consumer Price MSCI EMF
Markets Funds Index Class A Index -- U.S. Index
------------------- ---------------------- -------------- ---------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11281 10499 10214 10847
5/31/97 13999 12224 10465 11456
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C Emerging Markets Equity Fund (Class A) including 4.75% sales charge
(SEC results) +10.92% +13.35%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class A) at net asset value +16.43% +16.85%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) with CDSC (SEC results) +11.87% +13.95%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class B) at net asset value +15.87% +16.24%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) with CDSC (SEC results) +14.96% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class C) at net asset value +15.97% +16.30%
- ------------------------------------------------------------------------------------------------------
MFS/F&C Emerging Markets Equity Fund (Class I) at net asset value +16.67% +17.00%
- ------------------------------------------------------------------------------------------------------
MSCI EMF Index+ + 7.76% + 8.87%
- ------------------------------------------------------------------------------------------------------
Lipper Emerging Markets Funds Index++ +10.90% +16.30%
- ------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
10
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
11
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 36.6%
Brazil 14.0%
Mexico 10.0%
Hong Kong 6.9%
India 6.2%
South Africa 5.5%
Portugal 4.6%
Russia 4.5%
Greece 4.0%
Argentina 4.0%
Egypt 3.7%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Communications 18.9%
Banking 14.6%
Electricity, Gas, or Sanitation 11.3%
Food and Kindred Products 7.4%
Petroleum Refining 5.8%
Top 10 Holdings
Telecomunicacoes Brasileiras
Brazilian telecommunications company
Petroleo Brasileiro
Brazilian petroleum and natural
gas company
Taipei Fund
Closed-end Taiwan country fund
Telefonos de Mexico
Mexican telecommunications company
Compania Anonima Nacional Telefonos
de Venezuela
Venezuelan telecommunications company
Cheung Kong
Hong Kong property development
and investment company
Portugal Telecom
Portuguese telecommunications company
Credicorp Ltd.
Peruvian bank holding company
Swire Pacific
Diversif ied Hong Kong trading, property,
and manufacturing company
Hindustan Lever
Indian cosmetics and toiletries company
Portfolio Structure (% of Net Assets)
Stocks 95.1%
Cash 4.9%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 84% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 5.2% of its ordinary income.
12
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial Emerging Markets Equity Fund
Stocks - 95.1%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Argentina - 4.0%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 15,016 $ 394,170
Perez Companc S.A. (Oils) 89,308 683,548
Siderar S.A.I.C., ADR (Steel)*## 11,900 401,625
Telecom Argentina S.A.
(Telecommunications) 7,450 397,644
Telefonica de Argentina, ADR
(Utilities - Telephone) 9,850 357,063
Transportadora de Gas del Sur, S.A.
(Pipelines) 31,300 395,162
YPF Sociedad Anonima, ADR (Oils) 33,200 996,000
------------
$ 3,625,212
- -------------------------------------------------------------------------
Brazil - 15.3%
Ing Baring Financial Products (Finance) 7,530 $ 1,030,047
Aracruz Celulos S.A. (Paper Products) 277,000 564,197
Banco Bradesco S.A., Preferred (Banks and
Credit Cos.) 57,000,000 454,807
Centrais Eletricas Brasileiras, ADR
(Utilities - Electric) 50,050 1,176,175
Centrais Eletricas Brasileiras S.A. -
Eletrobras, Preferred, "B"
(Utilities - Electric) 950,000 467,766
Cia Cervejaria Brahma, Preferred
(Beverages) 965,000 700,556
Cia Vale Rio Doce (Diversified Minerals) 24,000 0
Cia Vale Rio Doce, Preferred (Diversified
Minerals) 24,000 530,319
Companhia Energetica S.A., ADR
(Utilities - Electric) 8,700 386,062
Companhia Paranaense de Energia -
COPEL "B", Preferred (Electrical) 38,800 572,774
Itausa Investimentos Itau S.A.
(Conglomerate) 450,000 374,194
Petroleo Brasileiro S.A., Preferred (Oils) 10,400,000 2,487,527
Telebras (Telecommunications) 7,000,000 965,991
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 29,650 4,062,050
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 16,300 179,300
------------
$13,951,765
- -------------------------------------------------------------------------
Canada - 0.6%
Super Sol Ltd. (Supermarkets) 155,550 $ 515,015
- -------------------------------------------------------------------------
Chile - 0.9%
Compania de Telecom de Chile
(Telecommunications) 24,692 $ 845,701
- -------------------------------------------------------------------------
China - 2.0%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 40,850 $ 980,400
Qingling Motors Co. "H" (Automotive) 938,000 520,573
Yizheng Chemical Fibre Co. Ltd. (Textiles) 1,686,000 330,759
------------
1,831,732
- -------------------------------------------------------------------------
Stocks - continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Colombia - 3.2%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 26,700 $ 1,021,275
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 55,450 977,306
Cementos Diamante S.A., ADR
(Construction)## 59,900 943,425
------------
$ 2,942,006
- -------------------------------------------------------------------------
Egypt - 3.6%
Commercial International Bank (Banks and
Credit Cos.)## 11,765 $ 229,417
Nasar City For Housing (Housing
Development) 8,150 1,124,137
North Cairo Mills (Food) 11,700 557,480
Suez Cement Co., GDR (Construction)*## 64,185 1,177,795
Torah For Cement (Construction) 7,935 201,334
------------
$ 3,290,163
- -------------------------------------------------------------------------
Greece - 4.0%
Attica Enterprises (Transportation) 25,000 $ 224,812
Ergo Bank (Banks and Credit Cos.) 14,800 1,045,696
Hellenic Telecommunication Organization
S.A. (Telecommunications) 37,300 930,960
Intracom (Telecommunications) 15,300 745,766
Titan Cement Co (Building Materials) 7,500 749,037
------------
$ 3,696,271
- -------------------------------------------------------------------------
Hong Kong - 7.2%
Bank of East Asia Ltd. (Banks and Credit
Cos.) 234,400 $ 853,134
Cheung Kong Holdings Ltd. (Real Estate) 141,000 1,442,211
Citic Pacific Ltd. (Conglomerate) 52,000 297,315
Hong Kong & China Gas Ltd. (Oil and
Gas) 414,000 721,347
New World Development Co.
(Real Estate) 147,000 933,454
Swire Pacific Air Ltd., "A"
(Transportation) 150,500 1,262,584
Wharf Holdings Ltd. (Real Estate) 183,000 819,579
Zhenhai Refining and Chemical Co., Ltd.
(Oils) 515,000 212,700
------------
$ 6,542,324
- -------------------------------------------------------------------------
Hungary - 2.1%
Borsodchem Rt (Chemicals) 11,050 $ 404,917
Mol Magyar Olaj Es Gazipari Rt (Oils)## 18,400 340,400
Pannonplast Muanuagipari (Chemicals) 8,330 409,803
Richter Gedeon Veg (Medical) 8,840 734,894
------------
$ 1,890,014
- -------------------------------------------------------------------------
India - 6.2%
Bajaj Auto Ltd. (Automotive) 300 $ 7,240
East India Hotels (Lodging) 25,300 291,991
Eih Ltd. (Consumer Goods and Services) 12,700 146,573
Hindustan Lever Ltd. (Consumer Goods
and Services) 39,000 1,217,112
13
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
India - continued
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 55,000 $ 655,935
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 170,000 436,660
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 114,000 911,170
State Bank of India (Banks and
Credit Cos.) 91,000 781,474
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 270 2,986
Tata Steel (Steel) 100,000 483,622
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 36,120 744,072
------------
$ 5,678,835
- ------------------------------------------------------------------------------
Israel - 2.2%
Israel Chemicals Ltd. (Chemicals) 400,000 $ 490,626
Makhteshim Chemical Works Ltd.
(Chemicals)* 81,442 527,294
NICE Systems Ltd., ADR
(Telecommunications) 8,850 269,925
Tadiran Telecommunications Ltd.
(Telecommunications) 22,250 403,281
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 5,850 351,000
------------
$ 2,042,126
- ------------------------------------------------------------------------------
Malaysia - 3.1%
DCB Holdings Berhad (Finance) 120,000 $ 386,866
Malayan Banking Berhad (Finance) 82,600 871,204
Petronas Gas Berhad (Oil and Gas)*## 150,000 543,283
Resorts World Berhad (Entertainment) 63,000 210,627
Tenaga Nasional Berhad
(Utilities - Electric) 180,000 823,881
------------
$ 2,835,861
- ------------------------------------------------------------------------------
Mauritius - 2.1%
Mauritius Commercial Bank (Banks and
Credit Cos.) 130,000 $ 564,247
New Mauritius Hotels (Lodging) 170,000 302,649
Rogers & Co. Ltd. (Finance) 90,000 434,772
State Bank Mauritius (Banks and Credit
Cos.) 1,150,000 648,602
------------
$ 1,950,270
- ------------------------------------------------------------------------------
Mexico - 10.0%
Apasco S.A. (Building Materials) 56,000 $ 366,018
Cemex S.A., "B" (Construction) 175,000 654,867
Cifra S.A. de C.V. (Consumer Goods and
Services) 400,000 685,714
Corporacion GEO S.A. de C.V.
(Housing)## 22,500 455,625
Desc S.A. de C.V. (Special Products and
Services) 64,000 436,915
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 26,400 382,800
Stocks - continued
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
Mexico - continued
Fomento Economico Mexicano S.A., "B"
(Beverages) 84,376 $ 448,014
Gruma S.A. (Food Products) 245,493 1,163,842
Grupo Carso, "A1" (Conglomerate) 80,201 455,250
Grupo Financiero Banamex, "B" (Finance) 127,000 274,872
Grupo Financiero Inbursa S.A. de C.V. (Finance) 2,798 9,710
Hylsamex S.A. de C.V. (Steel) 133,000 643,982
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 70,000 242,478
Telefonos de Mexico S.A. (Utilities - Telephone) 1,011,000 2,246,951
Tubos de Acero de Mexico S.A. (Steel)* 38,678 680,655
------------
$ 9,147,693
- ------------------------------------------------------------------------------
Morocco - 2.5%
Banque Marocaine du Commerce (Banks
and Credit Cos.) 12,500 $ 744,901
Brasserica du Maroc (Consumer Goods and
Services) 2,100 366,953
Credit Eqdom (Financial Institutions) 2,182 220,657
ONA S.A. (Conglomerate) 6,600 534,226
Societe Nationale d'Investissement
(Conglomerate) 5,600 416,401
------------
$ 2,283,138
- ------------------------------------------------------------------------------
Pakistan - 1.6%
Hub Power Co. Ltd., GDR
(Utilities - Electric)* 40,200 $ 928,620
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 8,950 554,900
------------
$ 1,483,520
- ------------------------------------------------------------------------------
Peru - 3.7%
Alicorp S.A. (Consumer Goods and Services) 185,000 $ 322,343
Compania de Minas Buenaventura S.A.
(Mining) 66,640 613,098
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 449,870 1,152,127
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 58,584 1,325,463
------------
$ 3,413,031
- ------------------------------------------------------------------------------
Poland - 3.0%
Agros Holding S.A. (Food Products) 9,900 $ 266,063
Bank Slaski S.A. w Katowicach (Banks and
Credit Cos.) 3,800 296,875
Bydgoska Fabryka Kabli S.A.
(Electrical Equipment) 46,375 347,812
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 70,300 628,306
Exbud S.A. (Construction) 20,000 218,125
Stomil Olsztyn S.A. (Tires and Rubber) 26,500 331,250
Wedel S.A. (Food) 7,000 428,750
Zywiec (Brewery) 4,000 224,375
------------
$ 2,741,556
- ------------------------------------------------------------------------------
14
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Portugal - 4.6%
Banco Espirito Santo e Comercial de
Lisboa S.A. (Banks and Credit Cos.) 45,289 $ 938,822
Cimentos de Portugal S.A.
(Building Materials) 31,526 693,499
Jeronimo Martins & Filho S.A. (Retail) 6,200 421,471
Portugal Telecom S.A.
(Utilities - Telephone) 36,042 1,383,871
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 3,000 112,635
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 8,246 633,848
------------
$ 4,184,146
- -----------------------------------------------------------------------
Russia - 3.3%
Lukoil Oil Co., ADR (Oils) 18,100 $ 1,079,212
Mosenergo, ADR (Utilities - Electric)## 14,410 544,698
Rostelecom (Telecommunications)## 20 758,000
Surgutneftegaz (Oil and Gas) 15,400 656,425
------------
$ 3,038,335
- -----------------------------------------------------------------------
South Africa - 5.5%
Anglo American Corp. of South Africa
Ltd. (Mining) 8,000 $ 468,428
De Beers Centenary AG (Diamonds -
Precious Stones) 29,000 1,016,234
Liberty Life Association of Africa Ltd.
(Insurance) 28,000 783,699
Nedcor Ltd. (Financial Services) 38,964 759,039
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
South Africa - continued
Sappi (Paper Products) 30,000 $ 275,414
Sasol Ltd. (Oils) 62,700 768,658
South African Breweries Ltd. (Brewery) 35,000 983,542
------------
$ 5,055,014
- -----------------------------------------------------------------------
Taiwan - 2.5%
Taipei Fund (Finance) 207 $ 2,256,300
- -----------------------------------------------------------------------
Turkey - 0.2%
Adana Cimento (Building Materials) 3,257,000 $ 214,656
- -----------------------------------------------------------------------
Venezuela - 1.7%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 43,000 $ 1,596,375
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $73,539,525) $87,051,059
- -----------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Student Loan Marketing Assn., due
6/24/97 $1,750 $ 1,743,963
General Electric Capital Corp., due
6/02/97 1,060 1,059,835
- -----------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,803,798
- -----------------------------------------------------------------------
Total Investments (Identified Cost, $76,343,323) $89,854,857
Other Assets, Less Liabilities - 1.8% 1,662,782
- -----------------------------------------------------------------------
Net Assets - 100.0% $91,517,639
- -----------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
15
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth and Income Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth and Income 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 the
differences in loads and fees paid by shareholders investing in the different
classes. It is not possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International 70% MSCI EAFE/30%
Lipper International Growth and Income Consumer Price J.P. Morgan Global
Funds Index Fund -- Class A Index -- U.S. Bond Index
-------------------- -------------------- -------------- ------------------
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10162 10214 10794
5/31/97 12940 10455 10465 11468
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth and Income Fund (Class A) including 4.75% sales
charge (SEC results) - 2.02% +2.82%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class A) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) with CDSC (SEC results) - 1.67% +3.00%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class B) at net asset value + 2.33% +5.43%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) with CDSC (SEC results) + 1.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class C) at net asset value + 2.61% +5.61%
- -------------------------------------------------------------------------------------------------------
MFS/F&C International Growth and Income Fund (Class I) at net asset value + 2.88% +6.00%
- -------------------------------------------------------------------------------------------------------
70% MSCI EAFE/30% J.P. Morgan Global Bond Index+ + 6.24% +9.03%
- -------------------------------------------------------------------------------------------------------
Lipper International Funds Index+ +15.56% +17.68%
- -------------------------------------------------------------------------------------------------------
Consumer Price Index**++ + 2.47% +2.88%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
++Source: CDA/Wiesenberger.
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
16
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
17
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 26.1%
Japan 21.7%
United Kingdom 14.8%
France 7.1%
Germany 6.6%
Hong Kong 6.4%
Switzerland 5.2%
Netherlands 5.1%
Sweden 3.0%
Australia 2.0%
Spain 2.0%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 12.8%
Banks, Retail 9.1%
Telecommunications 6.8%
Pharmaceuticals 5.5%
Engineering 4.7%
Top 10 Holdings
Canon Inc.
Japanese off ice equipment and imaging company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
DDI Corp.
Japanese telecommunications company
HSBC Holdings
British banking and financial services company
Ricoh Company
Japanese off ice and business equipment company
Kyocera Corp.
Japanese component manufacturer
Roche Holdings
Swiss pharmaceutical company
Cheung Kong
Hong Kong property development and investment
company
Inchcape PLC
U.K. car distributor and trading company
Portfolio Structure (% of Net Assets)
Stocks 80.8%
Bonds 13.2%
Cash 6.0%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 87% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 6.3% of its ordinary income.
18
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth and Income Fund
Stocks - 80.8%
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Australia - 2.0%
Capral Aluminum Ltd. (Metals) 81,700 $ 295,325
Western Mining (Holding Company) 47,400 306,247
------------
$ 601,572
- -------------------------------------------------------------------------
Austria - 0.9%
OMV AG (Oil and Gas) 2,100 $ 266,469
- -------------------------------------------------------------------------
Belgium - 0.9%
Generale de Banque (Finance) 690 $ 272,752
- -------------------------------------------------------------------------
France - 7.1%
Accor (Lodging) 1,720 $ 239,013
Compagnie de St. Gobain (Building Materials) 1,960 271,343
Dexia France (Finance) 2,930 274,322
Eaux (Cie Generale) (Utilities - Water) 1,430 176,359
Lafarge S.A., Bearer Shares (Building
Materials) 4,000 256,383
Legrand, Preference Shares (Electrical
Equipment) 1,400 159,528
Michelin, "B" (Tires) 3,700 202,642
Societe Nationale Elf Aquitaine (Oils) 2,700 270,610
TOTAL S.A., "B" (Oils)* 2,560 234,789
------------
$ 2,084,989
- -------------------------------------------------------------------------
Germany - 6.6%
Bayer AG (Chemicals) 9,100 $ 353,489
Deutsche Bank AG (Banks) 4,030 223,771
Deutsche Telekom AG (Utilities - Telephone) 14,960 332,444
Mannesmann AG (Diversified Machinery) 550 223,805
Siemens AG (Electrical Equipment) 4,800 271,114
VEBA AG (Oil and Gas) 4,700 266,209
Volkswagen AG (Automotive) 420 271,873
------------
$ 1,942,705
- -------------------------------------------------------------------------
Hong Kong - 6.4%
Cheung Kong Holdings Ltd. (Real Estate) 41,000 $ 419,366
Hong Kong Electric Holdings Ltd.
(Utilities - Electric) 47,000 169,244
HSBC Holdings PLC (Finance) 15,600 473,154
New World Development Co. (Real Estate) 32,000 203,201
Swire Pacific Air Ltd., "A" (Transportation) 45,000 377,517
Wharf Holdings Ltd. (Real Estate) 51,000 228,407
------------
$ 1,870,889
- -------------------------------------------------------------------------
Italy - 1.5%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 89,580 $ 263,439
Telecom Italia S.p.A. (Telecommunications
Services) 60,750 167,692
------------
$ 431,131
- -------------------------------------------------------------------------
Stocks -continued
- -------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------
Japan - 21.7%
Canon, Inc. (Consumer Goods) 29,000 $ 735,914
DDI Corp. (Telecommunications) 79 590,546
Fujisawa Pharmaceuticals (Pharmaceuticals) 37,000 350,108
Hitachi (Electronics) 16,000 170,667
Hitachi Zosen (Engineering) 63,000 241,161
Ito-Yokado Co. Ltd. (Retail) 7,000 399,828
Kyocera Corp. (Electronics) 6,000 433,032
Marubeni Corp. (Distribution/Wholesale) 81,000 344,903
Matsushita Electric Industrial Co.
(Electrical Equipment) 18,000 339,097
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 38,000 273,927
NKK Corp. (Steel) 114,000 224,568
Oji Paper Co. Ltd. (Paper Products) 833 4,822
Omron Corp. (Electronics) 32,000 644,129
Pioneer Electronic Corp. (Electronics) 26,000 644,129
Ricoh Co. Ltd. (Office/Business Equipment) 34,000 447,484
TDK Corp. (Special Products and Services) 5,000 384,516
Tokyo Broadcasting System (Broadcasting) 9,000 164,129
------------
$ 6,392,960
- -------------------------------------------------------------------------
Malaysia - 2.0%
Genting Berhad (Entertainment) 11,000 $ 57,353
Malayan Banking Berhad (Finance) 9,000 94,925
Petronas Gas Berhad (Oil and Gas)*## 85,000 307,861
Sime Darby Berhad (Holding Company) 36,000 117,493
------------
$ 577,632
- -------------------------------------------------------------------------
Netherlands - 5.1%
ABN Amro Holdings N.V. (Finance) 17,200 $ 318,236
Akzo Nobel (Chemicals) 1,800 239,881
Philips Electronics N.V. (Manufacturing) 5,080 278,266
Royal Dutch Petroleum Co. (Oils) 400 77,365
Vendex International N.V. (Retail) 4,800 269,683
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 13,660 308,982
------------
$ 1,492,413
- -------------------------------------------------------------------------
Singapore - 1.6%
City Developments Ltd. (Real Estate) 22,000 $ 204,615
Development Bank of Singapore Ltd. (Banks) 8,000 100,140
Overseas-Chinese Banking Corp. Ltd. (Finance) 13,600 169,287
------------
$ 474,042
- -------------------------------------------------------------------------
Spain - 2.0%
Repsol S.A. (Oils) 6,050 $ 253,427
Telefonica de Espana (Utilities - Telephone) 11,450 330,586
------------
$ 584,013
- -------------------------------------------------------------------------
Sweden - 3.0%
Ericsson LM, "B" (Telecommunications) 8,760 $ 307,591
Sparbanken Sverige AB, "A" (Banks) 15,960 313,167
Swedish Match AB (Tobacco) 3,200 10,410
Volvo AB, "B" (Automobiles) 9,600 265,827
------------
$ 896,995
- -------------------------------------------------------------------------
19
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -----------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------
Switzerland - 5.2%
Ciba Specialty AG (Chemicals) 2,570 $ 243,809
Nestle AG, Registered Shares (Food and
Beverage Products) 230 286,584
Novartis AG (Pharmaceuticals) 210 285,451
Roche Holdings AG (Pharmaceuticals) 48 427,497
Winterthur (Insurance) 350 286,443
------------
$ 1,529,784
- -----------------------------------------------------------------------
United Kingdom - 14.8%
Allied Domecq PLC (Food and Beverage
Products) 32,850 $ 240,699
BAA PLC (Transportation) 33,560 291,561
British Petroleum PLC (Oil and Gas) 23,600 282,401
British Telecommunications PLC
(Telecommunications) 40,430 293,589
BTR PLC (Holding Company) 57,040 186,065
Caradon PLC (Holding Company) 7,449 11,844
Caradon PLC (Holding Company) 26,397 90,867
Carlton Communications PLC (Broadcasting) 31,620 273,152
General Accident PLC (Insurance) 13,180 194,658
Glaxo Wellcome PLC (Pharmaceuticals) 14,460 289,649
Granada Group PLC (Leisure) 10,960 155,942
Inchcape PLC (Commercial Services) 85,470 403,495
Land Securities PLC (Real Estate) 9,350 140,697
Lloyds TSB Group PLC (Banks and Credit Cos.) 29,620 298,480
National Westminster (Finance) 9,000 110,203
Sainsbury (J.) PLC (Retail) 30,550 175,772
Smith (W.H.) Group PLC (Retail) 38,200 264,245
Storehouse PLC (Retail) 50,400 179,689
Tesco PLC (Retail) 32,580 200,269
Unilever PLC (Consumer Goods) 10,200 273,369
------------
$ 4,356,646
- -----------------------------------------------------------------------
Total Stocks (Identified Cost, $20,959,241) $23,774,992
- -----------------------------------------------------------------------
Warrants
- -----------------------------------------------------------------------
France
Eaux (Cie General) (Utilities - Water) 1,150 $ 789
Sweden
Volvo AB, "B" (Automobiles) 9,600 2,565
- -----------------------------------------------------------------------
Total Warrants (Identified Cost, $0) $ 3,354
- -----------------------------------------------------------------------
Bonds - 13.2%
- -----------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------
Australia - 2.0%
Commonwealth of Australia,
8.75s, 2001 AUD 170 $ 138,620
Commonwealth of Australia,
9.75s, 2002 365 310,680
Commonwealth of Australia,
10s, 2002 165 142,516
-----------
$ 591,816
- -----------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 6s, 1999 DKK 518 $ 82,584
Kingdom of Denmark, 8s, 2001 482 82,436
Kingdom of Denmark, 7s, 2007 526 83,357
Nykredit, 8s, 2026 522 82,442
-----------
$ 330,819
- -----------------------------------------------------------------------
France - 0.8%
Government of France, 7s, 2000 FRF 1,286 $ 241,921
- -----------------------------------------------------------------------
Greece - 0.7%
Hellenic Republic, 12.6s, 2003 GRD 20,500 $ 79,306
Hellenic Republic, 13.4s, 2003 10,000 38,227
Hellenic Republic, 14.8s, 2003 20,000 76,528
-----------
$ 194,061
- -----------------------------------------------------------------------
Ireland - 1.2%
Republic of Ireland, 6.25s, 1999 IEP 60 $ 91,044
Republic of Ireland, 8s, 2000 50 80,012
Republic of Ireland, 6.5s, 2001 110 169,258
-----------
$ 340,314
- -----------------------------------------------------------------------
Italy - 2.6%
Republic of Italy, 9.5s, 1999 ITL 625,000 $ 385,503
Republic of Italy, 9.5s, 2001 605,000 387,880
-----------
$ 773,383
- -----------------------------------------------------------------------
New Zealand - 1.0%
Government of New Zealand,
8s, 2001 NZD 420 $ 296,411
- -----------------------------------------------------------------------
Spain - 2.0%
Government of Spain, 6.75s, 2000 ESP 19,700 $ 141,459
Government of Spain, 8.4s, 2001 17,330 131,820
Government of Spain, 10.5s, 2003 16,180 136,952
Government of Spain, 7.35s, 2007 25,380 183,809
-----------
$ 594,040
- -----------------------------------------------------------------------
Sweden - 0.6%
Kingdom of Sweden, 10.25s, 2000 SEK 1,100 $ 159,837
- -----------------------------------------------------------------------
United Kingdom - 1.2%
United Kingdom Treasury,
7s, 2001 GBP 210 $ 343,156
- -----------------------------------------------------------------------
Total Bonds (Identified Cost, $4,001,187) $3,865,758
- -----------------------------------------------------------------------
Short-Term Obligation - 5.9%
- -----------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/02/97, at Amortized Cost $1,720 $1,719,735
- -----------------------------------------------------------------------
20
<PAGE>
Portfolio of Investments - continued
Call Options Purchased
- ---------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ---------------------------------------------------------------------------
Canadian Dollars
June/1.365 CAD $ 524 $ 50
Deutsche Marks/British Pounds
July/2.7 DEM 538 910
Japanese Government Bonds
June/117.226 JPY 48,000 96
June/117.622 115,000 115
July/114.635 29,000 116
Swiss Francs
August/1.350 CHF 894 6,012
- ---------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $28,209) $7,299
- ---------------------------------------------------------------------------
Put Options Purchased
- ------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- ------------------------------------------------------------------------------
Deutsche Marks
June/1.72 (Premium Paid,
$2,736) DEM 1,034 $ 991
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $26,711,108) $ 29,372,129
- ------------------------------------------------------------------------------
Put Options Written - (0.1)%
- ------------------------------------------------------------------------------
British Pounds
July/1.65 GBP 371 $ (3,823)
Japanese Government Bonds
June/117.226 JPY 48,000 (5,472)
July/114.635 29,000 (6,989)
- ------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $6,589) $ (16,284)
- ------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.1% $ 54,211
- ------------------------------------------------------------------------------
Net Assets - 100.0% $ 29,410,056
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
21
<PAGE>
Performance Summary
MFS/Foreign & Colonial International Growth Fund
The information below illustrates the historical performance of MFS/Foreign &
Colonial International Growth 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 the differences in loads and
fees paid by shareholders investing in the different classes. It is not
possible to invest directly in an index.
[TABULAR REPRESENTATION OF LINE CHART]
Growth of a Hypothetical $10,000 Investment
(For the period from November 1, 1995, through May 31, 1997)
<TABLE>
<CAPTION>
MFS/F&C International
Lipper International Growth Fund -- Consumer Price MSCI
Funds Index Class A Index -- U.S. EAFE
-------------------- --------------------- -------------- ----
<S> <C> <C> <C> <C>
11/1/95 10000 9524 10000 10000
5/31/96 11067 10613 10214 10836
5/31/97 12940 10838 10465 11687
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns as of May 31, 1997 1 Year Life of Fund*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS/F&C International Growth Fund (Class A) including 4.75% sales charge
(SEC results) - 2.70% + 5.15%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class A) at net asset value + 2.13% + 8.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) with CDSC (SEC results) - 2.44% + 5.40%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class B) at net asset value + 1.56% + 7.80%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) with CDSC (SEC results) + 0.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class C) at net asset value + 1.82% + 7.98%
- ---------------------------------------------------------------------------------------------------------
MFS/F&C International Growth Fund (Class I) at net asset value + 2.31% + 8.52%
- ---------------------------------------------------------------------------------------------------------
MSCI EAFE+ + 7.88% +10.23%
- ---------------------------------------------------------------------------------------------------------
Lipper International Funds Index++ +15.56% +17.68%
- ---------------------------------------------------------------------------------------------------------
Consumer Price Index**+ + 2.47% + 2.88%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
October 24, 1995, through May 31, 1997.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
22
<PAGE>
Performance Summary - continued
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares,
which became available on January 2, 1997, have no sales charge or Rule 12b-1
fees and are only available to certain institutional investors.
Class C share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class C shares. Operating expenses attributable to
Class C shares are not significantly different than those of Class B shares.
The Class B share performance included in the Class C share SEC performance has
been adjusted to reflect the CDSC generally applicable to Class C shares rather
than the CDSC generally applicable to Class B 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 in 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.
23
<PAGE>
Portfolio Concentration as of May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Country Weightings (% of Net Assets)
[TABULAR REPRESENTATION OF PIE CHART]
Other 24.6%
Japan 23.1%
UK 14.0%
Germany 6.4%
France 5.9%
Netherlands 5.5%
Switzerland 5.3%
Hong Kong 5.0%
Brazil 3.9%
Sweden 3.5%
Australia 2.8%
For a more complete breakdown, refer to the Portfolio of Investments.
Top 5 Industry Weightings (% of Net Assets)
Electronics and Electricals 11.9%
Telecommunications 8.9%
Banks, Retail 8.2%
Engineering 6.4%
Diversified Industries 6.3%
Top 10 Holdings
TDK Corp.
Japanese manufacturer of audio and
video products
Telecomunicacoes Brasileiras
Leading Brazilian telecommunications company
Capral Aluminum
Australian aluminum company
Taipei Fund
Closed-end Taiwan country fund
Volkswagen AG
German automobile and truck manufacturer
Cheung Kong
Hong Kong property development and investment
company
Pioneer Electronics Corp.
Japanese electronics company
Omron Corp.
Japanese electronic-control manufacturer
Kyocera Corp.
Japanese component manufacturer
Stork NV
Dutch machinery and tool manufacturer
Portfolio Structure (% of Net Assets)
Stocks 98.2%
Cash 1.8%
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.
Foreign Tax Credit
The Fund is estimated to have derived approximately 82% of its ordinary income
from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 10.3% of its ordinary income.
24
<PAGE>
Portfolio of Investments - May 31, 1997
MFS/Foreign & Colonial International Growth Fund
Stocks - 98.2%
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Argentina - 0.7%
Banco de Galicia y Buenos Aires S.A. de
C.V., ADR (Banks and Credit Cos.) 3,287 $ 86,284
Perez Companc S.A. (Oils) 23,159 177,255
Siderar S.A.I.C., ADR (Steel)*## 2,900 97,875
Telecom Argentina Stet - France Telecom
S.A. (Telecommunications) 1,800 96,075
Telefonica de Argentina, ADR
(Uitlities - Telephone) 2,600 94,250
Transportadora de Gas del Sur, S.A. (TGS)
(Pipelines) 7,500 94,687
YPF Sociedad Anonima, ADR (Oils) 8,150 244,500
-------------
$ 890,926
- -------------------------------------------------------------------------------
Australia - 2.8%
Capral Aluminum Ltd. (Metals) 406,269 $ 1,468,561
Futuris Corp. Ltd. (Commercial Services) 695,738 1,090,681
Western Mining (Holding Company) 134,478 868,848
-------------
$ 3,428,090
- -------------------------------------------------------------------------------
Austria - 0.4%
OMV AG (Oil and Gas) 3,440 $ 436,502
- -------------------------------------------------------------------------------
Belgium - 0.5%
Generale de Banque (Finance) 1,560 $ 616,658
- -------------------------------------------------------------------------------
Brazil - 3.9%
Centrais Eletricas Brasile, ADR
(Utilities - Electric) 38,980 $ 916,030
Companhia Energetica S.A., ADR
(Utilities - Electric) 4,650 206,344
Companhia Paranaense de Energia -
COPEL, "B", Preferred (Electrical) 13,900 205,195
Itausa Investimentos Itau S.A. (Conglomerate) 200,000 166,308
Lojas Americanas S.A., ADR (Retail) 7,800 105,300
Petroleo Brasileiro S.A., Preferred (Oils) 4,110,000 983,051
Telecomunicacoes Braileiras S.A.
(Utilities - Telephone) 1,500,000 195,492
Telecomunicacoes Brasileiras S.A., ADR
(Utilities - Telephone) 12,900 1,767,300
Usinas Siderurgicas de Minas Gerais S.A.,
ADR, Preferred (Iron/Steel) 18,300 201,300
-------------
$ 4,746,320
- -------------------------------------------------------------------------------
Canada - 0.1%
Super Sol Ltd. (Supermarkets) 32,500 $ 107,605
- -------------------------------------------------------------------------------
China - 0.4%
Huaneng Power International, Inc., ADR
(Utilities - Electric) 10,200 $ 244,800
Qingling Motors Co. "H" (Automotive) 308,000 170,935
Yizheng Chemical Fibre Co., Ltd. (Textiles) 452,000 88,673
-------------
$ 504,408
- -------------------------------------------------------------------------------
Colombia - 0.5%
Banco Ganadero S.A., ADR (Banks and
Credit Cos.) 5,900 $ 225,675
Banco Industrial Colombiano, ADR
(Banks and Credit Cos.) 11,500 202,687
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Colombia - continued
Cementos Diamante S.A., ADR
(Construction)## 11,100 $ 174,825
-------------
$ 603,187
- -------------------------------------------------------------------------------
Egypt - 0.3%
Commercial International Bank (Banks and
Credit Cos.)## 10,500 $ 204,750
South Cairo Flour Mills (Food Products) 3,250 63,285
Torah For Cement (Construction) 3,500 88,805
-------------
$ 356,840
- -------------------------------------------------------------------------------
Finland - 0.2%
Oy Tamro AB (Pharmaceuticals)## 34,660 $ 230,438
- -------------------------------------------------------------------------------
France - 5.9%
Accor (Lodging) 5,620 $ 780,962
Compagnie de St. Gobain (Building Materials) 5,800 802,953
Dexia France (Finance) 6,980 653,503
Filipacchi Medias (Publishing) 1,600 346,292
Guilbert S.A. (Distributing) 2,895 430,956
Lafarge S.A., Bearer Shares (Building Materials) 2,200 141,011
Lafarge S.A., Bearer Shares (Building Materials) 4,700 301,251
Michelin, "B" (Tires) 15,800 865,336
Seb S.A. (Household Goods) 2,800 479,555
Societe Nationale Elf Aquitaine (Oils) 8,060 807,820
Strafor-Facom S.A. (Office Equipment) 3,600 248,880
TOTAL S.A., "B" (Oils)* 10,350 949,244
Union des Assurances Federales S.A.
(Insurance) 3,500 425,569
- -------------------------------------------------------------------------------
$ 7,233,332
- -------------------------------------------------------------------------------
Germany - 6.4%
Bayer AG (Chemicals) 12,500 $ 485,562
Buderus AG (Manufacturing) 1,403 715,690
Deutsche Bank AG (Banks) 11,140 618,562
Deutsche Telekom AG
(Utilities - Telephone) 44,545 989,889
Fresenius AG (Medical Supplies) 311 67,652
Fresenius AG (Medical Supplies) 2,800 620,581
Mannesmann AG (Diversified Machinery) 2,000 813,838
Moebel Walther AG (Furniture) 10,500 560,246
Siemens AG (Electrical Equipment) 15,580 879,989
VEBA AG (Oil and Gas) 14,400 815,620
Volkswagen AG (Automotive) 1,900 1,229,903
-------------
$ 7,797,532
- -------------------------------------------------------------------------------
Greece - 0.5%
Ergo Bank (Banks and Credit Cos.) 2,100 $ 148,376
Hellenic Telecommunication Organization
S.A. (Telecommunications) 6,500 162,232
Intracom (Telecommunications) 2,300 112,109
Titan Cement Co (Building Materials) 1,350 134,826
-------------
$ 557,543
- -------------------------------------------------------------------------------
25
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Hong Kong - 5.0%
Associated International Hotels (Lodging) 747,000 $ 501,342
Bank of East Asia Ltd. (Banks and Credit
Cos.) 42,000 152,865
Chen Hsong Holdings (Machines) 1,034,000 607,215
Cheung Kong Holdings Ltd. (Real Estate) 118,000 1,206,957
Citic Pacific Ltd. (Conglomerates) 19,000 108,635
HSBC Holdings PLC (Finance) 34,200 1,037,300
Li & Fung Ltd. (Wholesale) 1,120,000 1,113,061
New World Development Co. (Real Estate) 40,000 254,001
Swire Pacific Air Ltd., "A" (Transportation) 61,500 515,940
Wharf Holdings Ltd. (Real Estate) 136,000 609,086
-------------
$ 6,106,402
- --------------------------------------------------------------------------------
India - 1.8%
Bajaj Auto Ltd. (Automotive) 250 $ 6,033
Eih Ltd. (Consumer Goods and Services) 18,000 207,741
Hindustan Lever Ltd. (Consumer Goods
and Services) 11,500 358,892
Hindustan Petroleum Corp. Ltd.
(Oil and Gas) 20,000 238,522
Industrial Development Bank of India Ltd.
(Banks and Credit Cos.) 109,000 279,976
Mahanagar Telephone Nigam Ltd.
(Telecommunications) 41,000 327,701
State Bank of India (Banks and Credit Cos.) 47,000 403,618
Tata Engineering and Locomotive Co. Ltd.
(Automotive) 800 8,847
Videsh Sanchar Nigam Ltd., GDR
(Telecommunications)## 19,910 410,146
-------------
$ 2,241,476
- --------------------------------------------------------------------------------
Israel - 0.5%
Israel Chemicals Ltd. (Chemicals) 90,000 $ 110,391
Makhteshim Chemical Works Ltd.
(Chemicals)* 17,000 110,066
NICE Systems Ltd., ADR
(Telecommunications) 2,100 64,050
Tadiran Telecommunications Ltd.
(Telecommunications) 5,000 90,625
Teva Pharmaceutical Industries Ltd., ADR
(Pharmaceuticals) 3,800 228,000
-------------
$ 603,132
- --------------------------------------------------------------------------------
Italy - 2.0%
Telecom Italia Mobile S.p.A. (Cellular
Telecommunications) 179,480 $ 527,820
Industrie Natuzzi S.p.A., ADR (Consumer
Goods and Services) 42,620 1,076,155
Telecom Italia S.p.A. (Telecommunications
Services) 287,000 792,222
-------------
$ 2,396,197
- --------------------------------------------------------------------------------
Japan - 23.1%
Aeon Credit Service Co. Ltd. (Financial Services) 10,800 $ 667,045
Aiphone Co. Ltd. (Telecommunications) 30,000 467,097
ALBIS Co. Ltd. (Food) 36,000 359,226
Stocks - continued
- --------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------
Japan - continued
Ariake Japan Co. Ltd. (Food) 13,200 $ 433,755
Canon, Inc. (Consumer Goods) 40,000 1,015,054
Chofu Seisakusho Co. (Machines) 18,700 337,806
Daimei Telecom Engineer Corp.
(Telecommunications) 46,000 415,484
Daiwa Industries Co. Ltd. (Distributor) 41,000 352,335
DDI Corp. (Telecommunications) 93 695,200
Diamond Computer Service Co.
(Computers-Software) 23,000 387,785
Exedy Corp. (Automotive Parts) 23,700 285,419
Fuji Photo Film Co. (Photographic Products) 15,000 581,935
Fujisawa Pharmaceuticals (Pharmaceuticals) 100,000 946,237
Fukuda Denshi (Electronics) 24,000 466,581
Hitachi Zosen Tomioka (Automotive) 120,000 459,355
Homac Corp. (Retail) 21,300 324,310
Ito-Yokado Co. Ltd. (Retail) 20,000 1,142,366
Keyence Corp. (Electronics) 7,700 1,112,774
Kyocera Corp. (Electronics) 16,000 1,154,753
Mandom (Cosmetics) 40,700 483,148
Marubeni Corp. (Distribution/Wholesale) 216,000 919,742
Matsuda Sangyo Co. Ltd. (Food) 24,000 454,193
Matsushita Electric Industrial Co.
(Electrical Equipment) 56,000 1,054,968
Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 130,000 937,118
Miura Co. (Machines) 24,000 334,452
NAC Co. Ltd. (Commercial Services) 30,240 395,396
NEC Corp. (Computers) 72,000 1,003,355
Nichiha (Building and Construction) 40,000 633,118
NKK Corp. (Steel) 392,000 772,198
Oi Electric Co. (Electronics) 31,000 274,667
Omron Corp. (Electronics) 58,000 1,167,484
Pioneer Electronic Corp. (Electronics) 48,000 1,189,161
Ricoh Co. Ltd. (Office/Business Equipment) 77,000 1,013,419
Ryohin Keikaku Co. Ltd. (Retail) 6,500 492,602
Sanshin Electronics Co. Ltd. (Electronics) 37,000 677,935
Sato Corp. (Machines) 19,536 329,381
Sawako Corp. (Engineering/Construction) 23,200 363,217
TDK Corp. (Special Products and Services) 38,000 2,922,323
TKC Corp. (Computer Software and Services) 23,600 560,310
Tokyo Broadcasting System (Broadcasting) 18,000 328,258
Yoshinoya D&C Co. Ltd. (Retail) 28 325,161
-------------
$ 28,236,123
- --------------------------------------------------------------------------------
Malaysia - 1.8%
Genting Berhad (Entertainment) 21,000 $ 109,492
Malayan Banking Berhad (Finance) 10,000 105,473
Malaysian Industrial Development Finance
Berhad (Finance) 229,000 331,765
Petronas Gas Berhad (Oil and Gas)*## 226,000 818,547
Resorts World Berhad (Entertainment) 27,000 90,269
Tenaga Nasional Berhad (Utilities - Electric) 104,000 476,020
United Engineers Berhad (Engineering) 33,000 266,627
-------------
$ 2,198,193
- --------------------------------------------------------------------------------
26
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Mexico - 2.1%
Cemex S.A., "B" (Construction) 66,000 $ 246,979
Corporacion GEO, S.A. de C.V., "B"
(Real Estate) 21,000 100,752
Empresas ICA Sociedad Controladora S.A.,
ADR (Special Products and Services) 13,000 188,500
Fomento Economico Mexicano S.A., "B"
(Beverage) 36,950 196,195
Gruma S.A. (Food Products) 73,666 349,238
Grupo Carso S.A. de C.V. (Conglomerates) 52,800 188,238
Grupo Carso, "A1" (Conglomerates) 52,800 299,712
Grupo Financiero Banamex, "B" (Finance) 58,000 125,532
Grupo Financiero Inbursa S.A. de C.V.
(Finance) 1,842 6,392
Kimberly-Clark de Mexico S.A. de C.V.
(Forest and Paper Products) 30,000 103,919
Telefonos de Mexico S.A.
(Utilities - Telephone) 201,000 446,723
Tubos de Acero de Mexico S.A.
(Iron/Steel)* 17,340 305,149
-------------
$ 2,557,329
- ----------------------------------------------------------------------------
Morocco - 0.4%
Banque Marocaine du Commerce (Banks
and Credit Co.)## 5,300 $ 105,735
Brasserica du Maroc (Consumer Goods
and Services) 530 92,612
Credit Eqdom (Financial Institutions) 750 75,845
ONA S.A. (Conglomerate) 1,500 121,415
Societe Nationale d'Investissement
(Conglomerate) 1,350 100,382
-------------
$ 495,989
- ----------------------------------------------------------------------------
Netherlands - 5.5%
ABN Amro Holdings N.V. (Finance) 52,000 $ 962,110
Ahrend Groep N.V. (Furniture and
Home Appliances) 13,248 838,918
Akzo Nobel (Chemicals) 6,200 826,257
Hagemeyer (Distributing) 18,020 885,644
Royal Dutch Petroleum Co. (Oils) 600 116,047
Stork NV (Machinery) 25,965 1,150,271
Vendex International N.V. (Retail) 19,000 1,067,494
Verenigde Nederlandse Uitgeversbedrijven
Verenigd Bezit (Publishing) 41,300 934,185
-------------
$ 6,780,926
- ----------------------------------------------------------------------------
Pakistan - 0.6%
Hub Power Co. Ltd., GDR (Utilities - Electric)* 20,000 $ 462,000
Pakistan Telecommunications Corp., GDR
(Utilities - Telephone) 4,800 297,600
-------------
$ 759,600
- ----------------------------------------------------------------------------
Peru - 1.4%
Alicorp S.A. (Consumer Goods and Services) 136,000 $ 236,966
Compania de Minas Buenaventura S.A.
(Mining) 33,507 308,269
Stocks - continued
- ----------------------------------------------------------------------------
Issuer Shares Value
- ----------------------------------------------------------------------------
Peru - continued
CPT Telefonica del Peru S.A., "B"
(Utilities - Telephone) 238,080 $ 609,728
Credicorp Ltd. Holding Co. (Banks and
Credit Cos.) 23,328 527,796
-------------
$ 1,682,759
- ----------------------------------------------------------------------------
Poland - 0.6%
Elektrim Spolka Akcyjna S.A.
(Electrical Equipment) 56,500 $ 504,969
Stomil Olsztyn S.A. (Tires and Rubber) 22,500 281,250
-------------
$ 786,219
- ----------------------------------------------------------------------------
Portugal - 1.0%
Cimentos de Portugal S.A. (Building Materials) 7,326 $ 161,155
Inparsa - Industria e Participacoes, SGPS,
S.A. (Building Materials) 3,500 29,771
Jeronimo Martins & Filho S.A. (Retail) 1,866 126,849
Portugal Telecom S.A. (Utilities - Telephone) 7,400 284,131
Sonae Investimentos-Sociedade Gestora de
Participacoes Sociais, S.A. (Finance) 7,000 262,814
Telecel - Comunicacaoes Pessoais S.A.
(Cellular Telephones) 5,418 416,468
-------------
$ 1,281,188
- ----------------------------------------------------------------------------
Russia - 1.2%
Lukoil Oil Co., ADR (Oils) 13,800 $ 822,825
Mosenergo, ADR (Utilities - Electric)## 9,900 374,220
Rostelecom (Telecommunications)## 8 303,200
-------------
$ 1,500,245
- ----------------------------------------------------------------------------
Singapore - 1.9%
City Developments Ltd. (Real Estate) 44,000 $ 409,231
Development Bank of Singapore Ltd. (Banks) 59,000 738,531
Overseas-Chinese Banking Corp. Ltd. (Finance) 21,400 266,378
Wing Tai Holdings Ltd. (Holding Company) 300,000 893,706
-------------
$ 2,307,846
- ----------------------------------------------------------------------------
South Africa - 1.0%
Anglo American Corp. of South Africa
Ltd. (Mining) 2,400 $ 140,529
De Beers Centenary AG (Diamonds -
Precious Stones) 5,500 192,734
Liberty Life Association of Africa Ltd.
(Insurance) 7,250 202,922
Nedcor Ltd. (Financial Services) 10,539 205,305
Sappi (Paper Products) 7,000 64,263
Sasol Ltd. (Oils) 18,500 226,797
South African Breweries Ltd. (Brewery) 7,350 206,544
-------------
$ 1,239,094
- ----------------------------------------------------------------------------
Spain - 1.4%
BCO Intercont (Banks) 2,200 $ 372,277
Cristaleria Espanola S.A. (Glass Products) 3,700 295,119
Repsol S.A. (Oils) 10,600 444,021
Telefonica de Espana (Utilities - Telephone) 21,100 609,202
-------------
$ 1,720,619
- ----------------------------------------------------------------------------
27
<PAGE>
Portfolio of Investments - continued
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
Sweden - 3.5%
Autoliv AB (Automotive) 9,280 $ 351,606
Enator AB (Computer Services) 9,600 187,132
Ericsson LM, "B" (Telecommunications) 25,500 895,384
Munksjo AB (Forest and Paper Products) 59,700 578,010
Nobel Biocare AB (Medical and Health Products) 26,280 305,329
PLM AB (Packaging and Containers) 11,400 207,503
Sparbanken Sverige AB, "A" (Banks) 43,680 857,090
Volvo AB, "B" (Automobiles) 31,160 862,829
-------------
$ 4,244,883
- -------------------------------------------------------------------------------
Switzerland - 5.3%
Ciba Specialty AG (Chemicals) 6,720 $ 637,508
Fotolabo S.A. (Leisure) 1,300 423,363
Kuoni Reisen Holdings AG (Transportation) 300 998,230
Lindt & Spruengli AG (Food) 40 795,752
Logitech International (Electrical Equipment) 5,220 901,720
Nestle AG, Registered Shares (Food and
Beverage Products) 750 934,513
Novartis AG (Pharmaceuticals) 560 761,204
Roche Holdings AG (Pharmaceuticals) 112 997,494
-------------
$ 6,449,784
- -------------------------------------------------------------------------------
Taiwan - 1.1%
Taipei Fund (Finance) 125 $ 1,362,500
- -------------------------------------------------------------------------------
Turkey - 0.1%
Adana Cimento Sanayii (Building
Materials) 1,363,600 $ 89,869
- -------------------------------------------------------------------------------
United Kingdom - 14.0%
ASDA Property Holdings PLC (Real Estate) 157,600 $ 392,674
BAA PLC (Transportation) 121,780 1,057,995
Blick PLC (Electrical) 51,200 234,996
British Petroleum PLC (Oil and Gas) 65,540 784,262
British Telecommunications PLC
(Telecommunications) 108,940 791,084
BTR PLC (Holding Company) 169,520 552,975
Bullough PLC (Manufacturing) 275,900 547,229
Carlton Communications PLC (Broadcasting) 104,640 903,941
Close Brothers Group PLC (Banks) 71,800 556,695
David Brown Group PLC
(Engineering/Construction) 88,400 315,893
Devro International PLC (Food) 96,300 513,028
Fine Art Developments PLC (Retail) 66,600 324,237
Forth Ports PLC (Harbor Transportation
Services) 21,000 206,539
Glaxo Wellcome PLC (Pharmaceuticals) 45,880 919,023
Hazlewood Foods PLC (Food) 280,800 464,890
Inchcape PLC (Commercial Services) 54,150 255,636
Independent Insurance Group PLC (Insurance) 46,300 610,954
Lloyds TSB Group PLC (Banks and Credit Cos.) 105,800 1,066,144
Marley PLC (Building Materials) 193,900 400,479
Midland Independent Newspapers PLC
(Publishing) 138,000 334,790
National Westminster (Finance) 20,900 255,917
Roxboro Group PLC (Manufacturing) 89,700 313,187
Stocks - continued
- -------------------------------------------------------------------------------
Issuer Shares Value
- -------------------------------------------------------------------------------
United Kingdom - continued
Sainsbury (J.) PLC (Retail) 36,800 $ 211,732
Serco Group PLC (Commercial Services) 24,500 284,135
Seton Healthcare Group PLC (Medical Supplies) 39,000 303,662
SIG PLC (Building Materials) 105,940 541,531
Storehouse PLC (Retail) 170,460 607,734
T & S Stores PLC (Retail) 119,400 346,425
Tesco PLC (Retail) 114,000 700,758
Triplex Lloyd PLC (Hardware) 121,600 324,902
Unilever PLC (Consumer Goods) 33,580 899,974
Vardon PLC (Entertainment) 197,050 361,765
VCI PLC (Leisure) 58,000 239,585
Walker Greenbank PLC (Maufacturing) 247,300 235,117
Wardle Storeys PLC (Chemicals) 32,500 223,751
-------------
$ 17,083,639
- -------------------------------------------------------------------------------
Venezuela - 0.3%
Compania Anonima Nacional Telefonos de
Venezuela, ADR (Telecommunications)* 10,000 $ 371,250
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $107,428,950) $120,004,643
- -------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------
Sweden
Volvo AB, "B" (Automobiles)
(Identified Cost, $0) $ 31,160 $ 8,327
- -------------------------------------------------------------------------------
Short-Term Obligations - 0.5%
- -------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.,
due 6/23/97 $ 450 $ 448,493
General Electric Capital Corp., due
6/02/97 205 204,968
- -------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 653,461
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $108,082,411) $120,666,431
Other Assets, Less Liabilities - 1.3% 1,583,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $122,249,901
- -------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
Portfolio Footnotes:
*Non-income producing security.
##SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GBP = British Pounds
BEF = Belgian Francs GRD = Greek Drachmas
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Netherlands Guilders
ESP = Spanish Pesetas NZD = New Zealand Dollars
FRF = French Francs SEK = Swedish Kronor
28
<PAGE>
Financial Statements
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
May 31, 1997 Equity and Income Growth
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $76,343,323, $26,711,108, and
$108,082,411,respectively) $89,854,857 $29,372,129 $120,666,431
Cash -- -- 44,183
Foreign currency, at value (identified cost, $651,563, $13,658, and $482,608,
respectively) 651,681 13,586 483,169
Net receivable for forward foreign currency exchange contract sold -- 283,017 958,593
Net receivable for master netting agreements and closed foreign currency exchange
contracts purchased -- 74,704 --
Net receivable for forward foreign currency exchange contracts purchased -- 111,737 131,216
Receivable for Fund shares sold 1,133,639 286,428 774,640
Receivable for investments sold -- 280,112 --
Interest and dividends receivable 319,469 226,451 498,231
Deferred organization expenses 20,691 18,385 19,115
----------- ----------- ------------
Total assets $91,980,337 $30,666,549 $123,575,578
----------- ----------- ------------
Liabilities:
Cash overdraft $ 2,136 $ 555,757 $ --
Payable for Fund shares reacquired 50,712 39,749 237,117
Payable for investments purchased 229,460 563,801 892,412
Written options outstanding, at value (premiums received $0, $6,589, and $0,
respectively) -- 16,284 --
Payable to affiliates -
Management fee 6,191 1,579 6,554
Administrative fee 74 24 101
Shareholder servicing agent fee 644 211 874
Distribution fee 42,423 14,110 58,398
Accrued expenses and other liabilities 131,058 64,978 130,221
----------- ----------- ------------
Total liabilities $ 462,698 $ 1,256,493 $ 1,325,677
----------- ----------- ------------
Net assets $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Net assets consist of:
Paid-in capital $80,593,249 $27,843,519 $114,182,502
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies 13,408,306 3,116,858 13,675,208
Accumulated net realized loss on investments and foreign currency transactions (2,016,103) (1,182,827) (4,780,289)
Accumulated net investment loss (467,813) (367,494) (827,520)
----------- ----------- ------------
Total $91,517,639 $29,410,056 $122,249,901
=========== =========== ============
Shares of beneficial interest outstanding 4,838,654 1,805,209 7,251,124
=========== =========== ============
Class A shares:
Net asset value per share
(net assets of $37,539,578, $13,425,340, and $56,810,289 [divided by] 1,979,873,
822,833, and 3,361,154 shares of beneficial interest outstanding, respectively) $18.96 $16.32 $16.90
====== ====== ======
Offering price per share (100 - 95.25 of net asset value per share) $19.91 $17.13 $17.74
====== ====== ======
Class B shares:
Net asset value and offering price per share
(net assets of $51,019,984, $15,748,793, and $62,958,124 [divided by] 2,701,302,
967,802, and 3,741,995 shares of beneficial interest outstanding, respectively) $18.89 $16.27 $16.82
====== ====== ======
Class C shares:
Net asset value and offering price per share
(net assets of $2,658,810, $235,453, and $2,397,128 [divided by] 141,725, 14,545,
and 142,994 shares of beneficial interest outstanding, respectively) $18.76 $16.19 $16.76
====== ====== ======
Class I shares:
Net asset value, offering price and redemption price per share
(net assets of $299,267, $470.34, and $84,360 [divided by] 15,754, 28.825, and
4,981 shares of beneficial interest outstanding, respectively) $19.00 $16.32 $16.94
====== ====== ======
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B, and Class C shares.
See notes to financial statements
29
<PAGE>
kl.
Financial Statements - continued
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging International
Markets Growth International
Year Ended May 31, 1997 Equity and Income Growth
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Interest $ 202,857 $ 459,577 $ 403,067
Dividends 1,028,372 475,670 2,092,771
Foreign taxes withheld (63,610) (59,180) (233,349)
------------ ------------ ------------
Total investment income $ 1,167,619 $ 876,067 $ 2,262,489
------------ ------------ ------------
Expenses -
Management fee $ 687,535 $ 277,086 $ 1,049,705
Trustees' compensation 6,458 6,892 11,015
Administrative fee 3,019 1,100 4,467
Shareholder servicing agent fee 37,906 15,593 62,315
Shareholder servicing agent fee (Class A) 18,926 11,517 42,410
Shareholder servicing agent fee (Class B) 28,770 19,201 68,426
Shareholder servicing agent fee (Class C) 223 24 525
Distribution and service fee (Class A) 128,054 66,872 252,648
Distribution and service fee (Class B) 284,900 149,349 559,606
Distribution and service fee (Class C) 8,454 1,034 11,524
Custodian fee 66,789 53,394 116,586
Registration fees 58,565 49,349 34,241
Printing 47,823 22,734 69,269
Postage 37,403 9,202 24,397
Auditing fees 32,111 26,826 38,272
Legal fees 9,916 10,794 10,649
Amortization of organization expenses 5,197 5,197 5,197
Miscellaneous 41,506 33,494 79,131
------------ ------------ ------------
Total expenses $ 1,503,555 $ 759,658 $ 2,440,383
Fees paid indirectly (4,573) (7,370) (7,957)
Refund of expenses to investment adviser 25,887 -- --
------------ ------------ ------------
Net expenses $ 1,524,869 $ 752,288 $ 2,432,426
------------ ------------ ------------
Net investment income (loss) $ (357,250) $ 123,779 $ (169,937)
------------ ------------ ------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,983,312) $ (1,254,793) $(4,497,196)
Written option transactions -- 7,796 --
Foreign currency transactions (83,420) (430,595) (441,519)
------------ ------------ ------------
Net realized loss on investments and foreign currency transactions $(2,066,732) $ (1,677,592) $(4,938,715)
------------ ------------ ------------
Change in unrealized appreciation (depreciation) -
Investments (net of applicable deferred foreign taxes of $103,099, $0, and $1,118,
respectively) $11,949,720 $ 1,748,881 $ 7,102,874
Written options -- (32,094) --
Translation of assets and liabilities in foreign currencies 2,504 589,842 1,120,254
------------ ------------ ------------
Net unrealized gain on investments and foreign currency translation $11,952,224 $ 2,306,629 $ 8,223,128
------------ ------------ ------------
Net realized and unrealized gain on investments and foreign currency $ 9,885,492 $ 629,037 $ 3,284,413
------------ ------------ ------------
Increase in net assets from operations $ 9,528,242 $ 752,816 $ 3,114,476
============ ============= ============
</TABLE>
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity International Growth and Income
------------------------------ --------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
- --------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (357,250) $ 13,002 $ 123,779 $ 81,065
Net realized gain (loss) on investments and foreign
currency transactions (2,066,732) 502,931 (1,677,592) 87,073
Net unrealized gain on investments and foreign
currency translation 11,952,224 1,456,082 2,306,629 810,229
-------------- ------------- -------------- -------------
Increase in net assets from operations $ 9,528,242 $ 1,972,015 $ 752,816 $ 978,367
-------------- ------------- -------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (8,868) $ (68,626) $ (12,226)
From net investment income (Class B) -- -- -- (7,299)
From net investment income (Class C) -- -- (575) --
From net realized gain on investments and foreign
currency transactions (Class A) (309,984) -- (35,996) --
From net realized gain on investments and foreign
currency transactions (Class B) (238,475) -- (39,731) --
From net realized gain on investments and foreign
currency transactions (Class C) (11,143) -- (193) --
In excess of net investment income (Class B) -- (3,354) -- --
-------------- ------------- -------------- -------------
Total distributions declared to shareholders $ (559,602) $ (12,222) $ (145,121) $ (19,525)
-------------- ------------- -------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 92,886,375 $ 46,419,714 $ 14,540,133 $ 27,711,754
Net asset value of shares issued to shareholders in
reinvestment of distributions 500,512 12,183 128,054 15,767
Cost of shares reacquired (50,719,552) (8,510,026) (11,456,699) (3,095,490)
-------------- ------------- -------------- -------------
Increase in net assets from Fund share
transactions $ 42,667,335 $ 37,921,871 $ 3,211,488 $ 24,632,031
-------------- ------------- -------------- -------------
Total increase in net assets $ 51,635,975 $ 39,881,664 $ 3,819,183 $ 25,590,873
Net assets:
At beginning of period 39,881,664 -- 25,590,873 --
-------------- ------------- -------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 91,517,639 $ 39,881,664 $ 29,410,056 $ 25,590,873
============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
International Growth
--------------------------------
Year Ended Period Ended
May 31, 1997 May 31, 1996*
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ (169,937) $ (4,270)
Net realized gain (loss) on investments and foreign
currency transactions (4,938,715) 334,764
Net unrealized gain on investments and foreign
currency translation 8,223,128 5,452,080
-------------- -------------
Increase in net assets from operations $ 3,114,476 $ 5,782,574
-------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ -- $ (6,653)
From net investment income (Class B) -- --
From net investment income (Class C) -- --
From net realized gain on investments and foreign
currency transactions (Class A) (469,661) --
From net realized gain on investments and foreign
currency transactions (Class B) (305,586) --
From net realized gain on investments and foreign
currency transactions (Class C) (14,849) --
In excess of net investment income (Class B) -- --
-------------- -------------
Total distributions declared to shareholders $ (790,096) $ (6,653)
-------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 129,496,667 $ 84,291,229
Net asset value of shares issued to shareholders in
reinvestment of distributions 830,061 5,219
Cost of shares reacquired (95,147,991) (5,325,585)
-------------- -------------
Increase in net assets from Fund share
transactions $ 35,178,737 $ 78,970,863
-------------- -------------
Total increase in net assets $ 37,503,117 $ 84,746,784
Net assets:
At beginning of period 84,746,784 --
-------------- -------------
At end of period (including accumulated
undistributed net investment income (loss) of
$(463,770) and $(23,100), $(367,494) and
$123,689, and $(775,180) and $(220,228),
respectively) $ 122,249,901 $ 84,746,784
============== =============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996
See notes to financial statements.
31
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Emerging Markets Equity
----------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
---------------- --------------- -------------- ---------------
Class A Class B
- -------------------------------------------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.52 $ 15.00 $ 16.47 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ (0.07) $ 0.04 $ (0.15) $ (0.02)
Net realized and unrealized gain on
investments and foreign currency
transactions 2.74 1.50 2.73 1.50
------- ------- ------- -------
Total from investment operations $ 2.67 $ 1.54 $ 2.58 $ 1.48
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.02) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.23) -- (0.16) --
In excess of net investment income -- -- -- (0.01)
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.23) $ (0.02) $ (0.16) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 18.96 $ 16.52 $ 18.89 $ 16.47
------- ------- ------- -------
Total return+++ 16.43% 10.24%++ 15.87% 9.85%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 2.51% 2.48%+ 3.04% 3.06%+
Net investment income (loss) (0.42)% 0.35%+ (0.87)% (0.19)%+
Portfolio turnover 47% 22% 47% 22%
Average commission rate $0.0019 $0.0136 $0.0019 $0.0136
Net assets at end of period (000 omitted) $37,540 $19,861 $51,020 $20,021
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets Equity
- ---------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
---------------- ----------------
Class C Class I
- ---------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.77 $ 16.47
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.08) $ 0.10
Net realized and unrealized gain on
investments and foreign currency
transactions 2.36 2.43
------- -------
Total from investment operations $ 2.28 $ 2.53
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.29) --
In excess of net investment income -- --
------- -------
Total distributions declared to
shareholders $ (0.29) $ --
-------- -------
Net asset value - end of period $ 18.76 $ 19.00
-------- -------
Total return+++ 13.89%++ 15.36%++
Ratios (to average daily net assets)/Supplemental data ss.:
Expenses## 3.00%+ 2.01%+
Net investment income (loss) (0.48)%+ 1.14%+
Portfolio turnover 47% 47%
Average commission rate $0.0019 $0.0019
Net assets at end of period (000 omitted) $2,659 $299
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
+++Total returns for Class A shares do not include the applicable sales charge.
If the sales charge had been included, the results would have been lower.
ss.For the year ended May 31, 1997, the Adviser voluntarily agreed to bear,
subject to reimbursement by the Fund, expenses of each class of shares of the
Fund such that expenses, exclusive of management, distribution, service fees,
and certain other expenses, of the Fund's Class A shares, Class B shares,
Class C shares, and Class I shares do not exceed 0.75%, respectively, of the
Fund's average daily net assets on an annualized basis. For the period ended
May 31, 1996, the Adviser voluntarily agreed to maintain total expenses of
the Fund at not more than 2.50%, 3.07%, and 3.00% of average daily net assets
for Class A, Class B, and Class C shares, respectively. To the extent actual
expenses were over/under these limitations, the net investment income (loss)
per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $(0.06) $ 0.02 $ (0.14) $ (0.08) $ (0.07) $ 0.10
Ratios (to average net assets):
Expenses 2.45% 2.73%+ 2.98% 3.30%+ 2.97%+ 1.99%+
Net investment income (loss) (0.37)% 0.10%+ (0.82)% (0.44)%+ (0.39)%+ 1.14%+
</TABLE>
See notes to financial statements
32
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth and Income
--------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
------------------------------ ------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.98 $ 15.00 $ 15.94 $ 15.00
------- ------- ------- -------
Income from investment operations# -
Net investment income $ 0.11 $ 0.11 $ 0.03 $ 0.05
Net realized and unrealized gain on
investments and foreign currency
transactions 0.35 0.90 0.34 0.90
------- ------- ------- -------
Total from investment operations $ 0.46 $ 1.01 $ 0.37 $ 0.95
------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.08) $ (0.03) $ -- $ (0.01)
From net realized gain on investments and
foreign currency transactions (0.04) -- (0.04) --
------- ------- ------- -------
Total distributions declared to
shareholders $ (0.12) $ (0.03) $ (0.04) $ (0.01)
------- ------- ------- -------
Net asset value - end of period $ 16.32 $ 15.98 $ 16.27 $ 15.94
======= ======= ======= =======
Total return[dbldag] 2.88% 6.71%++ 2.33% 6.37%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.39% 2.52%+ 2.94% 3.11%+
Net investment income 0.72% 1.04%+ 0.18% 0.49%+
Portfolio turnover 89% 29% 89% 29%
Average commission rate $0.0197 $0.0291 $0.0197 $0.0291
Net assets at end of period (000 omitted) $13,425 $11,950 $15,749 $13,641
</TABLE>
<TABLE>
<CAPTION>
International Growth and Income
- -------------------------------------------------------------------------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
-------------------------------
Class C Class I
-------------- ---------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.02 $15.71
------- ------
Income from investment operations# -
Net investment income $ 0.12 $ 0.16
Net realized and unrealized gain on
investments and foreign currency
transactions 0.21 0.45
------- ------
Total from investment operations $ 0.33 $ 0.61
------- ------
Less distributions declared to shareholders -
From net investment income $ (0.12) $ --
From net realized gain on investments and
foreign currency transactions (0.04) --
------- ------
Total distributions declared to
shareholders $ (0.16) $ --
------- ------
Net asset value - end of period $ 16.19 $16.32
------- ------
Total return[dbldag] 2.09%++ 3.88%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.64%+ 1.89%+
Net investment income 0.80%+ 2.33%+
Portfolio turnover 89% 89%
Average commission rate $0.0197 $0.0197
Net assets at end of period (000 omitted) $235 $--
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares,
January 2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
33
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
International Growth
-------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
May 31, 1997 May 31, 1996* May 31, 1997 May 31, 1996*
-------------- ------------- ------------ --------------
Class A Class B
- ----------------------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $16.71 $ 15.00 $ 16.66 $ 15.00
------ ------- ------- -------
Income from investment operations# -
Net investment income (loss) $ 0.02 $ 0.03 $ (0.07) $ (0.03)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.32 1.69 0.31 1.69
------ ------- ------- -------
Total from investment operations $ 0.34 $ 1.72 $ 0.24 $ 1.66
------ ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.01) $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.15) -- (0.08) --
------ ------- ------- -------
Total distributions declared to
shareholders $(0.15) $ (0.01) $ (0.08) --
------ ------- ------- -------
Net asset value - end of period $16.90 $ 16.71 $ 16.82 $ 16.66
====== ======= ======= =======
Total return[dbldag] 2.13% 11.43%++ 1.56% 11.07%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 1.99% 2.24%+ 2.53% 2.85%+
Net investment income (loss) 0.13% 0.24%+ (0.42)% (0.31)%+
Portfolio turnover 53% 11% 53% 11%
Average commission rate $0.0069 $0.0107 $0.0069 $0.0107
Net assets at end of period (000 omitted) $56,810 $41,483 $62,958 $43,264
</TABLE>
<TABLE>
<CAPTION>
International Growth
---------------------------------
Period Ended Period Ended
May 31, 1997** May 31, 1997***
--------------- ----------------
Class C Class I
- -------------------------------------------------------------------------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 16.83 $ 15.90
------- -------
Income from investment operations# -
Net investment income (loss) $ (0.04) $ 0.11
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.15 0.93
------- -------
Total from investment operations $ 0.11 $ 1.04
------- -------
Less distributions declared to shareholders -
From net investment income $ -- $ --
From net realized gain on investments and
foreign currency transactions (0.18) --
------- -------
Total distributions declared to
shareholders $ (0.18) $ --
------- -------
Net asset value - end of period $ 16.76 $ 16.94
======= =======
Total return[dbldag] 0.79%++ 6.54%++
Ratios (to average daily net assets)/Supplemental data:
Expenses## 2.50%+ 1.52%+
Net investment income (loss) (0.27)%+ 1.40%+
Portfolio turnover 53% 53%
Average commission rate $0.0069 $0.0069
Net assets at end of period (000 omitted) $2,397 $84
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, July 1,
1996, to May 31, 1997.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 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.
[dbldag]Total returns for Class A shares do not include the applicable sales
charge. If the sales charge had been included, the results would have been
lower.
See notes to financial statements
34
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS/Foreign & Colonial Emerging Markets Equity Fund (Emerging Market Equity),
MFS/Foreign & Colonial International Growth and Income Fund (International
Growth and Income), and MFS/Foreign & Colonial International Growth Fund
(International Growth) (the Funds) are each a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are
not available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed
issues and forward contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the base
currency and translated into U.S. dollars at the closing daily exchange rate.
Future contracts, options, and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices. Over-the-counter
options are valued by brokers through the use of a pricing model which takes
into account closing bond valuations, implied volatility, and short-term
repurchase rates. Securities for which there are no such quotations or
valuations are valued at fair value as determined in good faith by or at the
direction of the Trustees.
Repurchase Agreements - The Funds may enter into repurchase agreements with
institutions that the Funds' investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Funds require
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Funds to obtain those securities
in the event of a default under the repurchase agreement. The Funds monitor, on
a daily basis, the value of the securities transferred to ensure that the
value, including accrued interest, of the securities under each repurchase
agreement is greater than amounts owed to the Funds under each such repurchase
agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
and losses. That portion of both realized and unrealized gains and losses on
investments that results from fluctuations in foreign currency exchange rates
is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Funds in connection with
their organization have been deferred and are being amortized on a
straight-line basis over a five-year period beginning on the date of
commencement of operations of the Funds.
Written Options - The Funds may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Funds. The Funds, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bear the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to
35
<PAGE>
Notes to Financial Statements - continued
the extent of the premium received. Written options may also be used as part of
an income-producing strategy reflecting the view of the Funds' management on
the direction of interest rates.
Forward Foreign Currency Exchange Contracts - The Funds may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Funds will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Funds may enter into contracts to deliver or receive foreign
currency they will receive from or require for their normal investment
activities. They may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Funds may enter into
contracts with the intent of changing the relative exposures of the Funds'
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized until the
contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly - The Funds' custodian bank calculates its fee based on
the Funds' average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Funds. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Funds' policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Funds file a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Funds' tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that reported
to shareholders on Form 1099-DIV. Foreign taxes have been provided for on
interest and dividend income earned on foreign investments in accordance with
the applicable country's tax rates and to the extent unrecoverable are recorded
as a reduction of investment income. Distributions to shareholders are recorded
on the ex-dividend date.
The 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 May 31, 1997, the following amounts were
reclassified due to differences between book and tax accounting for currency
transactions. These changes had no effect on the net assets or net asset value
per share.
Emerging International
Markets Growth and International
Equity Income Growth
------------- -------------- --------------
Increase (decrease):
Paid-in-capital ............ $ 4,043 $ -- $ 32,902
Accumulated undistributed net
realized gain on investments
and foreign currency
transactions ............... 83,420 545,761 404,453
Accumulated undistributed net
investment income ......... (87,463) (545,761) (437,355)
Multiple Classes of Shares of Beneficial Interest - The Funds offer Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in
their respective distribution and service fees. All shareholders bear the
common expenses of each Fund pro rata based on average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
difference in per share dividend rates are generally due to differences in
separate class expenses.
36
<PAGE>
Notes to Financial Statements - continued
(3) Transactions with Affiliates
Investment Adviser - Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
of 0.975% of average daily net assets for the International Growth Fund and the
International Growth and Income Fund, and 1.25% of average daily net assets for
the Emerging Markets Equity Fund The advisory agreements permit the adviser to
engage one or more sub-advisers and the adviser, MFS, has engaged Foreign &
Colonial Management Ltd., an England and Wales Company, to assist in the
performance of its services.
Under a temporary expense reimbursement agreement, MFS has voluntarily agreed
to pay all of the Emerging Markets Equity Fund's operating expenses, exclusive
of management, distribution, and service fees. The Emerging Markets Equity Fund
in turn will pay MFS an expense reimbursement fee not greater than 0.75% of
average daily net assets for Class A, Class B, and Class C shares. To the
extent that the expense reimbursement fee exceeds the Emerging Markets Equity
Fund's actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At May 31, 1997, the aggregate unreimbursed expenses owed to MFS
by the Emerging Markets Equity Fund amounted to $38,092.
Administrator - Effective March 1, 1997, each Fund has an administrative
services agreement with MFS to provide each Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, each Fund pays
MFS an administrative fee up to 0.015% per annum of each Fund's average daily
net assets, provided that the administrative fee is not assessed on Fund assets
that exceed $3 billion.
The Funds pay no compensation directly to their Trustees who are officers of
the investment adviser, or to officers of the Funds, all of whom receive
remuneration for their services to the Funds from MFS. Certain of the officers
and Trustees of the Funds are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). Each of the
Funds has an unfunded defined benefit plan for all of its independent Trustees
and Mr. Bailey. Included in Trustees' compensation are net periodic pension
expenses of $1,701, $1,701, and $1,701 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$44,930, $18,575, and $79,525 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively, for the year ended May 31, 1997, as its portion of the sales
charge on sales of Class A shares of each Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares of each Fund pursuant to Rule 12b-1 of the Investment Company Act of
1940 as follows:
Each Fund's distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A in order that
MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each
securities dealer that enters into a sales agreement with MFD of up to 0.25%
per annum of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers, and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for
accounts not attributable to a securities dealer which amounted to $15,111,
$6,002, and $28,940 for the Emerging Markets Equity Fund, International Growth
and Income Fund, and International Growth Fund, respectively, for the year
ended May 31, 1997. Fees incurred under each Fund's distribution plan during
the year ended May 31, 1997, were 0.50% of average daily net assets
attributable to Class A shares on an annualized basis.
Each Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and Class
C shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class
C shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $1,469, $1,835, and $5,117 for Class B
shares of the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively, for the year ended May 31,
1997 and $2, $0, and $26 for Class C shares of the Emerging Markets Equity
Fund, International Growth and Income Fund, and Interna-
37
<PAGE>
Notes to Financial Statements - continued
tional Growth Fund, respectively, for the period ended May 31, 1997. Fees
incurred under each Fund's distribution plan during the year ended May 31,
1997, were 1.00% of the Fund's average daily net assets attributable to Class B
and Class C shares, respectively, on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption with six years of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges for Class A shares imposed
during the year ended May 31, 1997, were $48, $11, and $1,254 for the Emerging
Markets Equity Fund, International Growth and Income Fund, and International
Growth Fund, respectively. Contingent deferred sales charges for Class B shares
imposed during the period ended May 31, 1997, were $43,118, $32,134, and
$103,091 for the Emerging Markets Equity Fund, International Growth and Income
Fund, and International Growth Fund, respectively. Contingent deferred sales
charges for Class C shares imposed during the period ended May 31, 1997, were
$1,252, $213, and $3,733 for the Emerging Markets Equity Fund, International
Growth and Income Fund, and International Growth Fund, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of each 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 of each Fund at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated $62,033,984
and $24,482,588, $27,162,926 and $22,901,788, and $90,622,329 and $25,759,078
for the Emerging Markets Equity Fund, International Growth and Income Fund, and
International Growth Fund, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
---------------- -------------------- -------------
<S> <C> <C> <C>
Aggregate cost $ 76,343,323 $ 26,735,821 $ 108,082,411
============= ============ =============
Gross unrealized appreciation $ 15,430,144 $ 3,339,321 $ 17,283,458
Gross unrealized depreciation (1,918,610) (703,013) (4,699,438)
------------- ------------ -------------
Net unrealized appreciation $ 13,511,534 $ 2,636,308 $ 12,584,020
============= ============ =============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares ------------------------------- ------------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- ------------------------------------ -------------- ---------------- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,277,472 $ 39,713,990 365,309 $ 5,792,690 3,428,135 $ 55,431,605
Shares issued to shareholders
in reinvestment of distributions 17,927 287,543 5,771 90,897 36,196 576,007
Transfer to Class I (1,982) (32,637) -- -- (1,308) (20,795)
Shares reacquired (1,516,023) (26,385,091) (296,169) (4,680,979) (2,584,373) (41,727,368)
----------- -------------- ---------- -------------- ----------- --------------
Net increase 777,394 $ 13,583,805 74,911 $ 1,202,608 878,650 $ 14,259,449
=========== ============== ========== ============== =========== ==============
</TABLE>
38
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Equity Fund and Income Fund Growth Fund
Class A Shares - continued ------------------------------- ------------------------------ -----------------------------
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- ------------------------------------------------- ---------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 1,490,414 $ 23,464,680 793,963 $ 12,142,184 2,712,981 $ 42,075,064
Shares issued to shareholders
in reinvestment of distributions 514 7,966 658 10,210 367 5,219
Shares reacquired (288,449) (4,694,661) (46,699) (723,607) (230,844) (3,729,818)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,202,479 $ 18,777,985 747,922 $ 11,428,787 2,482,504 $ 38,350,465
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class B Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997 Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,844,356 $ 50,086,036 462,559 $ 7,367,431 4,424,042 $ 71,166,884
Shares issued to shareholders in
reinvestment of distributions 12,630 202,215 2,318 36,552 15,231 240,644
Shares reacquired (1,371,122) (23,955,353) (352,648) (5,601,722) (3,294,305) (52,883,159)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,485,864 $ 26,332,898 112,229 $ 1,802,261 1,144,968 $ 18,524,369
=========== ============== ========= ============== =========== ==============
Period Ended May 31, 1996* Shares Amount Shares Amount Shares Amount
- --------------------------------------------- -------------- --------- -------------- ----------- --------------
Shares sold 1,451,675 $ 22,955,034 1,009,636 $ 15,569,570 2,695,977 $ 42,216,165
Shares issued to shareholders in -- --
reinvestment of distributions 268 4,217 358 5,557
Shares reacquired (236,505) (3,815,365) (154,421) (2,371,883) (98,950) (1,595,767)
----------- -------------- --------- -------------- ----------- --------------
Net increase 1,215,438 $ 19,143,886 855,573 $ 13,203,244 2,597,027 $ 40,620,398
=========== ============== ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class C Shares Equity Fund and Income Fund Growth Fund
------------------------------ ----------------------------- -----------------------------
Year Ended May 31, 1997** Shares Amount Shares Amount Shares Amount
- ----------------------------------------------- -------------- --------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 160,074 $ 2,796,205 89,056 $ 1,379,569 174,418 $ 2,818,920
Shares issued to shareholders in
reinvestment of distributions 676 10,754 39 605 852 13,410
Shares reacquired (19,025) (339,707) (74,550) (1,173,998) (32,276) (516,669)
----------- -------------- --------- -------------- ----------- --------------
Net increase 141,725 $ 2,467,252 14,545 $ 206,176 142,994 $ 2,315,661
=========== ============= ========= ============== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Emerging Markets International Growth International
Class I Shares Equity Fund and Income Fund Growth Fund
---------------------------- ----------------------------- ----------------------------
Period Ended May 31, 1997*** Shares Amount Shares Amount Shares Amount
- ----------------------------------------- -------------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 14,138 $ 257,507 29 $ 443 3,673 $ 58,463
Transfer from Class A 1,982 32,637 -- -- 1,308 20,795
Shares reacquired (366) (6,764) -- -- -- --
----------- -------------- --------- -------------- ----------- -------------
Net increase 15,754 $ 283,380 29 $ 443 4,981 $ 79,258
=========== ============== ========= ============== =========== ==============
</TABLE>
*For the period from the commencement of investment operations, October 24,
1995, to May 31, 1996.
**For the period from the commencement of offering of Class C shares, June 27,
1996, to May 31, 1997, for the Emerging Markets Equity Fund. For the period
from the commencement of offering of Class C shares, July 1, 1996, to May 31,
1997, for the International Growth and Income Fund and the International
Growth Fund.
***For the period from the commencement of offering of Class I shares, January
2, 1997, to May 31, 1997.
(6) Line of Credit
The Funds entered into agreements which enable them to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fees allocated to the Funds for the year ended May 31,
1997, were $0, $283, and $1,198 for the Emerging Markets Equity Fund,
International Growth and Income Fund, and International Growth Fund,
respectively.
39
<PAGE>
Notes to Financial Statements - continued
(7) Financial Instruments
The Funds trade financial instruments with off-balance sheet risk in the normal
course of their investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the Funds have in particular classes of financial
instruments and do not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
International Growth and Income Fund
Written Option Transactions
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
---------------------------------- ---------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
------------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Canadian Dollars -- $ -- 1,457 $ 3,828
Deutsche Marks 1,499 6,983 -- --
Deutsche Marks/British Pounds 1,386 4,209 -- --
Italian Lire/Deutsche Marks 2,817,989 20,484 -- --
Japanese Yen -- -- 122,808 7,290
Spanish Pesetas/Deutsche Marks -- -- 63,527 1,575
Options written -
Australian Dollars 147 993 -- --
British Pounds -- -- 371 2,800
Deutsche Marks 1,325 6,313 1,545 3,143
Deutsche Marks/British Pounds 1,819 7,202 728 9,382
Japanese Yen 219,563 19,049 282,000 17,466
Swiss Francs/Deutsche Marks 477 1,447 1,059 13,071
Options terminated in closing transactions -
Australian Dollars (147) (993) -- --
Deutsche Marks (2,824) (13,296) (1,545) (3,143)
Deutsche Marks/British Pounds (1,386) (4,209) (728) (9,382)
Italian Lire/Deutsche Marks (2,817,989) (20,484) -- --
Japanese Yen (219,563) (19,049) (205,000) (13,677)
Swiss Francs/Deutsche Marks -- -- (1,059) (13,071)
Options expired -
Canadian Dollars (1,457) (3,828)
Deutsche Marks/British Pounds (1,819) (7,202) -- --
Japanese Yen -- -- (122,808) (7,290)
Spanish Pesetas/Deutsche Marks -- -- (63,527) (1,575)
Swiss Francs/Deutsche Marks (477) (1,447) -- --
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
Options outstanding at end of period consist of:
British Pounds -- $ -- 371 $ 2,800
Japanese Yen -- -- 77,000 3,789
----------- --------- --------- ---------
Outstanding, end of period -- $ -- 77,371 $ 6,589
=========== ========= ========= =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
40
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts
International Growth and Income Fund
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
=================== ============================ ================= ============ ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 8/26/97 AUD 400,387 $ 310,670 $ 304,877 $ 5,793
6/30/97 BEF 12,095,412 376,125 343,957 32,168
8/26/97 CHF 88,335 62,423 63,218 (795)
8/26/97-10/14/97 DEM 4,413,501 2,704,813 2,607,501 97,312
9/30/97 ESP 13,746,758 95,400 95,375 25
10/14/97 FRF 6,200,000 1,180,728 1,085,825 94,903
9/30/97 GBP 39,621 64,860 64,782 78
6/30/97 ITL 305,660,812 180,124 180,646 (522)
10/14/97 JPY 239,000,000 2,143,210 2,096,030 47,180
6/30/97 SEK 520,009 74,073 67,198 6,875
----------- ----------- --------
$7,192,426 $6,909,409 $283,017
=========== =========== ========
Purchases 9/30/97 CAD 433,166 $ 314,490 $ 316,682 $ 2,192
8/26/97 CHF 935,115 640,200 669,230 29,030
9/30/97 DEM 161,159 95,400 95,311 (89)
6/30/97-8/26/97 ESP 38,703,652 270,694 268,111 (2,583)
6/30/97-8/26/97 JPY 217,948,304 1,797,772 1,884,856 87,084
8/26/97 NLG 1,148,588 606,000 602,103 (3,897)
----------- ----------- --------
$3,724,556 $3,836,293 $111,737
=========== =========== ========
</TABLE>
At May 31, 1997, forward foreign currency exchange contract purchases and sales
under master netting arrangements and closed forward foreign currency exchange
contracts excluded above for the International Growth and Income Fund amounted
to a net receivable of $74,704. At May 31, 1997, the Fund had sufficient cash
and/or securities to cover any commitments under these contracts.
Forward Foreign Currency Exchange Contracts
International Growth Fund
<TABLE>
<CAPTION>
Contracts to Contracts Net Unrealized
Settlement Date Deliver/Receive In Exchange for at Value Appreciation
================= =============================== ================= ============= ===============
<S> <C> <C> <C> <C> <C> <C>
Sales 10/14/97 DEM 6,400,000 $ 4,114,618 $ 3,789,018 $325,600
10/14/97 FRF 20,500,000 3,904,018 3,590,227 313,791
10/14/97 JPY 1,617,000,000 14,500,292 14,181,090 319,202
------------ ------------ ---------
$22,518,928 $21,560,335 $958,593
============ ============ =========
Purchases 10/14/97 JPY 808,500,000 $ 6,959,329 $ 7,090,545 $131,216
============ ============ =========
</TABLE>
At May 31, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
41
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Trustees of MFS Series Trust X and Shareholders of MFS/Foreign &
Colonial International Funds:
We have audited the accompanying statements of assets and liabilities of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund, ("the Funds") including the schedules of portfolio investments, as
of May 31, 1997, and the related statements of operations for the year then
ended, and the statements of changes in net assets and financial highlights for
the year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of May 31, 1997, by correspondence with the
custodian and brokers or other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign & Colonial
International Growth and Income Fund, and MFS/Foreign & Colonial International
Growth Fund at May 31, 1997, the results of their operations for the year then
ended, and the changes in their net assets and financial highlights for the
year then ended and for the period from October 24, 1995 (commencement of
operations) to May 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 1, 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.
42
<PAGE>
It's Easy to Contact Us
[PHONE GRAPHIC] MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Investment Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[QUESTION MARK GRAPHIC] MFS Personal Service
Account Service/Literature:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA Service:
Call 1-800-637-1255 any business day
from 9 a.m. to 5 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[LETTER GRAPHIC] MFS Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
World Wide Web:
www.mfs.com
43
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
Stock
- ----------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Value Fund
Stock and Bond
- ----------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- ----------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- ----------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- ----------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International
Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland,
Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia, West
Virginia
Money Market
- ----------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
44
<PAGE>
MFS/Foreign & Colonial International Funds
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive Officer,
Eastern Enterprises
Lawrence T. Perera - Partner, Hemenway & Barnes
William J. Poorvu - Adjunct Professor, Harvard University
Graduate School of Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive Vice President, Director
and Secretary, Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American Management
Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
Arnab Kumar Banerji
Jeff Chowdhry
Richard O. Hawkins*
June Scott
Ian K. Wright
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Ernst & Young LLP
Investor Information
For MFS stock and bond market outlooks, call toll free:
1-800-637-4458 anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any
business day from 8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free:
1-800-637-6576 any business day from 9 a.m. to 5 p.m.
Eastern time. (To use this service, your phone must be
equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances, and exchanges, call toll
free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
World Wide Web
www.mfs.com
[DALBAR GRAPHIC]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The
firm achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey.
A total of 110 firms responded, offering input on the quality of service they
received from 29 mutual fund companies nationwide. The survey contained
questions about service quality in 15 categories, including "knowledge of
phone service contracts," "accuracy of transaction processing," and "overall
ease of doing business with the firm."
45
<PAGE>
MFS(R)/
FOREIGN &
COLONIAL
INTERNATIONAL
FUNDS
[DALBAR GRAPHIC]
500 Boylston Street
Boston, MA 02116-3741
[MFS LOGO]
Bulk Rate
U.S. Postage
Paid
MFS
(C) 1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
85/285/385/885
86/286/386/886
87/287/387/887
MFC-2 7/97 48M
