<PAGE> 1
MFS[R] WORLD ASSET ALLOCATION FUND
(A SERIES OF MFS SERIES TRUST I)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN VERMONT
The Fund's investments in foreign fixed income securities may include
securities in any of the rating categories (and comparable unrated securities)
including securities in lower ranking categories. Please see RISK FACTORS for
further information.
THE DATE OF THIS SUPPLEMENT IS JUNE 27, 1994
<PAGE> 2
MFS[R] WORLD ASSET
ALLOCATION FUND
(A SERIES OF MFS SERIES TRUST I)
SUPPLEMENT TO BE AFFIXED TO THE CURRENT
PROSPECTUS FOR DISTRIBUTION IN OHIO
Prospective Ohio investors should note the following:
a. This prospectus must be delivered to the investor prior to
consummation of the sale;
b. Ohio regulations prohibit the investment of more than 15% of a Fund's
total assets in the securities of issuers which are restricted as to
disposition. The Fund may invest up to 50% of its assets in restricted
securities, including Rule 144A securities, which have been deemed to be
liquid by the Board of Trustees.
THE DATE OF THIS SUPPLEMENT IS DECEMBER 1, 1994
LNC104 MAA-160H-12/94/6.5M
<PAGE> 3
<TABLE>
<C> <C>
MASSACHUSETTS INVESTORS TRUST MFS[R] WORLD TOTAL RETURN FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS[R] MUNICIPAL BOND FUND
MFS[R] CAPITAL GROWTH FUND MFS[R] MUNICIPAL HIGH INCOME FUND
MFS[R] EMERGING GROWTH FUND MFS[R] MUNICIPAL INCOME FUND
MFS[R] GOLD & NATURAL RESOURCES FUND MFS[R] ALABAMA MUNICIPAL BOND FUND
MFS[R] GROWTH OPPORTUNITIES FUND MFS[R] ARKANSAS MUNICIPAL BOND FUND
MFS[R] MANAGED SECTORS FUND MFS[R] CALIFORNIA MUNICIPAL BOND FUND
MFS[R] OTC FUND MFS[R] FLORIDA MUNICIPAL BOND FUND
MFS[R] RESEARCH FUND MFS[R] GEORGIA MUNICIPAL BOND FUND
MFS[R] VALUE FUND MFS[R] LOUISIANA MUNICIPAL BOND FUND
MFS[R] TOTAL REFUND FUND MFS[R] MARYLAND MUNICIPAL BOND FUND
MFS[R] UTILITIES FUND MFS[R] MASSACHUSETTS MUNICIPAL BOND FUND
MFS[R] BOND FUND MFS[R] MISSISSIPPI MUNICIPAL BOND FUND
MFS[R] GOVERNMENT MORTGAGE FUND MFS[R] NEW YORK MUNICIPAL BOND FUND
MFS[R] GOVERNMENT SECURITIES FUND MFS[R] NORTH CAROLINA MUNICIPAL BOND FUND
MFS[R] HIGH INCOME FUND MFS[R] PENNSYLVANIA MUNICIPAL BOND FUND
MFS[R] INTERMEDIATE INCOME FUND MFS[R] SOUTH CAROLINA MUNICIPAL BOND FUND
MFS[R] STRATEGIC INCOME FUND MFS[R] TENNESSEE MUNICIPAL BOND FUND
MFS[R] GOVERNMENT LIMITED MATURITY FUND MFS[R] TEXAS MUNICIPAL BOND FUND
MFS[R] LIMITED MATURITY FUND MFS[R] VIRGINIA MUNICIPAL BOND FUND
MFS[R] MUNICIPAL LIMITED MATURITY FUND MFS[R] WASHINGTON MUNICIPAL BOND FUND
MFS[R] WORLD EQUITY FUND MFS[R] WEST VIRGINIA MUNICIPAL BOND FUND
MFS[R] WORLD GOVERNMENTS FUND MFS[R] WORLD ASSET ALLOCATION FUND
MFS[R] WORLD GROWTH FUND
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from February 1, 1995 through April 14, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the Funds'
distributor), MFD will pay Corelink Financial Inc. ("Corelink") an additional
commission equal to 0.10% of the gross commissionable sales for Class A shares
and Class B shares and the net asset value for Class C shares (if applicable) of
the Funds sold by Corelink during the Sales Period.
THE DATE OF THIS SUPPLEMENT IS FEBRUARY 1, 1995.
<PAGE> 4
<TABLE>
<C> <C>
MFS[R] MANAGED SECTORS FUND MFS[R] MUNICIPAL LIMITED MATURITY FUND
MFS[R] CASH RESERVE FUND MFS[R] ALABAMA MUNICIPAL BOND FUND
MFS[R] WORLD ASSET ALLOCATION FUND MFS[R] ARKANSAS MUNICIPAL BOND FUND
MFS[R] EMERGING GROWTH FUND MFS[R] CALIFORNIA MUNICIPAL BOND FUND
MFS[R] CAPITAL GROWTH FUND MFS[R] FLORIDA MUNICIPAL BOND FUND
MFS[R] GOLD & NATURAL RESOURCES FUND MFS[R] GEORGIA MUNICIPAL BOND FUND
MFS[R] INTERMEDIATE INCOME FUND MFS[R] LOUISIANA MUNICIPAL BOND FUND
MFS[R] HIGH INCOME FUND MFS[R] MARYLAND MUNICIPAL BOND FUND
MFS[R] MUNICIPAL HIGH INCOME FUND MFS[R] MASSACHUSETTS MUNICIPAL BOND FUND
MFS[R] MONEY MARKET FUND MFS[R] MISSISSIPPI MUNICIPAL BOND FUND
MFS[R] GOVERNMENT MONEY MARKET FUND MFS[R] NEW YORK MUNICIPAL BOND FUND
MFS[R] MUNICIPAL BOND FUND MFS[R] NORTH CAROLINA MUNICIPAL BOND FUND
MFS[R] OTC FUND MFS[R] PENNSYLVANIA MUNICIPAL BOND FUND
MFS[R] TOTAL REFUND FUND MFS[R] SOUTH CAROLINA MUNICIPAL BOND FUND
MFS[R] RESEARCH FUND MFS[R] TENNESSEE MUNICIPAL BOND FUND
MFS[R] WORLD TOTAL RETURN FUND MFS[R] TEXAS MUNICIPAL BOND FUND
MFS[R] UTILITIES FUND MFS[R] VIRGINIA MUNICIPAL BOND FUND
MFS[R] WORLD EQUITY FUND MFS[R] WASHINGTON MUNICIPAL BOND FUND
MFS[R] WORLD GOVERNMENTS FUND MFS[R] WEST VIRGINIA MUNICIPAL BOND FUND
MFS[R] VALUE FUND MFS[R] GROWTH OPPORTUNITIES FUND
MFS[R] STRATEGIC INCOME FUND MFS[R] GOVERNMENT MORTGAGE FUND
MFS[R] WORLD GROWTH FUND MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS[R] BOND FUND MFS[R] GOVERNMENT SECURITIES FUND
MFS[R] LIMITED MATURITY FUND MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
Effective as of January 1, 1995, MFS Fund Distributors, Inc. ("MFD")
has replaced MFS Financial Services, Inc. ("FSI") as the Fund's distributor.
Both MFD and FSI are wholly-owned subsidiaries of Massachusetts Financial
Services Company ("MFS"), the Fund's investment adviser.
Class A shares of the Fund may be purchased at net asset value by
certain retirement plans subject to the Employee Retirement Income Security Act
of 1974, as amended, subject to the following:
(i) The sponsoring organization must demonstrate to the satisfaction
of MFD that either (a) the employer has at least 25 employees or
(b) the aggregate purchases by the retirement plan of Class A
shares of the Funds will be in an amount of at least $250,000
within a reasonable period of time, as determined by MFD in its
sole discretion; and
(ii) A contingent deferred sales charge of 1% will be imposed on such
purchases in the event of certain redemption transactions
within 12 months following such purchases.
-------------------------------------
Class A shares may be sold at net asset value, subject to appropriate
documentation, through a dealer where the amount invested represents redemption
proceeds from a registered open-end management investment company not
distributed or managed by MFD or its affiliates if: (i) the redeemed shares were
subject to an initial sales charge (whether or not actually imposed); (ii) such
redemption has occurred no more than 90 days prior to the purchase of Class A
shares of the Fund; and (iii) the Fund, MFD or its affiliates have not agreed
with such company or its affiliates, formally or imformally, to sell Class A
shares at net asset value or provide any other incentive with respect to such
redemption and sale.
-------------------------------------
Class A shares of the Fund may be purchased at net asset value by
retirement plans whose third party administrators have entered into an
administrative services agreement with MFD or one or more of its affiliates to
perform certain administrative services, subject to certain operational
requirements specified from time to time by MFD or one or more of its
affiliates.
-------------------------------------
(Over)
<PAGE> 5
Class A shares of the Fund (except of the MFS's municipal bond funds
identified above) may be purchased at net asset value by retirement plans
qualified under Section 404(k) of the Code through certain broker-dealers and
other financial institutions which have entered into an agreement with MFD
which includes certain minimum size qualifications for such retirement plans
and provides that the broker-dealer or other financial institution will
perform certain administrative services with respect to the plan's account.
-----------------------------
The CDSC on Class A and Class B shares will be waived upon redemption by
a retirement plan where the redemption proceeds are used to pay expenses of the
retirement plan or certain expenses of participants under the retirement plan
(e.g. participant account fees), provided that the retirement plan's sponsor
subscribes to the MFS Fundamental 401(k) Plan[sm] or another similiar
recordkeeping system made available by MFS Servcie Center, Inc. (the
"Shareholder Servicing Agent").
-----------------------------
The CDSC on Class A and B shares will be waived upon the transfer
of registration from shares held by a retirement plan through a single account
maintained by the Shareholder Servicing Agent to multiple Class A and B share
accounts, respectively, maintained by the Shareholder Servicing Agent on behalf
of individual participants in the retirement plan, provided that the retirement
plan's sponsor subscribes to the MFS Fundamental 401(k) Plan[sm] or another
similar recordkeeping system made available by the Shareholder Servicing
Agent.
-----------------------------
The applicability of a CDSC will be unaffected by exchanges or transfers
of registration, except that, with respect to transfers of registration to an
IRA rollover account, the CDSC will be waived if the shares being registered
would have been eligible for a CDSC waiver had they been redeemed.
-----------------------------
The current Prospectus discloses that "Class A shares of the Fund may
also be purchased at net asset value where the purchase is in an amount of $3
million or more and where the dealer and FSI enter into an agreement in which
the dealer agrees to return any commission paid to it on the sale (or a pro rata
portion thereof) as described above if the shareholder redeems his or her shares
within one year of purchase. (Shareholders who purchase shares at NAV pursuant
to these conditions are called ("3 Million Shareholders"). This policy is
terminated effective as of the date of this Supplement and the above-referenced
language, and all references to "$3 Million Shareholders," are deleted from the
Prospectus.
-----------------------------
From time to time, MFD may pay dealers 100% of the applicable sales
charge on sales of Class A shares of certain specified Funds sold by such dealer
during a specified sales period. In addition, MFD or its affiliates may, from
time to time, pay dealers an additional commission equal to 0.5% of the net
asset value of all of the Class B shares of certain specified Funds sold by
such dealer during a specified sales period.
-----------------------------
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, such shareholder's
distribution option will automatically be converted to reinvest all dividends
and other distributions reinvested in additional shares.
-----------------------------
From time to time, MFS 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).
-----------------------------
THE DATE OF THIS SUPPLEMENT IS JANUARY 13, 1995.
<PAGE> 6
<TABLE>
<C> <C>
MFS[R] TOTAL RETURN FUND MFS[R] ALABAMA MUNICIPAL BOND FUND
MASSACHUSETTS INVESTORS GROWTH STOCK FUND MFS[R] ARKANSAS MUNICIPAL BOND FUND
MFS[R] GROWTH OPPORTUNITIES FUND MFS[R] CALIFORNIA MUNICIPAL BOND FUND
MFS[R] EMERGING GROWTH FUND MFS[R] FLORIDA MUNICIPAL BOND FUND
MFS[R] CAPITAL GROWTH FUND MFS[R] GEORGIA MUNICIPAL BOND FUND
MFS[R] INTERMEDIATE INCOME FUND MFS[R] LOUISIANA MUNICIPAL BOND FUND
MFS[R] GOLD & NATURAL RESOURCES FUND MFS[R] MARYLAND MUNICIPAL BOND FUND
MFS[R] MANAGED SECTORS FUND MFS[R] MASSACHUSETTS MUNICIPAL BOND FUND
MFS[R] VALUE FUND MFS[R] MISSISSIPPI MUNICIPAL BOND FUND
MFS[R] UTILITIES FUND MFS[R] NEW YORK MUNICIPAL BOND FUND
MFS[R] WORLD EQUITY FUND MFS[R] NORTH CAROLINA MUNICIPAL BOND FUND
MFS[R] WORLD TOTAL RETURN FUND MFS[R] PENNSYLVANIA MUNICIPAL BOND FUND
MFS[R] BOND FUND MFS[R] SOUTH CAROLINA MUNICIPAL BOND FUND
MFS[R] LIMITED MATURITY FUND MFS[R] TENNESSEE MUNICIPAL BOND FUND
MFS[R] GOVERNMENT MORTGAGE FUND MFS[R] TEXAS MUNICIPAL BOND FUND
MFS[R] GOVERNMENT LIMITED MATUURITY FUND MFS[R] VIRGINIA MUNICIPAL BOND FUND
MFS[R] GOVERNMENT SECURITIES FUND MFS[R] WASHINGTON MUNICIPAL BOND FUND
MFS[R] HIGH INCOME FUND MFS[R] WEST VIRGINIA MUNICIPAL BOND
MFS[R] STRATEGIC INCOME FUND MFS[R] MUNICIPAL LIMITED MATURITY FUND
MFS[R] WORLD GOVERNMENTS FUND MFS[R] MUNICIPAL BOND FUND
MFS[R] WORLD GROWTH FUND MFS[R] MUNICIPAL INCOME FUND
MFS[R] OTC FUND MFS[R] RESEARCH FUND
MFS[R] MUNICIPAL HIGH INCOME FUND MFS[R] WORLD ASSET ALLOCATION
MASSACHUSETTS INVESTORS TRUST
</TABLE>
SUPPLEMENT TO THE CURRENT PROSPECTUS
During the period from January 3, 1995 through April 28, 1995 (the "Sales
Period") (unless extended by MFS Fund Distributors, Inc. ("MFD"), the Funds'
principal underwriter), MFD will pay A.G. Edwards and Sons, Inc., ("A.G.
Edwards") 100% of the applicable sales charge on sales of Class A shares of
each of the Funds listed above (the "Funds") sold for investment in Individual
Retirement Accounts ("IRAs") (excluding SEP-IRAs). In addition, MFD will pay
A.G. Edwards in additional commission equal to 0.50% of the net asset value of
all of the Class B shares of the Funds sold by A.G. Edwards during the
Sales Period.
The date of this Supplement is January 3, 1995.
<PAGE> 7
PROSPECTUS
December 1, 1994
MFS[R] WORLD ASSET Class A Shares of Beneficial Interest
ALLOCATION FUND[SM] Class B Shares of Beneficial Interest
(A member of the MFS Family of Funds[R]) Class C Shares of Beneficial Interest
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary..................................................... 2
2. The Fund............................................................ 3
3. Condensed Financial Information..................................... 4
4. Investment Objectives and Policies.................................. 4
5. Risk Factors........................................................ 13
6. Management of the Fund.............................................. 16
7. Information Concerning Shares of the Fund........................... 17
Purchases...................................................... 17
Exchanges...................................................... 23
Redemptions and Repurchases.................................... 23
Distribution Plans............................................. 25
Distributions.................................................. 27
Tax Status..................................................... 27
Net Asset Value................................................ 28
Description of Shares, Voting Rights and Liabilities........... 28
Performance Information........................................ 29
8. Shareholder Services................................................ 29
Appendix............................................................ 32
</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 WORLD ASSET ALLOCATION FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of the MFS World Asset Allocation Fund (the "Fund") is
to seek total return over the long term through investments in equity and fixed
income securities, low volatility of share price (i.e., net asset value per
share) and reduced risk (compared to an aggressive equity/fixed income fund).
The Fund is a non-diversified series of MFS Series Trust I (the "Trust"), an
open-end investment company. See "Investment Objective and Policies." The
minimum initial investment is generally $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Financial Services, Inc.
("FSI"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information concerning the Fund 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 December 1, 1994, which
contains more detailed information about the Trust and the Fund and is
incorporated into this Prospectus by reference. See page 31 for a further
description of the information set forth in the Statement of Additional
Information. A copy of the Statement of Additional Information may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 8
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% 0.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees...................................... 0.60% 0.60% 0.60%
Rule 12b-1 Fees...................................... 0.30%(2) 1.00%(3) 1.00%(3)
Other Expenses (4)................................... 0.60% 0.67% 0.60%
Total Operating Expenses (after expense reductions)
(5)................................................ 1.50% 2.27% 2.20%
- ---------------
<FN>
(1) Purchases of $1 million or more 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 "Information Concerning Shares
of the Fund--Purchases").
(2) The Fund has adopted a Distribution Plan for its Class A shares in accordance with Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of) 0.50% per annum of the
average daily net assets attributable to the Class A shares. All or a portion of Class A
distribution/service fees may be borne by FSI as described under the caption "Information
Concerning Shares of the Fund--Distribution Plans" below. Based on estimated expenses for the Fund's
current fiscal year, FSI anticipates bearing the Fund's Class A distribution/service fees equal to
0.20% of the average daily net assets attributable to Class A shares. After a substantial period of
time distribution expenses paid under this Plan, together with the initial sales charge, may total
more than the maximum sales charge that would have been permissible if imposed entirely as an
initial sales charge.
(3) The Fund has adopted separate Distribution Plans for its Class B and its Class C shares in
accordance with Rule 12b-1 under the 1940 Act, which provide 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 Class B shares under the Class B Distribution Plan and the Class C shares under
the Class C Distribution Plan. See "Information Concerning Shares of the Fund--Distribution Plans"
below. After a substantial period of time, distribution expenses paid under these Plans, together
with any CDSC payable upon redemption of Class B shares, may total more than the maximum sales
charge that would have been permissible if imposed entirely as an initial sales charge.
(4) "Other expenses" have been based on estimates of payments to be made during the Fund's current
fiscal year.
(5) The Adviser has voluntarily agreed to pay expenses for each class of shares of the Fund that
exceed 1.50%, 2.57% and 2.50% of the Fund's average daily net assets allocable to Class A,
Class B and Class C shares, respectively, on an annualized basis. This expense reduction may be
discontinued at any time. See "Management of the Fund" below. If the Adviser had not voluntarily
reduced expenses and FSI had not borne certain expenses under the Class A Distribution Plan (see
note (2) above), based on estimates of payments to be made during the Fund's current fiscal year,
"Total Operating Expenses" would have been 1.70% for Class A shares.
</TABLE>
EXAMPLE OF EXPENSES
-------------------
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) 5% annual return and (b) redemption at the
end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------- ------- -------------- --------
<S> <C> <C> <C> <C>
(1)
1 year.......................................... $62 $ 63 $23 $ 22
3 years......................................... 93 101 71 69
- ---------------
<FN>
(1) Assumes no redemption.
</TABLE>
2
<PAGE> 9
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 expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plans."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-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 1986. The Trust presently consists of three
series, each of which represents a portfolio with separate investment policies.
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 (or a
CDSC) in the case of certain purchases of $1 million or more) and are subject to
a Distribution Plan providing for an annual distribution fee and service fee.
Class B shares are offered at net asset value without an initial sales charge
but are subject to a CDSC and a Distribution Plan providing for an annual
distribution fee and service fee which are greater than the Class A annual
distribution fee and service fee; 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 or a CDSC but are subject to a
Distribution Plan providing for an annual distribution fee and service fee which
are equal to the Class B annual distribution fee and service fee. Class C shares
do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees of the Trust 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.
3
<PAGE> 10
3. CONDENSED FINANCIAL INFORMATION
The following information should be read in conjunction with the Fund's
financial statements for the period from the commencement of investment
operations, July 22, 1994, to August 31, 1994 included in the Fund's Annual
Report to Shareholders which are incorporated by reference into the Statement of
Additional Information, in reliance upon the report of Ernst & Young LLP,
independent auditors, as experts in accounting and auditing.
FINANCIAL HIGHLIGHTS
PERIOD ENDED AUGUST 31, 1994*++
<TABLE>
<CAPTION>
1994 1994
------- ------- 1994
CLASS CLASS --------
A* B* CLASS C*
------- ------- --------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- Beginning of period.............................. $ 15.00 $ 15.00 $15.00
Income from investment operations:
Net investment income........................................... $ 0.04 $ 0.02 $ 0.03
Net realized and unrealized gain on investments................. 0.29 0.29 0.28
Total from investment operations........................... $ 0.33 $ 0.31 $ 0.31
Net asset value -- End of period.................................... $ 15.33 $ 15.31 $15.31
Total return#....................................................... 2.20%++ 2.07%++ 2.07%++
Ratios (to average net assets)/Supplemental Data:
Expenses........................................................ 1.50%+sec. 2.57%+sec. 2.50%+sec.
Net investment income........................................... 2.43%+sec. 1.39%+sec. 1.68%+sec.
Portfolio turnover.................................................. 1% 1% 1%
Net assets at end of period (000 omitted)........................... $25,254 $26,495 $3,435
- ---------------
<FN>
+ Annualized.
++ Not annualized.
# Total returns do not include the applicable sales charge. If the sales charge had been
included, the results would have been lower.
++ Per share data for the period are based on average shares outstanding.
sec. MFS and FSI did not impose a portion of their fee for Class A shares for the period
indicated. If these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
Net investment income............................................. $ 0.02 $ 0.01 $0.02
Ratios (to average net assets)
Expenses...................................................... 2.62%+ 3.21%+ 3.18%+
Net investment income......................................... 1.31%+ 0.75%+ 1.00%+
* The Fund commenced investment operations on July 22, 1994.
</TABLE>
4. INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES -- The Fund's investment objective is to seek total return
over the long term through investments in equity and fixed income securities,
low volatility of share price (i.e., net asset value per share) and reduced risk
(compared to an aggressive equity/fixed income fund). Any investment involves
risk and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by allocating
portfolio assets among various asset classes of equity and fixed income
securities where the opportunities for total return are expected to be most
attractive. On average, over time, the Fund intends to invest approximately 65%
of its total assets in equity securities; however, at any particular point in
time,
4
<PAGE> 11
equity securities may constitute more or less than 65% of the Fund's total
assets. Under normal circumstances, the Fund intends to invest at least 30% of
its total assets in equity securities and allocate its assets among at least
three asset classes, except when the Adviser believes that investing for
temporary defensive purposes is appropriate as noted below.
Equity securities include: common and preferred stocks; securities such as
bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities. Fixed income securities include: bonds,
debentures and other debt instruments issued by a variety of issuers, including
corporations and other business entities, the United States and foreign
governments and their agencies, authorities, instrumentalities and political
subdivisions and supranational entities; mortgage-backed and other asset backed
securities; receipts evidencing separately traded interest and principal
component parts of obligations; and repurchase agreements involving any of the
foregoing types of securities.
The Adviser will allocate assets among some or all of the following five asset
classes of securities:
(i) U.S. Equity Securities -- equity securities of U.S. issuers including
securities of emerging growth companies;
(ii) Foreign Equity Securities -- equity securities of foreign issuers
including securities of issuers in emerging markets (as described below);
(iii) U.S. Investment Grade Fixed Income Securities -- fixed income
securities of U.S. issuers (including securities issued or guaranteed by the
U.S. government or its agencies, authorities or instrumentalities,
short-term instruments and municipal obligations) rated Baa or better by
Moody's Investors Service, Inc. ("Moody's"), or BBB or better by Standard
and Poor's Rating Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch") or comparable unrated securities;
(iv) U.S. High Yield Fixed Income Securities -- high yield fixed income
securities of U.S. issuers, including municipal obligations, rated Ba or
below by Moody's or BB or below by S&P or by Fitch or comparable unrated
securities; and
(v) Foreign Fixed Income Securities -- fixed income securities of foreign
issuers, including securities of issuers in emerging markets and securities
in any of the rating categories (and comparable unrated securities)
including securities in the lower rating categories (as defined below).
As of the date of this Prospectus, the allocation of assets among the asset
classes was in the following approximate proportions of the Fund's portfolio:
U.S. Equity Securities -- 15%, Foreign Equity Securities -- 40%, U.S. Investment
Grade Fixed Income Securities -- 0%, U.S. High Yield Fixed Income Securities --
15% and Foreign Fixed Income Securities -- 25%. Such allocation will change from
time to time, as described below.
The Adviser will allocate the assets of the Fund among some or all of the
various asset classes described above where the opportunities for total return
are expected to be the most attractive, consistent with the objective of seeking
low share price volatility and reduced risk. The judgment of the Adviser
concerning the allocation of the Fund's assets will be based on the Adviser's
experience in qualitative and fundamental analysis and disciplined quantitative
techniques. The Adviser will make changes in the allocation of assets of the
Fund when its research and analysis indicate the likely occurrence of changes in
financial markets or economic conditions affecting the various asset classes
that may change the expected total return from the various asset classes. To the
extent Fund assets are allocated among most or all of the asset classes, this
allocation will reduce the impact of the poorer performing classes at any point
in time. By following this asset allocation strategy, the Fund's performance in
part will be dependent on the Adviser's skill in allocating assets.
Although the percentage of the Fund's assets invested in foreign securities will
vary, the Fund will be invested in at least three different countries, one of
which may be the United States, except when the Adviser believes that investing
for defensive purposes is appropriate as noted below.
The risks of each asset class vary. For example, the values of equity securities
change in response to general market and economic conditions and the activities
and changing circumstances of individual issuers and the values of fixed income
securities change in response to changes in economic conditions, interest rates
and the creditworthiness of individual issuers. A significant portion of the
Fund's assets may be allocated to equity and fixed income investments in foreign
securities which involve the risks set forth under "Risk Factors" below. The
Fund may also invest in high yield fixed income securities. See "Risk Factors"
below.
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<PAGE> 12
DEFENSIVE INVESTING: When the Adviser believes that investing for defensive
purposes is appropriate, such as during periods of unusual or unfavorable market
or economic conditions, or in order to meet anticipated redemption requests, up
to 100% of the Fund's assets may be temporarily invested in cash (including
foreign currency) or cash equivalents including, but not limited to, obligations
of banks (including certificates of deposit, bankers' acceptances and repurchase
agreements) with assets of $1 billion or more, commercial paper, short-term
notes, obligations issued or guaranteed by the U.S. or any foreign government or
any of their agencies, authorities or instrumentalities and repurchase
agreements.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of small and
medium-size U.S. and foreign companies that are early in their life cycle but
which have the potential to become major enterprises (emerging growth
companies). Such companies generally have annual gross revenues ranging from $10
million to $2 billion, would be expected to show earnings growth over time that
is well above the growth rate of the overall economy and the rate of inflation,
and would have the products, management, and market opportunities which are
usually necessary to become more widely recognized as growth companies. The Fund
may also invest in more established 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 -- Emerging Growth Companies" below. The Fund may also
invest to a limited extent in restricted securities of companies which the
Adviser believes have significant growth potential. These securities may be
considered speculative and may not be readily marketable. See "Restricted
Securities" below.
EMERGING MARKET SECURITIES: The Fund may invest in countries or regions with
relatively low gross national product per capita compared to the world's major
economies, and in countries or regions with the potential for rapid economic
growth (emerging markets). Emerging markets will include any country: (i) having
an "emerging stock market" as defined by the International Finance Corporation;
(ii) with low- to middle-income economies according to the International Bank
for Reconstruction and Development (the "World Bank"); (iii) listed in World
Bank publications as developing; or (iv) determined by the Adviser to be an
emerging market as defined above. The Fund may invest in securities of: (i)
companies the principal securities trading market for which is an emerging
market country; (ii) companies organized under the laws of, and with a principal
office in, an emerging market country; (iii) companies whose principal
activities are located in emerging market countries; (iv) companies traded in
any market that derive 50% or more of their total revenue from either goods or
services produced in an emerging market or sold in an emerging market or (v)
emerging market governments or any of their political subdivisions, agencies,
authorities or instrumentalities. See "Risk Factors -- Foreign Securities"
below.
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 Mexico, Uruguay, Venezuela, Costa Rica,
Argentina, Nigeria and the Philippines. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
U.S. GOVERNMENT SECURITIES: The Fund may invest in securities that are issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities ("U.S. Government Securities") and in
obligations that are fully collateralized or otherwise fully secured by U.S.
Government Securities as described below. U.S. Government Securities include
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<PAGE> 13
(1) U.S. Treasury obligations, which differ only in their interest rates,
maturities and times of issuance; U.S. Treasury bills (maturity of one year or
less); U.S. Treasury notes (maturities of one to 10 years); and U.S. Treasury
bonds (generally maturities of greater than 10 years), all of which are backed
by the full faith and credit of the U.S. Government; and (2) obligations issued
or guaranteed by U.S. Government agencies, authorities or instrumentalities;
some of which are backed by the full faith and credit of the U.S. Treasury,
e.g., direct pass-through certificates of the Government National Mortgage
Association ("GNMA"); some of which are supported by the right of the issuer to
borrow from the U.S. Government, e.g, obligations of Federal Home Loan Banks;
some of which are backed only by the credit of the issuer itself, e.g.,
obligations of the Student Loan Marketing Association; and some of which are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations, e.g., obligations of the Federal National Mortgage
Association ("FNMA"). No assurance can be given that the U.S. Government will
provide financial support to these entities because it is not obligated by law,
in certain instances, to do so. U.S. Government Securities do not generally
involve the credit risks associated with other types of fixed income securities.
However, like other fixed income securities, the values of U.S. Government
Securities change as interest rates fluctuate.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the Statement of Additional
Information for further information on these securities.
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.
"WHEN-ISSUED" OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or 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 in 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 30% of its assets to such purchases. The Fund does not
pay for the securities until they are 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 cash, short-term money market instruments or U.S. Government
Securities 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 basis may involve more risk than other types of purchases.
For additional information concerning these securities, see the Statement of
Additional Information.
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<PAGE> 14
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations and other direct indebtedness." By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate 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 loan
participations 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. Loan
participations 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 loan participations and the
risks related to transactions therein, see the Statement of Additional
Information.
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 or interest rates rise or fall
according to the change in one or more specified underlying instruments. Indexed
securities may be positively or negatively indexed (i.e., their value 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.
MUNICIPAL OBLIGATIONS: The Fund may invest in municipal obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities when the Adviser determines that they offer the highest income
available. Such municipal obligations may be rated Ba or below by Moody's or BB
or below by S&P or Fitch (or may be comparable unrated securities). For the risk
considerations involved, see "Risk Factors -- Lower Rated Fixed Income
Securities" below.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity as a
result of unscheduled principal prepayments. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or a part of a premium if any
has been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
a mortgage pass-through security generally will decline; however, when interest
rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed-income
securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the GNMA); or guaranteed by agencies or instrumentalities of the U.S. Government
(such as the FNMA) or the Federal Home Loan Mortgage Corporation ("FHLMC"), and
not guaranteed by the U.S. Government. Mortgage pass-through securities may also
be issued by nongovernmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may be
supported by various forms of insurance or guarantees.
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<PAGE> 15
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations,
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are interests
in a trust composed of Mortgage Assets. CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of the premium if any has been paid.
Certain classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the Statement of Additional
Information.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. For a further description of SMBS and the risks related to
transactions therein, see the Statement of Additional Information.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the Statement of Additional Information, the Fund has adopted
certain procedures intended to minimize any risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is illiquid and thus subject to the Fund's limitation on investing not
more than 15% of its net assets in illiquid investments, or liquid and thus not
subject to such limitation. The Board of Trustees has adopted guidelines and
delegated to MFS the daily function of determining and monitoring the liquidity
of Rule 144A securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. The Board will carefully
monitor the Fund's investments in Rule 144A securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund 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
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<PAGE> 16
investments, the Fund may also invest in restricted securities that may not be
sold under Rule 144A, which presents certain risks. As a result, the Fund might
not be able to sell these securities when the Adviser wishes to do so, or might
have to sell them at less than fair value. In addition, market quotations are
less readily available. Therefore, judgment may at times play a greater role in
valuing these securities than in the case of unrestricted securities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans will usually be made to member firms (and subsidiaries thereof) of
the New York Stock Exchange and to member banks of the Federal Reserve System,
and would be required to be secured continuously by collateral in cash, cash
equivalents or U.S. Treasury securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. If the
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 total assets of
the Fund.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. In the event that the party with whom the Fund
contracts to replace substantially similar securities on a future date fails to
deliver such securities, the Fund may not be able to obtain such securities at
the price specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options. The Fund will write
such Options for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Fund writes an Option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been 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 be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. 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. In the event that the expected changes occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the Options purchased. The risk assumed by the Fund in connection with
such transactions is limited to the amount of the premium and related
transaction costs associated with the Option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the Options do not move in the direction or to the extent anticipated.
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 a yield curve option is based on the difference between the yields of
designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the Statement of Additional
Information.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to
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<PAGE> 17
repurchase an option it writes at any time at a price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula in the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will generally be based on
a multiple of the premium received by the Fund for writing the option, plus the
amount, if any of the option's intrinsic value (i.e., the amount that the option
is in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers, including
foreign dealers, and will treat the assets used to cover these options as
illiquid for purposes of the SEC illiquidity ceiling.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on domestic and foreign 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.
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 indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("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 declines in a securities
market, as well as for non-hedging purposes to the extent permitted by
applicable law. 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 Adviser believes that use
of such contracts will benefit the Fund, if its investment judgment about the
general direction of interest or exchange rates or a securities market 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. The Fund will
not enter into any Futures Contract if immediately thereafter the value of all
such Futures Contracts would exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of 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 portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts, since the potential loss is limited to
the amount of the premium paid for the option, plus related transaction costs.
The writing of such options, however, does not present less risk than the
trading of Futures Contracts, and will constitute only a partial hedge, up to
the amount of the premium received, less related transaction costs. In addition,
if an option is exercised, the Fund may suffer a loss on the transaction. The
Fund may also purchase and write Options on Futures Contracts for non-hedging
purposes, to the extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase and sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging
11
<PAGE> 18
purposes as well as for non-hedging purposes, which may be considered
speculative. 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. 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, a
reasonable degree of correlation can be expected between movements in the values
of the two currencies. 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 has established procedures
consistent with statements of the SEC and its Staff regarding the use of Forward
Contracts by registered investment companies, which requires use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
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 portfolio securities and
against increases in the dollar cost of 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.
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 indexes, 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 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 will tend 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. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on 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 Statement of Additional Information on the risks involved
in these activities.
12
<PAGE> 19
PORTFOLIO TRADING: Although the Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held or whether the sale would result in a gain or loss.
Therefore, the rate of portfolio turnover is not a limiting factor when a change
in the portfolio is otherwise appropriate. It is anticipated that the Fund's
portfolio turnover rate will not exceed 200% in the case of equity securities
and 200% in the case of fixed income securities during its first fiscal year.
Transaction costs incurred by the Fund and the realized capital gains and losses
of the Fund may be greater than that of a fund with a lower portfolio turnover
rate.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of FSI, the Fund's distributor, as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
For a further discussion of portfolio trading, see the Statement of Additional
Information.
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment 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.
The Statement of Additional Information 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
Statement of Additional Information may not be changed without shareholder
approval. See "Investment Restrictions" in the Statement of Additional
Information. 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.
5. RISK FACTORS
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). U.S. Government
Securities which are generally considered free of credit risk and are assured as
to payment of principal and interest if held to maturity are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
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 management comprised of only a few
people. 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. 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 economy
and financial markets.
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. Special considerations
may also include more limited information about foreign issuers, higher
brokerage 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 governmental supervision than in the United States.
Investments in foreign countries could be
13
<PAGE> 20
affected by other factors including expropriation, confiscatory taxation and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods.
In addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative and,
while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may 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 values of the portfolio securities or, if the
Fund has entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery.
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 delays in, 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.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also 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. Although ADRs are issued
by a U.S. depository, they are subject to many of the risks of foreign
securities such as changes in exchange rates and more limited information about
foreign issuers.
FOREIGN CURRENCIES: To the extent the Fund invests in securities not denominated
in U.S. dollars, the value of the Fund's foreign investments, and the value of
dividends and interest earned by the Fund on such investments, 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 may attempt to
manage currency exchange rate risks, there is no assurance that the Adviser will
do so at an appropriate time or that the Adviser will be able to predict
exchange rates accurately. For example, if the Adviser hedges 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, Forward Contracts and Options on Foreign Currencies when, in the
judgment of the 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 "Investment Objective, Policies and Restrictions" in the
Statement of Additional Information for further discussion of the holding of
foreign currency, 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.
14
<PAGE> 21
LOWER RATED FIXED INCOME SECURITIES: As noted above, the Fund may invest in
fixed income securities in the lower rating categories of recognized rating
agencies (that is, ratings of Ba or lower by Moody's or BB or lower by S&P or
Fitch) (and comparable unrated securities) (commonly known as "junk bonds"). For
a description of these and other rating categories, see Appendix A. No minimum
rating standard is required for a purchase by the Fund. These securities are
considered speculative and, while generally providing greater income than
investments in higher rated securities, will involve greater risk of principal
and income (including the possibility of default or bankruptcy of the issuers of
such securities) and may involve greater volatility of price (especially during
periods of economic uncertainty or change) than securities in the higher rating
categories and, because yields vary over time, no specific level of income can
ever be assured. These lower rated, high yielding fixed income securities
generally tend to 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 above under "Risk Factors -- Fixed Income Securities"). 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. For
example, federal rules require that savings and loan associations gradually
reduce their holdings of high yield securities. An effect of such legislation
may be to depress the prices of outstanding lower rated, high yielding fixed
income securities. The market for these lower rated fixed income securities may
be less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such trades. For example, if the Fund has hedged
against the possibility of an increase in interest rates, and rates instead
decline, the Fund will lose part or all of the benefit of the increased value of
the securities being hedged, and may be required to meet ongoing daily variation
margin payments.
INVESTMENT TECHNIQUES: Although the Fund will enter into transactions in
Options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies in part 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, Futures Contracts, Options on Futures Contracts and
Forward 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. In addition, foreign
currency markets may be extremely volatile from time to time. In addition, there
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.
15
<PAGE> 22
Transactions in Options may be entered into by the Fund on United States
exchanges regulated by the SEC, in the over-the-counter market and on foreign
exchanges, while 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 United States exchanges regulated by the Commodity Futures
Trading Commission (the "CFTC") 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.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated June 2, 1994 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. A committee (the "Allocation Committee")
of investment professionals employed by the Adviser determines the allocation of
assets among the various asset classes. The members of the Allocation Committee
are as follows: (i) A. Keith Brodkin, the Chairman and a Director of the Adviser
and the Chairman, President and a Trustee of the Trust (Mr. Brodkin has been
employed by the Adviser (or its predecessor) since 1970); (ii) Jeffrey L.
Shames, President of the Adviser (Mr. Shames has been employed by the Adviser
since 1983); (iii) Leslie J. Nanberg, a Senior Vice President of the Adviser who
has been employed by the Adviser since 1980; (iv) John W. Ballen, a Senior Vice
President of the Adviser who has been employed by the Adviser since 1984; and
(v) James T. Swanson, a Senior Vice President of the Adviser who has been
employed by the Adviser since 1985. The assets in the asset classes are then
managed by the following individuals: (i) U.S. Equity Securities -- John W.
Ballen and John Brennan, a Vice President of the Adviser who has been employed
by the Adviser since 1985; (ii) Foreign Equity Securities -- David R. Mannheim,
a Vice President of the Adviser who has been employed by the Adviser since 1988;
(iii) U.S. Investment Grade Fixed Income Securities -- Geoffery L. Kurinsky, a
Senior Vice President of the Adviser who has been employed by the Adviser since
1987; (iv) U.S. High Yield Fixed Income Securities -- Joan S. Batchelder, a
Senior Vice President of the Adviser who has been employed by the Adviser since
1978; and (v) Foreign Fixed Income Securities -- Leslie J. Nanberg. Mr. Swanson
supervises quantitative support and provides overall oversight of the Fund's
investments. Each individual listed above is responsible, however, for managing
the assets in his/her particular asset class. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for the Fund. For
its services and facilities, the Adviser receives a management fee computed and
paid monthly at the annual rate of 0.60% of the Fund's average daily net assets
for the Fund's then-current fiscal year. The Adviser has voluntarily agreed to
pay expenses of each class of the Fund that exceed 1.50%, 2.57% and 2.50% of the
Fund's average daily net assets attributable to Class A, Class B and Class C
shares, respectively, on an annualized basis. This temporary expense reduction
may be rescinded at any time by the Adviser without notice to shareholders as to
expenses accruing after the date of such rescission. For the period from
commencement of investment operations on July 22, 1994, to August 31, 1994, MFS
received fees under the Fund's Advisory Agreement of $28,252.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS(R)Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS Special Value Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts. MFS and its wholly-owned subsidiary, MFS Asset Management,
Inc., provides investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $33.9 billion on behalf of approximately 1.5 million investor
accounts as of October 31, 1994. As of such date, the MFS organization managed
approximately $18.2 billion of assets invested in fixed income securities,
approximately $11.0 billion of assets in equity securities and approximately
$3.3 billion of assets in foreign securities. MFS is a subsidiary of Sun Life of
Canada (U.S.), which in turn is a subsidiary of Sun Life Assurance Company
16
<PAGE> 23
of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D. Scott, John D. McNeil and John R. Gardner. Mr. Brodkin is the
Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and Gardner are the
Chairman and President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the United States since 1895, establishing a
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman,
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
O. Yost, and James R. Bordewick, Jr. all of whom are officers of MFS, are also
officers of the Trust.
DISTRIBUTOR -- FSI, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
securities dealer, certain banks and other financial institutions having selling
agreements with FSI. Non-securities dealer financial institutions will receive
transaction fees that are the same as commission fees to dealers. Securities
dealers and other financial institutions may also charge their customers fees
relating to investments in the Fund.
The Fund offers three classes of shares which bear sales charges and
distribution fees in different forms and amounts:
CLASS A SHARES: Class A shares are offered at net asset value per share plus an
initial sales charge (or CDSC in the case of certain purchases of $1 million or
more) as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS
PERCENTAGE OF:
-------------------------------- DEALER ALLOWANCE
NET AMOUNT AS A PERCENTAGE
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OF OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000................................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000................... 4.00 4.17 3.20
$250,000 but less than $500,000................... 2.95 3.04 2.25
$500,000 but less than $1,000,000................. 2.20 2.25 1.70
$1,000,000 or more................................ None** None** See Below**
- ---------------
<FN>
*Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
**A CDSC may apply in certain instances. FSI (on behalf of the Fund) will also
pay a commission on purchases of $1 million or more.
</TABLE>
No sales charge is payable at the time of purchase of Class A shares on
investments of $1 million or more. However, a CDSC shall be imposed on such
investments in the event of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares.
In determining whether a CDSC on such Class A shares is payable, and, if so, the
amount of the charge, it is assumed that shares not subject to the CDSC are the
first redeemed followed by other shares held for the longest period of time. All
investments made during a calendar month, regardless of when during the month
the investment occurred, will age one month on the last day of the month and
each subsequent month. Except as noted below, the CDSC on Class A shares will be
waived in the case of: (i) exchanges (except that if the shares acquired by
exchange were then redeemed within 12 months of the initial purchase
17
<PAGE> 24
(other than in connection with subsequent exchanges to other MFS Funds), the
charge would not be waived); (ii) distributions to participants from a
retirement plan qualified under section 401(a) of the Code (a "Retirement Plan")
due to: (a) a loan from the plan (repayments of loans, however, will constitute
new sales for purposes of assessing the CDSC); or (b) "financial hardship" of
the participant in the plan, as that term is defined in Treasury Regulations
Section 1.401(k)-1(d)(2), as amended from time to time; or (c) the death of a
participant in such plans; (iii) distributions from a 403(b) plan or an
Individual Retirement Account ("IRA") due to death, disability, or attainment of
age 59 1/2; (iv) tax-free returns of excess contributions to an IRA; (v)
distributions by other employee benefit plans to pay benefits and (vi) certain
involuntary redemptions and redemptions in connection with certain automatic
withdrawals from a qualified retirement plan. The CDSC on Class A Shares will
not be waived, however, if the Retirement Plan withdraws from the Fund, except
that if the Retirement Plan has invested its assets in Class A shares of one or
more of the MFS Funds for more than 10 years from the later to occur of (i)
January 1, 1993 or (ii) the date such Retirement Plan first invests its assets
in Class A shares of one or more of the MFS Funds, the CDSC on Class A shares
will be waived in the case of a redemption of all of the Retirement Plan's
shares (including shares of any other class) in all MFS Funds (i.e., all the
assets of the Retirement Plan invested in the MFS Funds are withdrawn), unless,
immediately prior to the redemption, the aggregate amount invested by the
Retirement Plan in Class A shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four year period equals 50% or more of the
total value of the Retirement Plan's assets in the MFS Funds, in which case the
CDSC will not be waived. Any applicable CDSC will be deferred upon an exchange
of Class A shares of the Fund for units of participation of the MFS Fixed Fund
(a bank collective investment fund) (the "Units"), and the CDSC will be deducted
from the redemption proceeds when such Units are subsequently redeemed (assuming
the CDSC is then payable). No CDSC will be assessed upon an exchange of Units
for Class A shares of the Fund. For purposes of calculating the CDSC payable
upon redemption of Class A shares of the Fund or Units acquired pursuant to one
or more exchanges, the period during which the Units are held will be aggregated
with the period during which the Class A shares are held. The applicability of
the CDSC will be unaffected by transfers of registration. FSI shall receive all
CDSCs which it intends to apply for the benefit of the Fund.
FSI 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 FSI 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 MFS Funds and other funds
owned or being purchased, the existence of an agreement to purchase additional
shares during a 13-month period (or a 36-month period for purchases of $1
million or more) or other special purchase programs. A description of the Right
of Accumulation, Letter of Intent and Group Purchases privileges by which the
sales charge may be reduced is set forth in the Statement of Additional
Information. In addition, FSI, on behalf of the Fund and pursuant to the Fund's
Class A Distribution Plan described below, will pay a commission to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
1.00% on sales up to $5 million, plus 0.25% on the amount in excess of $5
million. Purchases of $1 million or more for each shareholder account will be
aggregated over a 12-month period (commencing from the date of the first such
purchase) for purposes of determining the level of commissions to be paid during
that period with respect to such account.
Class A shares of the Fund may be sold at their net asset value to the officers
of the Trust, to any of the subsidiary companies of Sun Life, to eligible
Directors, officers, employees (including retired employees) and agents of MFS,
Sun Life or any of their subsidiary companies, to any trust, pension,
profit-sharing or any other benefit plan for such persons, to any trustees and
retired trustees of any investment company for which FSI serves as distributor
or principal underwriter, and to certain family members of such individuals and
their spouses, provided such shares will not be resold except to the Fund. Class
A shares of the Fund may be sold at net asset value to any employee, partner,
officer or trustee of any sub-adviser to any MFS Fund and to certain family
members of such individuals and their spouses, or to any trust, pension,
profit-sharing or other retirement plan for the sole benefit of such employee or
representative, provided such shares will not be resold except to the Fund.
Class A shares of the Fund may also be sold at their net asset value to any
employee or registered representative of any dealer or other financial
institution which has a sales agreement with FSI or its affiliates, to certain
family members of such employees or representatives and their spouses, or to any
trust, pension, profit-sharing or other retirement plan for the sole benefit of
such employee or representative,
18
<PAGE> 25
as well as to clients of the MFS Asset Management Group. Class A shares of the
Fund also may be sold at net asset value, subject to appropriate documentation,
through a dealer where the amount invested represents redemption proceeds from a
registered open-end management investment company not distributed or managed by
FSI or its affiliates, if such redemption has occurred no more than 60 days
prior to the purchase of Class A shares of the Fund and the shareholder either
(i) paid an initial sales charge or (ii) was at some time subject to, but did
not actually pay, a deferred sales charge with respect to the redemption
proceeds. Class A shares of the Fund may also be sold at net asset value where
the amount invested represents redemption proceeds from MFS Fixed Fund. In
addition, Class A shares of the Fund may be sold at net asset value in
connection with the acquisition or liquidation of the assets of other investment
companies or personal holding companies. Insurance company separate accounts may
purchase Class A shares of the Fund at their net asset value. Class A shares of
the Fund may also be purchased at their net asset value by retirement plans
where third party administrators of such plans have entered into certain
arrangements with FSI or its affiliates provided that no commission is paid to
dealers. Class A shares of the Fund may also be sold at net asset value through
the automatic reinvestment of Class A and Class B periodic distributions which
constitute required withdrawals from qualified retirement plans. Class A shares
of the Fund may be purchased at net asset value through certain broker-dealers
and other financial institutions which have entered into an agreement with FSI,
which includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or a similar program under which such clients
pay a fee to such broker-dealer or other financial institution.
Class A shares of the Fund may be purchased at net asset value by retirement
plans qualified under section 401(a) or 403(b) of the Code which are subject to
the Employee Retirement Income Security Act of 1974, as amended, as follows:
(i) the retirement plan and/or the sponsoring organization must subscribe to
the MFS FUNDamental 401(k) Plan or another similar Section 401(a) or 403(b)
recordkeeping program made available by MFS Service Center, Inc.;
(ii) either (a) the sponsoring organization must have at least 25 employees
or (b) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds must be in an amount of at least $250,000 within a reasonable
period of time, as determined by FSI in its sole discretion; and
(iii) a CDSC of 1% will be imposed on such purchases in the event of certain
redemption transactions within 12 months following such purchases.
Dealers who initiate and are responsible for purchases of Class A shares of the
Fund in this manner will be paid a commission by FSI, as follows: 1.00% on sales
up to $5 million, plus 0.25% on the amount in excess of $5 million; provided,
however, that FSI may pay a commission, on sales in excess of $5 million to
certain retirement plans, of 1.00% to certain dealers which, at FSI's
invitation, enter into an agreement with FSI in which the dealer agrees to
return any commission paid to it on the sale (or on a pro rata portion thereof)
if the shareholder redeems his or her shares within a period of time after
purchase as specified by FSI. Purchases of $1 million or more for each
shareholder account will be aggregated over a 12-month period (commencing from
the date of the first such purchase) for purposes of determining the level of
commissions to be paid during that period with respect to such account. Class A
shares of the Fund may also be purchased at net asset value where the purchase
is in an amount of $3 million or more and where the dealer and FSI enter into an
agreement in which the dealer agrees to return any commission paid to it on the
sale (or pro rata portion thereof) as described above if the shareholder redeems
his or her shares within one year of purchase. (Shareholders who purchase shares
at NAV pursuant to these conditions are called "$3 Million Shareholders").
Furthermore, Class A shares of the Fund may be sold at net asset value through
the automatic reinvestment of distributions of dividends and capital gains of
Class A shares of other MFS Funds pursuant to the Distribution Investment
Program (see "Shareholder Services" in the Statement of Additional Information).
19
<PAGE> 26
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First................................................................... 4%*
Second.................................................................. 4%
Third................................................................... 3%
Fourth.................................................................. 3%
Fifth................................................................... 2%
Sixth................................................................... 1%
Seventh and following................................................... 0%
<FN>
- ---------------
*Class B shares purchased between January 1, 1993 and August 31, 1993, are
subject to a CDSC of 5% in the event of a redemption within the first year
after purchase.
</TABLE>
For Class B shares purchased prior to January 1, 1993, the Fund imposes a CDSC
as a percentage of redemption proceeds as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
--------------- --------------
<S> <C>
First................................................................... 6%
Second.................................................................. 5%
Third................................................................... 4%
Fourth.................................................................. 3%
Fifth................................................................... 2%
Sixth................................................................... 1%
Seventh and following................................................... 0%
</TABLE>
No CDSC is paid upon an exchange of shares. For purposes of calculating the CDSC
upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares. See "Redemptions and
Repurchases -- Contingent Deferred Sales Charge" for further discussion of the
CDSC.
The CDSC on Class B shares will be waived upon the death or disability (as
defined in section 72(m)(7) of the Code) of any investor, provided the account
is registered (i) in the case of a deceased individual, solely in the deceased
individual's name, (ii) in the case of a disabled individual, solely or jointly
in the disabled individual's name or (iii) in the name of a living trust for the
benefit of the deceased or disabled individual. The CDSC on Class B shares will
also be waived in the case of redemptions of shares of the Fund pursuant to a
systematic withdrawal plan. In addition, the CDSC on Class B shares will be
waived in the case of distributions from an IRA, SAR-SEP or any other retirement
plan qualified under section 401(a) or 403(b) of the Code, due to death or
disability, or in the case of required minimum distributions from any such
retirement plan due to attainment of age 70 1/2. The CDSC on Class B shares will
be waived in the case of distributions from a retirement plan qualified under
Section 401(a) of the Code due to (i) returns of excess contribution to the
plan, (ii) retirement of a participant in the plan, (iii) a loan from the plan
(repayments of loans, however, will constitute new sales for purposes of
assessing the CDSC), (iv) "financial hardship" of the participant in the plan,
as that term is defined in Treasury Regulation 1.401(k)-1(d)(2), as amended from
time to time; and (v) termination of employment of the participant in the plan
(excluding, however, a partial or other termination of the plan). The CDSC on
Class B shares of the Fund will also be waived upon redemption by (i) officers
of the Fund, (ii) any of the subsidiary
20
<PAGE> 27
companies of Sun Life, (iii) eligible Directors, officers, employees (including
retired employees) and agents of MFS, Sun Life or any of their subsidiary
companies, (iv) any trust, pension, profit-sharing or any other benefit plan for
such persons, (v) any trustees and retired trustees of any investment company
for which FSI serves as distributor or principal underwriter, and (vi) certain
family members of such individuals and their spouses, provided in each case that
the shares will not be resold except to the Fund. The CDSC on Class B shares
will also be waived in the case of redemptions by any employee or registered
representative of any dealer or other financial institution which has a sales
agreement with FSI, by certain family members of such employee or representative
and their spouse, by any trust, pension, profit-sharing or other retirement plan
for the sole benefit of such employee or representative and by clients of the
MFS Asset Management, Inc. A retirement plan qualified under section 401(a) of
the Code, (a "Retirement Plan") that has invested its assets in Class B shares
of one or more of the MFS Funds for more than 10 years from the later to occur
of (i) January 1, 1993 or (ii) the date the Retirement Plan first invests its
assets in Class B shares of one or more of the funds in the MFS Funds will have
the CDSC on Class B shares waived in the case of a redemption of all the
Retirement Plan's shares (including any Class A shares) in all MFS Funds (i.e.,
all the assets of the Retirement Plan invested in the MFS Funds are withdrawn),
except that if, immediately prior to the redemption, the aggregate amount
invested by the Retirement Plan in Class B shares of the MFS Funds (excluding
the reinvestment of distributions) during the prior four year period equals 50%
or more of the total value of the Retirement Plan's assets in the MFS Funds,
then the CDSC will not be waived. The CDSC on Class B shares may also be waived
in connection with the acquisition or liquidation of the assets of other
investment companies or personal holding companies.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund will convert to Class A
shares of the Fund approximately eight years after the purchase date. Shares
purchased through the reinvestment of distributions paid in respect of Class B
shares will be treated as Class B shares for purposes of the payment of the
distribution and service fees under the Distribution Plan applicable to Class B
shares. However, for purposes of conversion to Class A shares, all shares in a
shareholder's account that were purchased through the reinvestment of dividends
and distributions paid in respect of Class B shares (and which have not
converted to Class A shares as provided in the following sentence) will be held
in a separate sub-account. Each time any Class B shares in the shareholder's
account (other than those in the sub-account) convert to Class A shares, a
portion of the Class B shares 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 or a CDSC. 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
$5,000,000 per transaction.
Class C shares are not currently available for purchase by any retirement plan
qualified under Code section 401(a) or 403(b) if the retirement plan and/or the
sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan or another
similar 401(a) or 403(b) recordkeeping program made available by MFS Service
Center, Inc.
GENERAL: Except as described below, the minimum initial investment is $1,000 per
account and the minimum additional investment is $50 per account. Accounts being
established for monthly automatic investments and under payroll savings programs
and tax-deferred retirement programs (other than IRAs) involving the submission
of investments by means of group remittal statements are subject to a $50
minimum on initial and additional investments per account. The minimum initial
investment for IRAs is $250 per account and the minimum additional investment is
$50 per account. Accounts being established for participation in the Automatic
Exchange Plan are subject to a $50 minimum on initial and additional investments
per account.
21
<PAGE> 28
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 FSI. The Fund reserves the right to cease offering its shares at
any time.
For shareholders who elect to participate in certain investment programs (e.g.,
the automatic investment plan) or avail themselves of certain other shareholder
services, FSI 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.
A shareholder whose shares are held in the name of, or controlled by, an
investment 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.
Purchases and exchanges should be made for investment purposes only. The Fund
and FSI each reserve the right to reject any specific purchase order or to
restrict purchases by a particular purchaser (or group of related purchasers).
The Fund or FSI may reject or restrict any purchases by a particular purchaser
or group, for example, when such purchase is contrary to the best interests of
the Fund's other shareholders or otherwise would disrupt the management of the
Fund.
FSI may enter into an agreement with shareholders who intend to make exchanges
among certain classes of certain MFS Funds (as determined by FSI) which follow a
timing pattern, and with individuals or entities acting on such shareholders'
behalf (collectively, "market timers"), setting forth the terms, procedures and
restrictions with respect to such exchanges. In the absence of such an
agreement, it is the policy of the Fund and FSI to reject or restrict purchases
by market timers if (i) more than two exchange purchases are effected in a timed
account in the same calendar quarter or (ii) a purchase would result in shares
being held in timed accounts by market timers representing more than (x) one
percent of the Fund's net assets or (y) specified dollar amounts in the case of
certain MFS Funds which may include the Fund and which may change from time to
time. The Fund and FSI each reserve the right to request market timers to redeem
their shares at net asset value, less any applicable CDSC, if either of these
restrictions is violated.
Securities dealers and other financial institutions may receive different
compensation with respect to sales of Class A, Class B and Class C shares. In
some instances, promotional incentives to dealers may be offered only to certain
dealers who have sold or may sell significant amounts of Fund shares.
From time to time FSI, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. The staff of the SEC has indicated that dealers who receive
more than 90% of the sales charge may be considered underwriters. Such
concessions provided by FSI 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 and members of their families or
other invited guests to various locations for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. In some instances,
these concessions may be offered to dealers or only to certain dealers who have
sold or may sell, during specified periods, certain minimum amounts of shares of
the Fund. From time to time, FSI 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. In addition, FSI may, from time to time, pay
additional compensation to MFS Investor Services, Inc., an affiliated
broker-dealer, in connection with assistance provided by such broker-dealer in
selling Fund shares. From time to time, FSI or its affiliates may offer a small
gift of nominal value to shareholders who elect to participate in certain
investment programs (e.g., the Automatic Investment Plan) or other shareholder
services. Other concessions may be offered to the extent not prohibited by the
laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. (the "NASD").
The Glass-Steagall Act prohibits national banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of the
prohibition has not been clearly defined, FSI believes that such Act should not
preclude banks from entering into agency agreements with FSI (as described under
Distribution Plans). If, however, a bank were prohibited from so acting, the
Trustees would consider what actions, if any, would be necessary to continue to
provide efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequence as a result of these
22
<PAGE> 29
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.
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 (if available for sale) at net asset value. In addition, Class C
shares may be exchanged for shares of MFS Money Market Fund at net asset value.
Shares of one class may not be exchanged for shares of any other class.
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 MFS Service Center, Inc.) or all the
shares in the account. If the 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 (the "Exchange"), the exchange usually will occur on
that day if all the requirements set forth above have been complied with at that
time. 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 investment
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Fund and consider the differences in objectives and
policies before making any exchange. 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 accounts. Special procedures, privileges and restrictions with
respect to exchanges may apply to market timers who enter into an agreement with
FSI, as set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the amount in his account on
any date on which the Fund is open for business by redeeming shares at their net
asset value or by selling such shares to the Fund through a dealer (a
repurchase). Since the net asset value of shares of the account fluctuate,
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. Payment of
redemption proceeds may be delayed for up to seven days from the redemption date
if the Fund determines that such a delay would be in the best interest of all
its shareholders.
A. REDEMPTION BY MAIL -- Each shareholder has the right to redeem all or any
portion of the shares in his account by mailing or delivering to the Shareholder
Servicing Agent (see back cover for address) a stock power with a written
request for redemption 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 share certificate must be endorsed by the record
owner(s) exactly as the shares are registered and the signature(s) must be
guaranteed in the manner set forth below under the caption "Signature
Guarantee". In addition, in some cases, "good order" may require the furnishing
of additional
23
<PAGE> 30
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 by the Shareholder Servicing Agent in "good
order," 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 the Exchange is restricted or to the extent otherwise
permitted by the 1940 Act if an emergency exists (see "Tax Status").
B. REDEMPTION BY TELEPHONE -- Each shareholder may redeem an amount from his
account by telephoning toll-free at (800) 225-2606. Shareholders wishing to
avail themselves of this telephone redemption privilege must so elect on their
Account Application, designate thereon a commercial bank and account number to
receive the proceeds of such redemption, and sign the Account Application Form
with the signature(s) guaranteed in the manner set forth below under the caption
"Signature Guarantee". The proceeds of such a redemption, reduced by the amount
of any applicable CDSC described above and the amount of any income tax required
to be withheld, are mailed by check to the designated account, without charge.
As a special service, investors may arrange to have proceeds in excess of $1,000
wired in federal funds to the designated account. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent will not be responsible for any
losses resulting from unauthorized telephone transactions if it follows
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
C. REPURCHASE THROUGH A DEALER -- If a shareholder desires to sell his shares at
their net asset value through his securities dealer (a repurchase), the
shareholder can place a repurchase order with his dealer, who may charge the
shareholder a fee. Net asset value is calculated on the day the dealer places
the order with FSI, as the Fund's agent. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO FSI ON THE SAME DAY BEFORE FSI CLOSES FOR BUSINESS, 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.
SIGNATURE GUARANTEE: In order to protect shareholders against fraud to the
greatest extent possible, 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.
GENERAL: Shareholders of the Fund who have redeemed their shares have a one-time
right to reinvest the redemption proceeds in the same class of shares of any of
the MFS Funds (if shares of such Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinstatement Privilege. If the shares credited for any CDSC paid are then
redeemed within six years of the initial purchase in the case of Class B shares,
or within 12 months of the initial purchase for certain Class A share purchases,
a CDSC will be imposed upon redemption. Such purchases under the Reinstatement
Privilege are subject to all limitations in the Statement of Additional
Information regarding this privilege.
Subject to the Fund's compliance with applicable regulations, the Fund has
reserved the right to pay the redemption or repurchase price of shares of the
Fund, either totally or partially, by a distribution in kind of 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
receives a distribution in kind, the shareholder could incur brokerage or
transaction charges in converting the securities to cash.
24
<PAGE> 31
Due to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem shares in any account for their then-current value (which
will be promptly paid to the shareholder) if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts 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"). Shareholders will be notified that the value of their account is
less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed. No CDSC will be
imposed with respect to such involuntary redemptions.
CONTINGENT DEFERRED SALES CHARGE. Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of 12 months (in the
case of purchases of $1 million or more of Class A shares) or six years (in the
case of purchases of Class B shares). Class C shares are not subject to a CDSC.
Purchases of Class A shares made during a calendar month, regardless of when
during the month the investment occurred, will age one month on the last day of
the month and each subsequent month. Class B shares purchased on or after
January 1, 1993 will be aggregated on a calendar month basis -- all transactions
made during a calendar month, regardless of when during the month they have
occurred, will age one year at the close of business on the last day of such
month in the following calendar year and each subsequent year. For Class B
shares of the Fund purchased prior to January 1, 1993, transactions will be
aggregated on a calendar year basis -- all transactions made during a calendar
year, regardless of when during the year they have occurred, will age one year
at the close of business on December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class represented by Direct Purchases exceeds the sum
of the six calendar year aggregations (12 months in the case of purchases of $1
million or more of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares").
Therefore, at the time of redemption of shares of a particular class, (i) any
Free Amount is not subject to the CDSC, and (ii) the amount of the redemption
equal to the then-current value of Reinvested Shares is not subject to the CDSC,
but (iii) any amount of redemption in excess of the aggregate of the
then-current value of Reinvested Shares and the Free Amount is subject to a
CDSC. The CDSC will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration.
DISTRIBUTION PLANS
The Trustees have adopted separate distribution plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Rule"), after having concluded that there is a reasonable
likelihood that the plans would benefit the Fund and its shareholders.
CLASS A DISTRIBUTION PLAN. The Class A Distribution Plan provides that the Fund
will pay FSI a distribution/service fee aggregating up to (but not necessarily
all of) 0.50% of the average daily net assets attributable to Class A shares
annually in order that FSI may pay expenses on behalf of the Fund related to the
distribution and servicing of Class A shares. The expenses to be paid by FSI on
behalf of the Fund include a service fee to securities dealers which enter into
a sales agreement with FSI of up to 0.25% of the Fund's average daily net assets
attributable to Class A shares that are owned by investors for whom such
securities dealer is the holder or dealer of record. This fee is intended to be
partial consideration for all personal services and/or account maintenance
services rendered by the dealer with respect to Class A shares. FSI may from
time to time reduce the amount of the service fee paid for shares sold prior to
a certain date. FSI may also retain a distribution fee of up to 0.25% of the
Fund's average daily net assets attributable to Class A shares. The purpose of
the distribution payments to FSI under the Class A Distribution Plan is to
compensate FSI for its distribution services to the Fund. Distribution fee
payments under the Plan will be used by FSI to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.25% 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
25
<PAGE> 32
investors for whom that securities dealer is the holder or dealer of record. In
addition, to the extent that the aggregate of the foregoing fees 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 other distribution-related
expenses, including commissions to dealers and payments to wholesalers employed
by FSI for sales at or above a certain dollar level. The 0.50%
distribution/service fee described above will be paid by the Fund only to the
extent that annualized total operating expenses for Class A shares of the Fund
do not exceed 1.50% of average daily net assets for Class A shares. To the
extent that such distribution/service fee payments would cause such annualized
operating expenses for Class A shares to exceed 1.50%, the amount of such
distribution/service fee payments in excess of 1.50% will be paid by FSI rather
than by the Fund. Based on estimated expenses for the Fund's current fiscal
year, FSI anticipates bearing the Fund's Class A distribution/service fee equal
to 0.20% of the average daily net assets attributable to Class A shares. Fees
payable under the Class A Distribution Plan are charged to, and therefore
reduce, income allocated to Class A shares. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. Dealers may from time to time be required to meet certain criteria in
order to receive service fees. FSI or its affiliates are entitled to retain all
service fees payable under the Class A Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by FSI or its affiliates for shareholder accounts. Certain banks and
other financial institutions that have agency agreements with FSI will receive
service fees that are the same as service fees to dealers.
CLASS B DISTRIBUTION PLAN. The Class B Distribution Plan provides that the Fund
will pay FSI a daily distribution fee equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class B shares and will pay FSI
a service fee of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class B shares (which FSI will in turn pay to securities dealers
which enter into a sales agreement with FSI at a rate of up to 0.25% per annum
of the Fund's average daily net assets attributable to Class B shares owned by
investors for whom that securities dealer is the holder or dealer of record).
This service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to the Class B shares. Fees payable under the Class B Distribution Plan are
charged to, and therefore reduce, income allocated to Class B shares. The Class
B Distribution Plan also provides that FSI will receive all CDSCs attributable
to Class B shares (see "Redemptions and Repurchases" above) which do not reduce
the distribution fee. FSI will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. FSI will also
advance to dealers the first year service fee at a rate equal to 0.25% of the
purchase price of such shares and, as compensation therefor, FSI may retain the
service fee paid by the Fund with respect to such shares for the first year
after purchase. Therefore, the total amount paid to a dealer upon the sale of
shares is 4.00% of the purchase price of the shares (commission rate of 3.75%
plus service fee equal to 0.25% of the purchase price). Additional payments may
also be made to dealers for sales of Class B shares. See "Information Concerning
Shares of the Fund -- Purchases" above. Dealers will become eligible for
additional service fees with respect to such shares commencing in the thirteenth
month following the purchase. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. FSI or its affiliates are
entitled to retain all service fees payable under the Class B Distribution Plan
for which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by FSI or its affiliates for shareholder
accounts.
The purpose of the distribution payments to FSI under the Class B Distribution
Plan is to compensate FSI for its distribution services to the Fund. Since FSI's
compensation is not directly tied to its expenses, the amount of compensation
received by FSI during any year may be more or less than its actual expenses.
For this reason, this type of distribution fee arrangement is characterized by
the staff of the SEC as being of the "compensation" variety. However, the Fund
is not liable for any expenses incurred by FSI in excess of the amount of
compensation it receives. The expenses incurred by FSI, including commissions to
dealers, are likely to be greater than the distribution fees for the next
several years, but thereafter such expenses may be less than the amount of the
distribution fees. Certain banks and other financial institutions that have
agency agreements with FSI will receive agency transaction and service fees that
are the same as commissions and service fees to dealers.
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<PAGE> 33
CLASS C DISTRIBUTION PLAN. The Class C Distribution Plan provides that the Fund
will pay FSI a distribution fee of up to 0.75% per annum of the Fund's average
daily net assets attributable to Class C shares and will pay FSI a service fee
of up to 0.25% per annum of the Fund's average daily net assets attributable to
Class C shares (which FSI in turn pays to securities dealers which enter into a
sales agreement with FSI at a rate of up to 0.25% per annum of the Fund's daily
net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record). The distribution/service
fees attributable to Class C shares are designed to permit an investor to
purchase such shares through a broker-dealer without the assessment of an
initial sales charge or a CDSC while allowing FSI to compensate broker-dealers
in connection with the sale of such shares. The service fee is intended to be
additional consideration for all personal services and/or account maintenance
services rendered with respect to Class C shares. FSI or its affiliates are
entitled to retain all service fees payable under the Class C Distribution Plan
with respect to accounts for which there is no dealer of record as partial
consideration for personal services and/or account maintenance services
performed by FSI or its affiliates for shareholder accounts. The purpose of the
distribution payments to FSI under the Class C Distribution Plan is to
compensate FSI for its distribution services to the Fund. Distribution fee
payments under the Plan will be used by FSI to pay securities dealers a
distribution fee in an amount equal on an annual basis to 0.75% of the Fund's
average daily net assets attributable to Class C shares owned by investors for
whom that securities dealer is the holder or dealer of record. (Therefore, the
total amount of distribution/service fees paid to a dealer on an annual basis is
1.00% of the Fund's average daily net assets attributable to Class C shares
owned by investors for whom the securities dealer is the holder or dealer of
record.) FSI also pays 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 compensation of personnel and all costs of travel, office
expense and equipment. Since FSI's compensation is not directly tied to its
expenses, the amount of compensation received by FSI during any year may be more
or less than its actual expenses. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as being of the
"compensation" variety. However, the Fund is not liable for any expenses
incurred by FSI in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with FSI will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly 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. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and also may 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 Code, and to make
distributions to its shareholders in accordance with the timing requirements
imposed by the Code. It is expected that the Fund will not be required to pay
entity level federal income or excise taxes, although foreign-source income
received by the Fund 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 dividends and capital gain distributions from the Fund, whether
paid in cash or additional shares. A portion of the dividends received from the
Fund (but none of the Fund's capital gains distributions) may qualify for the
dividends-received deduction for corporations. Shareholders may not have to pay
27
<PAGE> 34
state or local taxes on dividends derived from interest on U.S. Government
obligations. Investors should consult with their tax advisors in this regard.
A statement setting forth the federal income tax status of all dividends and
distributions for each calendar year, including the portion taxable as ordinary
income, the portion taxable as long-term capital gains, the portion, if any,
representing a return of capital (which is generally free of current taxes but
results in a basis reduction), and the amount, if any, of federal income tax
withheld will be sent to each shareholder promptly after the end of such year.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable law or
treaty. The Fund is also required in certain circumstances to apply backup
withholding of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have had 30%
withholding taken. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares 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 Statement of Additional Information. 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 FSI prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of three series of the Trust, has three classes of shares,
entitled Class A, Class B and Class C Shares of Beneficial Interest (without par
value). 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 would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees or
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
nonassessable. 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 does not intend to hold annual shareholder meetings.
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 is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and errors and omissions insurance)
and the Trust itself was unable to meet its obligations.
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PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as Lipper
Analytical Services, Inc., Morningstar, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per class share over a 30-day period stated as a percent of the maximum
public offering price on the last day of that period. Yield calculations for
Class B 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 twelve months and is
computed by dividing the amount of such dividends by the maximum public offering
price of that class at the end of such period. Current distribution rate
calculations for Class B shares assume no CDSC is paid. The current distribution
rate differs from the yield calculation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing, short-term capital gains, and return of invested
capital, and is calculated over a different period of time. Total rate of return
quotations will reflect the average annual percentage change over stated periods
in the value of an investment in each class of shares of the Fund made at the
maximum public offering price of shares of that class and with all distributions
reinvested and which, if quoted for periods of six years or less, will give
effect to the imposition of the CDSC assessed upon redemptions of the Fund's
Class B shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher. All performance quotations are based on historical performance and are
not intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time and current distribution rate reflects only
the rate of distributions paid by the Fund over a stated (period of) time, while
total rate of return reflects all components of investment return over a stated
period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. For
a discussion of the manner in which the Fund will calculate its yield, current
distribution rate and total rate of return, see the Statement of Additional
Information. 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.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and distributions for that year, including
whether any portion represents a return of capital (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions 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. 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
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paper work. The programs involve no extra charge to shareholders (other than a
sales charge in the case of certain Class A share purchases) and may be changed
or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the Statement of Additional Information) anticipates purchasing
$100,000 or more of Class A shares of the Fund alone or in combination with
shares of Class B or Class C of the Fund or any of the classes of other MFS
Funds or the MFS Fixed Fund (a bank collective investment fund) within a
13-month period (or a 36-month period for purchases of $1 million or more), the
shareholder may obtain such shares at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder (except a $3 Million Shareholder)
may direct the Shareholder Servicing Agent to send him (or anyone he designates)
regular periodic payments, as designated on the Account Application and based
upon the value of his account. Each payment under a Systematic Withdrawal Plan
(a "SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP will not
be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (and in the case of Class C shares, for shares of MFS Money
Market Fund) under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder
provided that such shares are available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds.
A shareholder should consider the objectives and policies of a fund and review
its prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, a 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 Statement of Additional
Information for further information concerning the Automatic Exchange Plan.
Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
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TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," 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 Statement of Additional Information, dated December 1, 1994 contains
more detailed information about the Trust and the Fund, including information
related to: (i) the Fund's investment policies and restrictions, including the
purchase and sale of Options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies; (ii) the Trustees, officers
and investment adviser; (iii) portfolio trading; (iv) the Fund's shares,
including rights and liabilities of shareholders; (v) tax status of dividends
and distributions; (vi) the Distribution Plans; and (vii) various services and
privileges provided by the Fund for the benefit of its shareholders, including
additional information with respect to the exchange privilege.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE NOT
ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME MATURITY,
COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME MATURITY AND
COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities 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.
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STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
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, B, CCC, CC AND C: Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
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
which 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
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
rating 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.
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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 protect. 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.
34
<PAGE> 41
--------------------------------
INVESTMENT ADVISER
Massachusetts Financial Services
Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR MFS[R]
MFS Financial Services, Inc.
500 Boylston Street, Boston, MA 02116 WORLD ASSET
(617) 954-5000
ALLOCATION
CUSTODIAN AND DIVIDEND DISBURSING FUND[SM]
AGENT
Investors Bank & Trust Company
89 South Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT [LOGO]
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO] PROSPECTUS
DECEMBER 1, 1994
MFS[R] WORLD ASSET
ALLOCATION FUND
500 Boylston Street, Boston, MA
02116
--------------------------------
MAA-1 12/94/175M 88/288/388
<PAGE> 42
<TABLE> [LOGO]
<S> <C>
MFS[R] WORLD ASSET STATEMENT OF
ALLOCATION FUND[SM] ADDITIONAL INFORMATION
(A member of the MFS Family of Funds[R]) December 1, 1994
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 13
Trustees.......................................................................... 13
Officers.......................................................................... 13
Investment Adviser................................................................ 14
Custodian......................................................................... 15
Shareholder Servicing Agent....................................................... 15
Distributor....................................................................... 15
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 17
Investment and Withdrawal Programs................................................ 17
Exchange Privilege................................................................ 19
Tax-Deferred Retirement Plans..................................................... 20
6. Tax Status............................................................................ 20
7. Determination of Net Asset Value and Performance...................................... 22
8. Distribution Plans.................................................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 27
</TABLE>
MFS WORLD ASSET ALLOCATION FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information sets forth information which may be of
interest to investors but which is not necessarily included in the Fund's
Prospectus, dated December 1, 1994. This Statement of Additional Information
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 STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A
CURRENT PROSPECTUS.
<PAGE> 43
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS World Asset Allocation
Fund, is a series of MFS
Series Trust I (the
"Trust"), a Massachusetts
business trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"FSI" -- MFS Financial Services,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus, dated Decem-
ber 1, 1994 of the Fund.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek total return
over the long term through investments in equity and fixed income securities.
The Fund will also seek to have low volatility of share price (i.e., net asset
value per share) and reduced risk (compared to an aggressive equity/fixed income
fund). There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
allocating portfolio assets among various classes of securities. The Prospectus
contains a discussion of the various types of securities in which the Fund may
invest and certain risks involved in such investments.
FOREIGN SECURITIES: The Fund may invest 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 United States. There is also less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
AMERICAN DEPOSITARY RECEIPTS: American 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. 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. 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 depository 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 the 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 foreign currency.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Authority-insured or Veterans Administration-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage pass-through securities. GNMA securities are often purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
2
<PAGE> 44
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates ("PCs") which
represent interest in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment of
interest and ultimate collection of principal regardless of the status of the
underlying mortgage loans.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables, Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the GNMA, FNMA or FHLMC, but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multiclass pass-through securities which are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC").
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or a part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of a series of a CMO in innumerable ways. In a common structure,
payments of principal, including any principal prepayments, on the Mortgage
Assets are applied to the classes of the series of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Certain CMOs may be stripped (securities which provide
3
<PAGE> 45
only the principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting primarily of
interest payments or principal payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest only or "IO"
class) while the other class will receive all of the principal (the principal
only or "PO" class). The yield to maturity on an IO is extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a material
adverse effect on such security's yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or subsidiaries
thereof), of the New York Stock Exchange or members of the Federal Reserve
System, recognized primary U.S. Government securities dealers or institutions
which the Adviser has determined to be of comparable creditworthiness. The
securities that the Fund purchases and holds through its agent are U.S.
Government securities, the values of which are equal to or greater than the
repurchase price agreed to be paid by the seller. The repurchase price may be
higher than the purchase price, the difference being income to the Fund, or the
purchase and repurchase prices may be the same, with interest at a standard rate
due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans would be required to be secured continuously by collateral in cash,
cash equivalents or U.S. Treasury securities maintained on a current basis at an
amount at least equal to the market value of the securities loaned. The Fund
would have the right to call a loan and obtain the securities loaned at any time
on customary industry settlement notice (which will 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
collateral. 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 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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
4
<PAGE> 46
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
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 cash, short-term
money market instruments or high quality debt securities 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.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loan
participations and other direct claims against a borrower. In purchasing a loan
participation, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate 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.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the Fund
to pay additional cash on a certain date or on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a company at
a time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash or
other high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations 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
credit-worthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation 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. For example, if a loan is foreclosed, the Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, the Fund could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund. In addition, loan participations 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.
To the extent that the Adviser determines that any such investments are
illiquid, the Fund will include them in the investment limitations described
below.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold,
5
<PAGE> 47
resulting in a security whose price tends to rise and fall together with gold
prices. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. 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 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.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread,"
or yield differential between two securities; transactions referred to as a
"yield curve" options. In contrast to other types of options, a yield curve
option is based on the
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<PAGE> 48
difference between the yields of designated securities, rather than the prices
of the individual securities, and is settled through cash payments. Accordingly,
a yield curve option is profitable to the holder if this differential widens (in
the case of a call) or narrows (in the case of a put), regardless of whether the
yields of the underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by the Fund
will be "covered." A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counter party with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
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, 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 cash or cash equivalents
in a segregated account with its custodian. The Fund may cover put options on
stock indices by maintaining cash or cash equivalents with a value equal to the
exercise price in a segregated account with its custodian, or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
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 investment. 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 indexes 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 the 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.
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<PAGE> 49
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 indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). This investment technique may be used to hedge (i.e., to
protect) against anticipated future changes in interest or exchange rates or
declines in a securities market 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.
The Fund may also enter into Futures Contracts 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 or, in the case of a Futures Contract or
an index of securities, to make or receive a cash settlement.
While Futures Contracts often 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.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to attempt 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.
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 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 cash,
cash equivalents or short-term money market instruments from the portfolio of
the Fund in an amount equal to the difference between the fluctuating market
value of such Futures Contracts and the aggregate value of the initial and
variation margin payments made by the Fund with respect to such Futures
Contracts, thereby assuring that the transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The Fund may enter into stock index futures contracts in order to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices and for non-hedging purposes to the extent permitted by applicable
law. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or in part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or in whole, offset increases in the cost of
securities that the Fund intends to purchase. As such acquisitions are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon the termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a related
purchase of securities. Futures Contracts on other securities indexes may be
used in a similar manner in order to protect the portfolio from broad
fluctuations in securities prices and for non-hedging purposes to the extent
permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures
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<PAGE> 50
Contract may constitute a partial hedge against declining prices of the security
or currency underlying the Futures Contract. If the futures price at expiration
of the option is below the exercise price, the Fund will retain the full amount
of the option premium, less related transaction costs, which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put Option on a Futures Contract may constitute a
partial hedge against increasing prices of the security or currency 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, a rise in interest rates 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 decline in interest
rates 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 forgo all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs. The Fund may also
enter into Options on Futures Contracts for non-hedging purposes, to the extent
permitted by applicable law.
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 enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "cross hedging" as noted in
the Prospectus. 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 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 forgo 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 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 consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts.
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 forgo a portion or all of the benefits of
advantageous changes in such rates.
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<PAGE> 51
The Fund may write Options on Foreign Currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it 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. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
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 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 MFS
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 arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, 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 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, Future
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 based on an index of securities or individual fixed income securities,
the portfolio will not duplicate the components of the index, and 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 portfolio securities being hedged
will not move in the same amount or direction as the underlying index or
obligation.
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. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction. The trading of Options on Futures Contracts
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option. The risk of
imperfect correlation, however, generally tends to diminish as the maturity or
termination date of the option, Futures Contract or Forward Contract approaches.
It should be noted that the Fund may purchase and sell 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, including 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
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<PAGE> 52
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 options 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.
RISKS OF 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 UNITED STATES 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,
twenty-four hour market, and the markets for foreign securities as well as
markets in foreign countries may be operating during non-business hours in the
United States, 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 United States 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 United States 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 foreign currencies. 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 such circumstances, the Fund may promptly
convert the foreign currencies into dollars at the then current exchange rate.
Alternatively, the Fund may hold such currencies for an indefinite period of
time if the Adviser believes that the exchange rate at the time of delivery is
unfavorable or if, for any other reason, the Adviser anticipates favorable
movements in such rates.
While the holding of 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. Certain
tax requirements may limit the extent to which the Fund will be able to hold
currencies.
In addition, 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.
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
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of various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the use of such Futures is unleveraged.
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 Statement of Additional Information, means
the lesser of (i) more than 50% of the outstanding shares of the Trust (or a
class or series, as applicable), or (ii) 67% or more of the outstanding shares
of the Trust (or a class or series, as applicable) present at a meeting if
holders of more than 50% of the outstanding shares of the Trust (or a class or
series, as applicable) are represented at such meeting in person or by proxy):
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or emergency
purposes;
(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 currencies, any type of option,
any 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
currencies, any type of option, any 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, any type of swap agreement, Forward Contracts and any type of
futures contract and collateral arrangements with respect in 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, and 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 25% or more of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
for obligations issued or guaranteed by the U.S. Government or its agencies,
authorities or instrumentalities and repurchase agreements collateralized by
such obligations).
Except with respect to Investment Restriction (1) above, these investment
restrictions and the investment restrictions below are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. 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 this limitation. Securities that are not registered
under the 1933 Act 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 5% of the value of the Fund's net assets, valued at the
lower of cost or market, in warrants. Included within such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value;
(3) 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.
(4) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer or a director of the investment 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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<PAGE> 54
(5) 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, any type of futures contract,
any type of swap agreement and Forward Contracts;
(6) 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;
(7) 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;
(8) 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, any type of futures contracts, any type of swap
agreement, Forward Contracts and payments of initial and variation margin in
connection therewith, are not considered a pledge of assets; or
(9) 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 or (ii) put or call options or combinations thereof with
respect to securities, indexes of securities, foreign currency, any type of
swap agreement or any type of futures contracts or (b) the purchase,
ownership, holding or sale of contracts for the future delivery of securities
or currencies.
(10) purchase securities while borrowings pursuant to fundamental investment
restriction 1 exceed 5% of a Fund's total assets; however, the Fund may
complete the purchase of securities already contracted for.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for the Fund's operations. The
Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN* Chairman and President
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (until September 30, 1991)
MARSHALL N. COHAN
Private Investor. Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery. Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman. Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director. Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (Corporate Financial Consultants), President and
Treasurer. Address: 110 Broad Street, Boston, Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
January, 1990); The Kendall Company (health care products), Chairman and Chief
Executive Officer (prior to January, 1990); Colgate-Palmolive Company Senior
Executive Vice President (prior to January, 1990). Address: One Liberty
Square, Boston, Massachusetts
WARD SMITH
NACCO Industries (holding company), Chairman (prior to June, 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director; Society
Corporation (bank holding company), Director (prior to April 1992); Society
National Bank (commercial bank), Director 1986 to April, 1992. Address: 5875
Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
W. THOMAS LONDON,* Treasurer
Massachusetts Financial Services Company, Senior Vice President and Assistant
Treasurer
STEPHEN E. CAVAN,* Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President and General
Counsel and Assistant Secretary
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
JAMES R. BORDEWICK, JR.,* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel (since September 1990); associated with a major law firm (prior to
August 1990)
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of FSI, Messrs.
Shames and Scott, Directors of FSI, and Mr. Cavan, the Secretary of FSI, 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 Trust has adopted a retirement plan for non-interested Trustees. Under this
plan, a Trustee will retire upon reaching age 75 and if the Trustee has
completed at least five years of
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<PAGE> 55
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 75 and receive reduced payments if he has completed at least
five 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 the interested Trustees. The Fund will accrue its allocable share of
compensation expenses each year to cover current year's service and amortize
past service cost.
As of October 31, 1994, the Trustees and officers, as a group, owned less than
1% of the Trust's shares outstanding on that date.
As of October 31, 1994, Merrill Lynch Pierce Fenner & Smith Inc., P.O. Box
45286, Jacksonville, FL 32232-5286 was the record owner of 8.72% of the
outstanding Class A shares of the Fund and of 14.39% of the outstanding Class B
shares of the Fund. As of October 31, 1994, Judith G. Cook, Roseville, CA,
95661-5170 was the record owner of 6.05% of the outstanding Class C 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 is a
subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
June 2, 1994 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly at
the annual rate of 0.60% of the Fund's average daily net assets for the Fund's
then-current fiscal year. The Adviser has voluntarily agreed to pay expenses of
each class of the Fund that exceed 1.50%, 2.57% and 2.50% of the Fund's average
daily net assets attributable to Class A, Class B and Class C shares,
respectively, on an annualized basis. This temporary expense reduction may be
rescinded at any time by the Adviser without notice to shareholders as to
expenses accruing after the date of such rescission.
For the period from commencement of investment operations on July 22, 1994, to
August 31, 1994, MFS received fees under the Fund's Advisory Agreement of
$28,252.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays the compensation of the Trustees who are not officers of MFS (who
each receive from $1,250 to $2,600 annually, depending on attendance at
meetings, plus fees for meetings of special committees, such as the Audit
Committee) and all the Fund's expenses (other than those assumed by MFS or FSI),
including: 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; expenses of preparing, printing and mailing share certificates,
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of Investors Bank & Trust Company, the
Fund's Custodian, for all services to the Fund, including safekeeping of funds
and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that the Fund's
Distribution Agreement with FSI requires FSI to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series are allocated among the series in a manner believed by
management of the Trust to be fair and equitable.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. MFS 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.
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<PAGE> 56
The Advisory Agreement will remain in effect until August 1, 1995, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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 Restrictions"), or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement also provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Fund's
assets. The Custodian's responsibilities include safekeeping and controlling the
Fund's cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest and dividends on the Fund's
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved subcustodial arrangements
with the Chase Manhattan Bank, N.A. for securities of the Fund held outside the
United States. 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 September 10, 1986, as amended (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 records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee based on the net
assets of each class of shares of the Fund, computed and paid monthly. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. For the period from commencement of investment operations, July 22, 1994
to August 31, 1994, the Fund paid the Shareholder Servicing Agent fees of $8,636
under its Agency Agreement. 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
FSI, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement as amended
and restated as of April 14, 1993 (the "Distribution Agreement"), with the
Trust.
CLASS A SHARES: FSI acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing 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 Shareholder Services -- 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" in this Statement of Additional Information). A group might qualify to
obtain quantity sales charge discounts (see "Investment and Withdrawal Programs"
in this Statement of Additional Information).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, FSI and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
FSI 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.
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<PAGE> 57
In the case of the maximum sales charge, the dealer retains 4% and FSI retains
approximately 3/4 of 1% of the public offering price. In addition, FSI, on
behalf of the Fund, pays commissions to dealers who initiate and are responsible
for purchases of $1 million or more as described in the Prospectus.
CLASS B AND CLASS C SHARES: As the distributor of the Fund FSI acts as agent in
selling Class B and Class C shares of the Fund to dealers. The public offering
price of Class B and Class C shares is their net asset value next computed after
the sale (see "Purchases" in the Prospectus).
GENERAL: Neither FSI nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, FSI 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. FSI may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the period from commencement of investment operations on July 22, 1994 to
August 31, 1994, FSI received sales charges of $5,785 and dealers received sales
charges of $810,371 (as their concession on gross sales charges of $816,156) for
selling Class A shares of the Fund; the Fund received $19,292,845 representing
the aggregate net asset value of such shares. For the same time period, the CDSC
imposed on redemption of Class B shares was $4,302.
The Distribution Agreement will remain in effect until August 1, 1995, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
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
United States 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 transactions may,
as authorized by the Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments are
in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of FSI as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
through such broker-dealers, but at present, unless otherwise directed by the
Fund, a commission higher than one charged elsewhere will not be paid to such a
firm solely because it provided such Research. The Fund's Trustees (together
with the Trustees of the other MFS Funds) have directed the Adviser to allocate
a
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<PAGE> 58
total of $20,000 of commission business from the MFS Funds to the Pershing
Division of Donaldson, Lufkin & Jenrette as consideration for the annual renewal
of the Lipper Directors' Analytical Data Service (which provides information
useful to the Trustees in reviewing the relationship between the Fund and the
Adviser).
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Fund is concerned.
In other cases, however, the Fund believes that its ability to participate in
volume transactions will produce better executions for the Fund.
For the period from commencement of investment operations on July 22, 1994 to
August 31, 1994, the Fund paid brokerage commissions of $75,554 on total
transactions of $37,699,868. For the period from commencement of investment
operations on July 22, 1994 to August 31, 1994, the Fund acquired and retained
securities issued by Salomon Brothers Inc., a regular broker-dealer of the Fund,
which securities had a value of $130,125 at the end of such period.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and in certain
cases, in the Fund's prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or the MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period in the case of
purchases of $1 million or more), the shareholder may obtain Class A shares of
the Fund at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of the
Fund's Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by FSI 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 FSI 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 or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts
on the purchase of Class A shares when his new investment, together with the
current offering price value of all holdings of all classes of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity discounts. For example, if a shareholder owns shares valued
at $75,000 and purchases an additional $25,000 of Class A shares of the Fund,
the sales charge for the $25,000 purchase would be at the rate of 4% (the rate
applicable to single transactions of $100,000). A shareholder must provide the
Shareholder Servicing Agent (or
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his investment dealer must provide FSI) with information to verify that the
quantity sales charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not 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 (except a $3 Million Shareholder, as
defined in the Prospectus) may direct the Shareholder Servicing Agent to send
him (or anyone he designates) regular periodic payments, as designated on the
Account Application and based upon the value of his account. Each payment under
a Systematic Withdrawal Plan (a "SWP") must be at least $100, except in certain
limited circumstances. The aggregate withdrawals of Class B shares in any year
pursuant to a SWP generally are limited to 10% of the value of the account at
the time of 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 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 in "Contingent Deferred Sales
Charge" in the Prospectus). The CDSC will be waived in the case of redemptions
of Class B shares pursuant to a SWP but will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC. To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce and may eventually exhaust the number
of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $10,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and because of the
assessment of the CDSC for certain share redemptions. The shareholder by written
instruction to the Shareholder Servicing Agent may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by
mailing a check payable to the Fund directly to the Shareholder Servicing Agent.
The shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group or association (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 FSI.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds (if available for sale)(and, in the case of Class C shares, for shares
of MFS Money Market Fund) under the Automatic Exchange Plan, a dollar cost
averaging program. The Automatic Exchange Plan provides for automatic transfers
of funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder. Under the
Automatic Exchange Plan, transfers of at least $50 each may be made to up to
four different funds effective on the seventh day of each month or every third
month, depending whether monthly or quarterly transfers are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
transfer will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Transfers 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 transfers. Additional payments made to a
shareholder's account will extend the period that transfers 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 a
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transfer is scheduled, such funds may not be available for transfers 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 transfers will be charged in connection with the
Automatic Exchange Plan. However, transfers 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
transferred to each fund, the funds to which transfers are to be made and the
timing of transfers (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's transfer.
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 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
shares of 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 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) at net asset value. In addition, Class C shares may be exchanged for
shares of MFS Money Market Fund 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 the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by MFS Service Center, Inc.) 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 Funds. 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 accounts. 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 on any business day prior to the close of regular
trading on the New York Stock Exchange (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 Funds, 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 FSI may also communicate a shareholder's Exchange
Request to the Shareholder Servicing Agent 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
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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 holders of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
acquired through direct purchase and dividends reinvested prior to June 1, 1992)
have the right to exchange their shares for shares of the 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, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. FSI makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
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 qualified corporate pension and profit-sharing plans.
The plan documents provided by FSI 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 FSI, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
FSI may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
MFS Service Center, Inc.
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 and holding period
of the Fund's portfolio assets. Because the Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
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 income including certain foreign currency
gains and any distributions from net short-term capital gains, whether received
in cash or reinvested in additional shares, are taxable to shareholders as
ordinary income for federal income tax purposes. A portion of the Fund's
ordinary income dividends (but none of its capital gains) is eligible for the
dividends-received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax or result in certain basis adjustments. Distributions of net capital
gains (i.e., the excess of the net long-term capital gains over the short-term
capital losses), whether received in cash or invested in additional shares, are
taxable to the Fund's shareholders as long-term capital gains for federal income
tax purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November or December and paid the following
January will be taxable to shareholders as if received on December 31 of the
year in which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares
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shortly before the record date of any distribution may thus pay the full price
for the shares and then effectively receive a portion of the purchase price back
as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within 90 days after their purchase followed by any
purchase (including purchases by exchange or by reinvestment) of the Fund or of
another MFS Fund (or any other shares of an MFS Fund generally sold subject to a
sales charge) without payment of an additional sales charge of Class A shares.
The Fund's transactions in Options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on such day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in Options, Futures Contracts, Forward
Contracts, swaps and related transactions to the extent necessary to meet the
requirements of Subchapter M of the Code.
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 investment in zero coupon securities, securities calling for deferred
interest or payment of interest in kind and certain securities purchased at a
market discount will cause it to realize income prior to the receipt of cash
payments with respect to those securities. In order to distribute this income
and avoid a tax on the Fund, the Fund may be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
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. Use of foreign currencies for nonhedging
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 sources within foreign countries 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 of tax where available. It is
impossible to determine the 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 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
includible 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. If the Fund
does not qualify or elect to "pass through" to the Fund's 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. federal income tax withholding at a rate of 30%. The
Fund intends to withhold U.S. Federal income tax at the rate of 30% on taxable
dividends and other payments Non-U.S. Persons that are subject to withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts over-
withheld may be recovered by such persons by filing a claim for refund with the
U.S. Internal Revenue Service within the time period applicable to such claims.
Distributions received from the Fund by Non-U.S. Persons also may be subject to
tax under the laws of their own jurisdiction. The Fund is also required in
certain circumstances
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to apply backup withholding of 31% of taxable dividends and redemption proceeds
paid to any shareholder required to pay Massachusetts who does not furnish to
the Fund certain information and certifications, or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
that have been subject to 30% withholding.
As long as the Fund qualifies as a regulated investment company under the Code,
the Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes in certain states. The fund intends to advise
shareholders of the extent, if any, to which its distributions consist of such
interest. Shareholders are urged to consult their tax advisers regarding the
possible exclusion of such portion of their dividends for state and local income
tax purposes as well as regarding the tax consequences of an investment in the
Fund.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this Statement of Additional Information, the New York Stock Exchange
(the "Exchange") is open for trading every weekday except for the following
holidays or the days on which they are observed: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.) This determination is made once each day as of the close of
regular trading on the Exchange by deducting the amount of the liabilities
attributable to the class from the value of the assets attributable to the class
and dividing the difference by the number of shares of the class outstanding.
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 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 Fund's 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
with a remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Other short-term obligations in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio 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 FSI, the Fund's
principal underwriter, prior to the close of that business day.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
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 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 maximum sales charge (currently
4.75%) and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not reflect the
effect of the maximum or other sales charge or CDSC.
The aggregate total rate of return for Class A shares for the period from July
22, 1994 (commencement of investment operations) to August 31, 1994 was -2.67%
including the effect of the sales charge and 2.20% without the effect of the
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sales charge. The aggregate total rate of return for Class B shares for the
period July 22, 1994 (commencement of investment operations) to August 31, 1994
was -1.93% including the effect of the CDSC and 2.07% without the effect of the
CDSC. The Fund's aggregate total rate of return for Class C shares, from July
22, 1994 (commencement of investment operations) to August 31, 1994 was 2.07%.
Certain total rate of return figures would have been lower if voluntary fee
reductions were not in place.
YIELD: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the period by
the maximum offering price per share of such class on the last day of that
period. The resulting figure is then annualized. Net investment income per share
of a class is determined by dividing (i) the dividends and interest earned by
the Fund allocated to the class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B and Class C shares.
The yield calculation for Class A shares for the 30-day period ended August 31,
1994 was 3.09%, taking into account certain fee waivers; without these waivers,
the yield would have been 2.04%. The yield calculation for Class B shares for
the 30-day period ended August 31, 1994 was 3.27%, taking into account certain
fee waivers; without these waivers, the yield would have been 2.17%. The yield
calculation for Class C shares for the 30-day period ended August 31, 1994 was
3.77%, taking into account certain fee waivers; without these waivers, the yield
would have been 2.44%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the Securities and Exchange Commission, is not indicative of the
amounts which will be paid to the Fund's shareholders. Amounts paid to
shareholders of each class are reflected in the quoted "current distribution
rate" for that class. The current distribution rate for a class is computed by
dividing the total amount of dividends per share paid by the Fund to
shareholders of that class during the past twelve months by the maximum public
offering price of that class at the end of such period. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid over the period such policies were in effect,
rather than using the dividends paid during the past twelve months. The current
distribution rate differs from the yield computation because it may include
distributions to shareholders from sources other than dividends and interest,
such as premium income for option writing, short-term capital gains and return
of invested capital, and is calculated over a different period of time. The
Fund's current distribution rate calculation for Class A shares assumes a
maximum sales charge of 4.75%. The Fund's current distribution rate calculation
for Class B shares assumes no CDSC is paid.
The current distribution rate for Class A shares of the Funds for the 30-day
period ended on September 30, 1994 was 1.61%. The current distribution rate for
Class B shares of the Fund based on this 30 day period was 1.32%. The current
distribution rate for Class C shares of the Fund based on this 30-day period was
1.31%.
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts, 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.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first mutual
fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
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-- 1936 -- Massachusetts Investors Trust is the first mutual fund to let
shareholders take capital gain distributions either in additional shares or
in cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1977 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first mutual fund to seek
high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Fund, the first
fund to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
8. DISTRIBUTION PLANS
The Trustees have adopted a Distribution Plan for each of Class A, Class B and
Class C Shares (the "Distribution Plans") pursuant to Section 12(b) of the 1940
Act and Rule 12b-1 thereunder (the "Rule") after having concluded that there is
a reasonable likelihood that each Distribution Plan would benefit the Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. Also, an increase in net assets may lessen the
adverse effects that could result were the Fund required to liquidate portfolio
securities to meet redemptions. There is, however, no assurance that the net
assets of the Fund will increase or that the other benefits referred to above
will be realized.
CLASS A DISTRIBUTION PLAN: The Distribution Plan relating to Class A shares
(the "Class A Distribution Plan") provides that the Fund will pay FSI up to (but
not necessarily all of) an aggregate of 0.50% of the average daily net assets
attributable to the Class A shares annually in order that FSI may pay expenses
on behalf of the Fund related to the distribution and servicing of its Class A
shares. The expenses to be paid by FSI on behalf of the Fund include a service
fee to securities dealers which enter into a sales agreement with FSI of up to
0.25% of the portion of the Fund's average daily net assets attributable to the
Class A shares owned by investors for whom that securities dealer is the holder
or dealer of record. These payments are partial consideration for personal
services and/or account maintenance performed by such dealers with respect to
Class A shares. FSI may from time to time reduce the amount of the service fee
paid for shares sold prior to a certain date. FSI may also retain a distribution
fee of up to 0.25% of the Fund's average daily net assets attributable to Class
A shares. The purpose of the distribution payments to FSI under the Class A
Distribution Plan is to compensate FSI for its distribution services to the
Fund. Distribution fee payments under the Plan will be used by FSI to pay
securities dealers a distribution fee in an amount equal on an annual basis to
0.25% 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. The
0.50% distribution/service fee described above will be paid by the Fund only to
the extent that annualized total operating expenses for Class A shares of the
Fund do not exceed 1.50% of average daily net assets for Class A shares. To the
extent that such distribution/service fee would cause such annualized operating
expenses for Class A shares to exceed 1.50%, the amount of such
distribution/service fee payments in excess of 1.50% will be paid by FSI rather
than by the Fund. Based on estimated expenses for the Fund's current fiscal
year, FSI anticipates bearing the Fund's Class A distribution/service fee equal
to 0.20%. Any remaining funds may be used to pay for other distribution related
expenses as described in the Prospectus. Service fees may be reduced for a
securities dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having a net asset value at or above a certain dollar
level. No service/distribution fee will be paid to any insurance company which
has entered into an agreement with the Fund and FSI that permits such insurance
company to purchase shares from the Fund at their net asset value in connection
with annuity agreements issued in connection with the insurance company's
separate accounts. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees. FSI or its affiliates are
entitled to retain all service fees payable under the Class A Distribution Plan
for which there is no dealer of record or for which qualification standards have
not been met as partial consideration for personal services and/or account
maintenance services performed by FSI or its affiliates for shareholder
accounts. Certain banks and other financial institutions that have agency
agreements with FSI will receive agency transaction and service fees that are
the same as commissions and service fees to dealers.
CLASS B DISTRIBUTION PLAN: The Distribution Plan relating to Class B shares
(the "Class B Distribution Plan") provides that
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the Fund shall pay FSI, as the Fund's distributor for its Class B shares, a
daily distribution fee equal on an annual basis to 0.75% of the Fund's average
daily net assets attributable to Class B shares and will pay FSI an annual
service fee of up to 0.25% of the Fund's average daily net assets attributable
to Class B shares (which FSI will in turn pay to securities dealers which enter
into a sales agreement with FSI at a rate of up to 0.25% of the Fund's average
daily net assets attributable to Class B shares owned by investors for whom that
securities dealer is the holder or dealer of record). This service fee is
intended to be additional consideration for all personal services and/or account
maintenance services rendered by the dealer with respect to Class B shares. FSI
will advance to dealers the first-year service fee at a rate equal to 0.25% of
the amount invested. As compensation therefor, FSI may retain the service fee
paid by the Fund with respect to such shares for the first year after purchase.
Dealers will become eligible for additional service fees with respect to such
shares commencing in the thirteenth month following purchase. Except in the case
of the first year service fee, no service fee will be paid to any securities
dealer who is the holder or dealer of record for investors who own Class B
shares having an aggregate net asset value of less than $750,000 or such other
amount as may be determined from time to time FSI. FSI, however, may waive this
minimum amount requirement from time to time if the dealer satisfies certain
criteria. Dealers may from time to time be required to meet certain other
criteria in order to receive service fees. FSI or its affiliates are entitled to
retain all service fees payable under the Class B Distribution Plan for which
there is no dealer of record or for which qualification standards have not been
met as partial consideration for personal services and/or account maintenance
services performed by FSI or its affiliates for shareholder accounts.
The purpose of distribution payments to FSI under the Class B Distribution Plan
is to compensate FSI for its distribution services to the Fund. FSI pays for
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. The Class B Distribution Plan also provides that FSI will receive
all CDSCs attributable to Class B shares (see "Distribution Plan" and
"Purchases" in the Prospectus).
During the period from July 22, 1994 (commencement of the Fund's investment
operations) to August 31, 1994, the Fund incurred expenses of $22,463 (equal to
1.0% of its average daily net assets attributable to Class B shares) relating to
the distribution and servicing of its Class B shares, of which FSI received
$16,847 (0.75% of the Fund's average daily net assets attributable to Class B
shares) and securities dealers of the Fund and certain banks and other financial
institutions received $5,616 (0.25% of the Fund's average daily net assets
attributable to Class B shares).
CLASS C DISTRIBUTION PLAN: The Distribution Plan relating to Class C shares (the
"Class C Distribution Plan") provides that the Fund will pay FSI a distribution
fee of up to 0.75% per annum of the Fund's average daily net assets attributable
to Class C shares and will annually pay FSI a service fee of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class C shares
(which FSI will in turn pay to securities dealers which enter into a sales
agreement with FSI at a rate of up to 0.25% per annum of the Fund's daily net
assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record).
The distribution/service fees attributable to Class C shares are designed to
permit an investor to purchase such shares through a broker-dealer without the
assessment of an initial sales charge or a CDSC while allowing FSI to compensate
broker-dealers in connection with the sale of such shares.
The service fee is intended to be additional consideration for all personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. FSI or its affiliates are entitled to retain all service fees
payable under the Class C Distribution Plan with respect to accounts for which
there is no dealer of record as partial consideration for personal services
and/or account maintenance services performed by FSI or its affiliates for
shareholder accounts.
The purpose of the distribution payments to FSI under the Class C Distribution
Plan is to compensate FSI for its distribution services to the Fund.
Distribution payments under the Plan will be used by FSI to pay securities
dealers a distribution fee in an amount equal on an annual basis to 0.75% of the
Fund's average daily net assets attributable to Class C shares owned by
investors for whom that securities dealer is the holder or dealer of record.
(Therefore, the total amount of distribution/service fees paid to a dealer on an
annual basis is 1.00% of the Fund's average daily net assets attributable to
Class C shares owned by investors for whom the securities dealer is the holder
or dealer of record.) FSI also pays 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 compensation of personnel and all costs of travel,
office expense and equipment. Since FSI's compensation is not directly tied to
its expenses, the amount of compensation received by FSI during any year may be
more or less than its actual expenses. For this reason, this type of
distribution fee arrangement is characterized by the staff of the SEC as being
of the "compensation" variety. However, the Fund is not liable for any expenses
incurred by FSI in excess of the amount of compensation it receives. Certain
banks and other financial institutions that have agency agreements with FSI will
receive agency transaction and service fees that are the same as distribution
and service fees to dealers. Fees payable under the Class C Distribution Plan
are charged to, and therefore reduce, income allocated to Class C shares.
During the period from July 22, 1994 (commencement of the Fund's investment
operations) to August 31, 1994, the Fund incurred expenses of $2,650 (equal to
1.0% of its average daily
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net assets attributable to Class C shares) relating to the distribution and
servicing of its Class C shares, all of which was paid by FSI to securities
dealers of the Fund and certain banks and other financial institutions.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1995, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties to such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and FSI each shall provide
to the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by a vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or FSI and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment or any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. None of the Distribution Plans may be amended to
increase materially the amount of permitted distribution expenses without the
approval of a majority of the respective class of the Fund's shares (as defined
in "Investment Restrictions") or may be materially amended in any case without a
vote of the Trustees and a majority of the Distribution Plan Qualified Trustees.
The selection and nomination of Distribution Plan Qualified Trustees shall be
committed to the discretion of the non-interested Trustees then in office. No
Trustee who is not an "interested person" has any financial interest in any of
the Distribution Plans or in any related agreement.
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 two 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
three classes of shares of the Fund (Class A, Class B and Class C 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, the
shareholders of each class of the Fund are entitled to share pro rata in the net
assets of the Fund allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue additional series
or classes of shares, in which case the shares of each series or class would
participate equally in the earnings, dividends and assets of the particular
series or class.
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, shareholders
have the right to remove one or more Trustees in accordance with the provisions
of Section 16(c) of the 1940 Act. No material amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. Shares have no pre-emptive or conversion rights
(except as set forth in "Purchases -- Conversion of Class B Shares" in the
Prospectus). Shares are fully paid and non-assessable. The Trust may enter into
a merger or consolidation, or sell all or substantially all of its assets (or
all or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust and its shareholders and the Trustees, officers,
employees and agents of the Trust covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful
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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 is the Fund's independent auditors, providing audit services,
tax return preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Fund's audited Financial Statements, consisting of the Portfolio of
Investments at August 31, 1994, the Statement of Assets and Liabilities at
August 31, 1994, the Statement of Operations for the period ended August 31,
1994, the Statement of Changes in Net Assets for the period ended August 31,
1994, the Financial Highlights table for the period from July 22, 1994 to August
31, 1994, and Notes to Financial Statements, each of which is included in the
Annual Report to shareholders of the Fund, are incorporated by reference into
this Statement of Additional Information. A copy of the Annual Report
accompanies this Statement of Additional Information.
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INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Financial Services, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
89 South Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO]
MFS[R] WORLD ASSET
ALLOCATION FUND[SM]
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
MAA-13 12/94/.5M 88/288/388
