<PAGE> 1
As filed with the Securities and Exchange Commission on December 29, 1995
1933 Act File No. 33-7638
1940 Act File No. 811-4777
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 22
AND REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24
MFS SERIES TRUST I
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company, 500 Boylston
Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on [date] pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice for its fiscal year ended
August 31, 1995 on October 30, 1995.
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BEING REGISTERED BEING REGISTERED PER SHARE PRICE FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial interest 41,376,162 $17.18 $290,000 $100
(without par value)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Registrant elects to calculate the maximum aggregate offering price
pursuant to Rule 24(e)-2. 895,106,482 shares were redeemed during
the fiscal year ended August 31, 1995. 853,747,200 shares were used
for reductions pursuant to paragraph (c) of Rule 24(f)-2 during the
current fiscal year. 41,359,282 shares is the amount of redeemed
shares used for reduction in this Amendment. Pursuant to Rule 457(d)
under the Securities Act of 1933, the maximum public offering price
of $17.18 per share (for Class C shares of MFS Asset Allocation Fund)
on December 15, 1995 is the price used as the basis for calculating
the registration fee. While no fee is required for the 41,359,282
shares, the Registrant has elected to register, for $100, an
additional $290,000 of shares (16,880 shares at $17.18 per share).
================================================================================
<PAGE> 2
MFS SERIES TRUST I
------------------
MFS[REGISTERED TRADEMARK] MANAGED SECTORS FUND
MFS[REGISTERED TRADEMARK] CASH RESERVE FUND
MFS[REGISTERED TRADEMARK] WORLD ASSET ALLOCATION FUND
CROSS REFERENCE SHEET
----------------------
(Pursuant to Rule 404 showing location in Prospectus and/or Statement of
Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ---------------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a) Condensed Financial Information *
(b) * *
(c) Information Concerning Shares of the *
the Fund - Performance Information
(d) Condensed Financial Information *
4 (a) Front Cover Page; the Fund; Investment *
Objective and Policies
(b), (c) Investment Objective and Policies *
5 (a) The Funds; Management of the Fund - *
Investment Adviser
(b) Front Cover Page; Management of the *
Fund - Investment Adviser; Back
Cover Page
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ---------------------------
<S> <C> <C>
(c) Management of the Fund - Investment *
Adviser
(d) Management of the Fund - Investment *
Adviser - Back Cover Page
(e) Management of the Fund - Back *
Cover Page
(f) Expense Summary *
(g) Information Concerning Shares of the *
Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of the *
Fund - Description of Shares, Voting
Rights and Liabilities; Information
Concerning Shares of the Fund -
Redemptions and Repurchases;
Information Concerning Shares of
the Fund - Purchases; Information
Concerning Shares of the Funds -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of the *
Fund - Distributions; Shareholder
Services - Distribution Options
(g) Information Concerning Shares of the *
Fund - Tax Status; Information
Concerning Shares of the Fund
Distributions
7 (a) Front Cover Page; Management of the *
Fund - Distributor; Back Cover
Page
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ---------------------------
<S> <C> <C>
(b) Information Concerning Shares of the *
Fund - Purchases; Information
Concerning Shares of the Fund -
Net Asset Value
(c) Information Concerning Shares of the *
Fund - Purchases; Information
Concerning Shares of the Fund -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Fund -
Purchases; Shareholder Services
(e) Information Concerning Shares of the *
Fund - Distribution Plans;
Information Concerning Shares of
the Fund - Purchases; Expense
Summary
(f) Information Concerning Shares of the *
Fund - Distribution Plans
8 (a) Information Concerning Shares of the *
Fund - Redemptions and Repurchases;
Information Concerning Shares of the
Fund - Purchases; Shareholder Services
(b), (c), (d) Information Concerning Shares of the *
Fund - Redemptions and Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ---------------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objective,
Policies and Restrictions
(d) * *
14 (a), (b) * Management of the Fund -
Trustees and Officers
(c) * Management of the Fund -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Fund -
Trustees and Officers
16 (a) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Fund - Management of the Fund -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Fund -
Investment Adviser
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares of Distribution Plans
the Fund - Distribution Plans
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ---------------------------
<S> <C> <C>
(g) * *
(h) * Management of the Fund -
Custodian; Independent
Auditors and Financial
Statements; Back Cover
Page
(i) * Management of the Fund -
Shareholder Servicing Agent
17 (a), (b), (c) * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares of Description of Shares, Voting
the Fund - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares of Shareholder Services
the Fund - Purchases
(b) Information Concerning Shares of Determination of Net Asset
the Fund - Net Asset Value; Value and Performance -
Information Concerning Shares of Net Asset Value
the Fund - Purchases
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Fund -
Distributor; Distribution
Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF
ITEM NUMBER ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION
- ----------------- ------------------ ----------------------------
<S> <C> <C>
23 * Independent Auditors and
Financial Statements
<FN>
- --------------------------------
* Not Applicable
** Contained in Annual Report
</TABLE>
<PAGE> 8
PROSPECTUS
MFS[R] MANAGED JANUARY 1, 1996
SECTORS FUND CLASS A SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds[R]) CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Expense Summary................................................................. 2
2. The Fund........................................................................ 3
3. Condensed Financial Information................................................. 4
4. Investment Objective and Policies............................................... 5
5. Management of the Fund.......................................................... 13
6. Information Concerning Shares of the Fund....................................... 15
Purchases.................................................................. 15
Exchanges.................................................................. 18
Redemptions and Repurchases................................................ 19
Distribution Plans......................................................... 21
Distributions.............................................................. 22
Tax Status................................................................. 22
Net Asset Value............................................................ 23
Description of Shares, Voting Rights and Liabilities....................... 23
Performance Information.................................................... 24
7. Shareholder Services............................................................ 24
APPENDIX A...................................................................... A-1
APPENDIX B...................................................................... B-1
APPENDIX C...................................................................... C-1
APPENDIX D...................................................................... D-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MANAGED SECTORS FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of MFS Managed Sectors Fund (the "Fund") is to provide
capital appreciation by varying the weighting of its portfolio among 13 equity
sectors. The Fund is a non-diversified series of MFS Series Trust I (the
"Trust"), an open-end management investment company. The Fund is intended for
investors who understand and are willing to accept the risks entailed in seeking
long-term growth of capital (see "Investment Objective and Policies"). The
minimum initial investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information (the "SAI"), dated January 1, 1996, as
amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 26 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 9
<TABLE>
1. EXPENSE SUMMARY
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price)............................... 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of
original
purchase price or redemption proceeds, as applicable)............. See Below(1) 4.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees..................................................... 0.75% 0.75%
Rule 12b-1 Fees..................................................... 0.35%(2) 1.00%(3)
Other Expenses...................................................... 0.36% 0.43%
---- ----
Total Operating Expenses ........................................... 1.46% 2.18%
<FN>
- ---------------
(1) Purchases of $1 million or more are not subject to an initial sales charge;
however, a contingent deferred sales charge (a "CDSC") of 1% will be imposed
on such purchases in the event of certain redemption transactions within 12
months following such purchases (see "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)
0.35% per annum of the average daily net assets attributable to the Class A
shares (see "Distribution Plans"). Distribution expenses paid under this
Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(3) The Fund has adopted a Distribution Plan for its Class B shares in
accordance with Rule 12b-1 under the 1940 Act, which provides that it will
pay distribution/service fees aggregating up to 1.00% per annum of the
average net assets attributable to the Class B shares (see "Distribution
Plans"). Distribution expenses paid under this Plan, together with any CDSC,
may cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge.
</TABLE>
<TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
PERIOD CLASS A CLASS B
------ ------- ---------------
<S> <C> <C> <C>
(1)
1 year........................................................ $ 72 $ 62 $ 22
3 years....................................................... 101 98 68
5 years....................................................... 133 137 117
10 years....................................................... 222 233(2) 233(2)
<FN>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plans".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2
<PAGE> 10
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 on July 30, 1986. The Trust presently consists of
eight series of shares (each of which are offered through a separate prospectus,
except that five series are offered through a single prospectus), each of which
represents a portfolio with separate investment objectives and policies. Shares
of the Fund are continuously sold to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Two classes of shares of the Fund
currently are offered to the general public. Class A shares are offered at net
asset value plus an initial sales charge (or a CDSC in the case of certain
purchases of $1 million or more) and subject to a Distribution Plan providing
for an annual distribution fee and service fee. Class B shares are offered at
net asset value without an initial sales charge but subject to a CDSC and a
Distribution Plan providing for an annual distribution fee and service fee which
are greater than the Class A distribution fee and service fee. Class B shares
will convert automatically to Class A shares approximately eight years after
purchase.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees are not affiliated with the
Adviser. The selection of investments and the way they are managed depend on the
conditions and trends in the economy and the financial marketplaces. The Fund
also offers to buy back (redeem) its shares from its shareholders at any time at
net asset value, less any applicable CDSC.
3
<PAGE> 11
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors, as experts in accounting and auditing. The Fund's current
independent auditors are Deloitte & Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
CLASS A AND CLASS B SHARES
<CAPTION>
NINE NINE
YEAR MONTHS PERIOD YEAR MONTHS
ENDED ENDED ENDED ENDED ENDED YEAR ENDED NOVEMBER 30,
AUG.31, AUG.31, NOV.30, AUG.31, AUG.31, ------------------------------
1995 1994 1993* 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------- --------
CLASS B
CLASS A -------------------
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of
period................................ $ 13.41 $ 15.50 $ 15.68 $ 13.35 $ 15.49 $ 15.42 $ 13.00 $ 9.23
-------- -------- -------- -------- -------- -------- -------- --------
Income from investment operations# --
Net investment income (loss)........ $ (0.05) $ (0.03) $ (0.02) $ (0.14) $ (0.10) $ (0.25) $ (0.24) $ (0.12)
-------- -------- -------- -------- -------- -------- -------- --------
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions.............. 3.22 0.77 (0.16) 3.20 0.75 0.94 2.66 3.89
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment operations....... $ 3.17 $ 0.74 $ (0.18) $ 3.06 $ 0.65 $ 0.69 $ 2.42 $ 3.77
-------- -------- -------- -------- -------- -------- -------- --------
Less distributions declared to
shareholders:
From net investment income............ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
From net realized gain on investments
and foreign currency transactions... (1.03) (2.83) -- (0.95) (2.79) (0.62) -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions declared to
shareholders.......................... $ (1.03) $ (2.83) $ -- $ (0.95) $ (2.79) $ (0.62) $ -- $ --
Net asset value -- end of period....... $ 15.55 $ 13.41 $ 15.50 $ 15.46 $ 13.35 $ 15.49 $ 15.42 $ 13.00
======== ======== ======== ======== ======== ======== ======== ========
Total return++......................... 26.12% 5.12%++ (5.99)%+ 25.19% 4.47%++ 4.50% 18.62% 40.85%
-------- -------- -------- -------- -------- -------- -------- --------
Ratios (to average net assets)/
Supplemental data:
Expenses............................ 1.46% 1.52%+ 1.59%+ 2.18% 2.26%+ 2.21% 2.37% 2.44%
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income (loss)........ (0.34)% (0.26)%+ (0.75)%+ (1.06)% (1.01)%+ (1.55)% (1.85)% (1.00)%
-------- -------- -------- -------- -------- -------- -------- --------
Portfolio turnover..................... 115% 76% 106% 115% 76% 106% 22% 59%
-------- -------- -------- -------- -------- -------- -------- --------
Net assets at end of period
(000 omitted)......................... $178,367 $121,498 $136,179 $199,773 $214,055 $232,982 $249,493 $190,232
-------- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
1990 1989 1988 1987**
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of
period................................ $ 11.32 $ 7.86 $ 6.94 $ 6.50
-------- -------- -------- --------
Income from investment operations# --
Net investment income (loss)........ $ (0.03) $ 0.03 $ 0.09 $ 0.03
-------- -------- -------- --------
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions.............. (2.06) 3.51 0.89 0.42
-------- -------- -------- --------
Total from investment operations....... $ (2.09) $ 3.54 $ 0.98 $ 0.45
-------- -------- -------- --------
Less distributions declared to
shareholders:
From net investment income............ $ -- $ (0.08) $ (0.06) $ (0.01)
From net realized gain on investments
and foreign currency transactions... -- -- -- --
-------- -------- -------- --------
Total distributions declared to
shareholders.......................... $ -- $ (0.08) $ (0.06) $ (0.01)
Net asset value -- end of period....... $ 9.23 $ 11.32 $ 7.86 $ 6.94
======== ======== ======== ========
Total return++......................... (18.46)% 45.35% 14.06% 7.47%+
-------- -------- -------- --------
Ratios (to average net assets)/
Supplemental data:
Expenses............................ 2.50% 2.52% 2.31% 2.25%+
-------- -------- -------- --------
Net investment income (loss)........ (0.27)% 0.37% 1.08% 0.09%+
-------- -------- -------- --------
Portfolio turnover..................... 79% 84% 146% 163%
-------- -------- -------- --------
Net assets at end of period
(000 omitted)......................... $152,132 $180,416 $137,311 $134,762
-------- -------- -------- --------
<FN>
- ---------------
* For the period from the commencement of offering of Class A shares, September 20, 1993 to November 30, 1993.
** For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+ Annualized.
++ Not annualized.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
</TABLE>
4
<PAGE> 12
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide capital appreciation. Dividend income, if any, is a
consideration incidental to the Fund's objective of capital appreciation.
The Fund seeks to achieve its investment objective by varying the weighting of
its portfolio among 13 equity sectors. The 13 sectors from among which the Fund
chooses its investments are: autos and housing; basic materials and consumer
staples; defense and aerospace; energy; financial services; health care;
industrial goods and services; leisure; retailing; technology; transportation;
utilities; and foreign securities. (For a description of the scope of each of
these industry sectors, see Appendix B to this Prospectus.) Certain sectors may
overlap; for example, the defense and aerospace sector and the technology sector
both include companies involved in the development of computer-related products.
Therefore, securities of certain companies or industries may simultaneously be
held in more than one industry sector. Occasionally, the number of sectors may
be increased if deemed appropriate by the Adviser due to the lack of desirable,
concentrated investment opportunities at a particular time.
In response to changes or anticipated changes in the general economy or within
one or more particular industry sectors, the Fund may increase, decrease or
eliminate entirely a particular sector's representation in the Fund's portfolio;
similarly, the Fund may acquire securities of a sector not then represented in
its portfolio. A sector or stock of a particular company will be added to or
eliminated from the Fund's portfolio based upon such factors as such sector's or
such company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
the Fund expects to remove such stocks from its portfolio. Any one sector or
cash may comprise up to 50% of the Fund's portfolio. The Fund has registered as
a "non-diversified" investment company so that more than 5% of the Fund's assets
may be invested (subject to the tax limitations described below) in the
securities of any one or more issuers. As a result of its non-diversified
status, the Fund's shares may be more susceptible to adverse changes in the
value of securities of a particular company than would be the shares of a
diversified investment company. Similarly, due to the Fund's policy of generally
concentrating in no more than five industry sectors at any one time, some of
which may overlap, the value of the Fund's shares may be more susceptible to any
single economic, political or regulatory occurrence than would be the shares of
an investment company without a policy of concentration in particular industry
sectors.
While the Fund's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities such as non-convertible and
convertible bonds, convertible preferred stocks and warrants to purchase common
stock, when relative values make such investments appear attractive either as
individual issues or as types of securities in certain economic environments
(see "Risk Factors Regarding Lower Rated Securities" and "Additional Risk
Factors" below). The non-convertible bonds invested in by the Fund may include
(i) obligations issued or guaranteed by the U.S. Treasury or U.S. Government
agencies, authorities or instrumentalities, and (ii) obligations of the U.S.
Treasury that have been issued without interest coupons or stripped of their
unmatured interest coupons, interest coupons that have been stripped from such
debt obligations, and receipts and certificates for such stripped debt
obligations and stripped coupons. U.S. Government securities also include
interests in trusts or other entities representing interests in obligations that
are issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. The Fund may invest in foreign securities, including emerging
market securities, and hold foreign currency (see "Foreign Securities" and
"Emerging Market Securities" below). The Fund may also enter into forward
foreign currency exchange contracts for the purchase or sale of foreign currency
for hedging purposes and non-hedging purposes, including transactions entered
into for the purpose of profiting from anticipated changes in foreign currency
exchange rates, as well as options on foreign currencies (see "Forward Contracts
on Foreign Currency" and "Options on Foreign Currencies" below).
The Fund may invest in corporate asset-backed securities (see "Corporate
Asset-Backed Securities" below). The Fund may write covered call and put options
and purchase call and put options on securities and stock indexes in an effort
to increase current income and for hedging purposes (see "Options" below). The
Fund may also purchase and sell stock index and interest rate futures contracts
and may write and purchase options thereon for hedging purposes and for
non-hedging purposes, subject to
5
<PAGE> 13
applicable law (see "Futures Contracts and Options on Futures Contracts" below).
In addition, the Fund may purchase portfolio securities on a "when-issued" or on
a "forward delivery" basis (see "When-Issued Securities" below).
Subject to tax requirements, portfolio changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss.
FIXED INCOME SECURITIES: When and if available, the Fund may purchase fixed
income securities at a discount from face value. However, the Fund does not
intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive.
FOREIGN SECURITIES: The Fund may also invest in foreign securities, which may be
traded on foreign exchanges. The Fund may invest up to 50% (and expects
generally to invest between 0% and 25%) of its total assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts ("ADRs")). Investing in foreign securities or on foreign
exchanges may present a greater degree of risk than investing in domestic
issuers. These risks include changes in currency rates, exchange control
regulations, governmental administration, economic or monetary policy (in this
country or abroad), war or expropriation. In particular, the dollar value of
portfolio securities of non-U.S. issuers fluctuates with changes in market and
economic conditions abroad and with changes in relative currency values (when
the value of the dollar increases as compared to a foreign currency, the dollar
value of a foreign-denominated security decreases, and vice versa). 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 accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including confiscatory
taxation and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods. Therefore, an investment in
shares of the Fund may be subject to a greater degree of risk than investments
in other investment companies which invest exclusively in domestic securities.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also invest in ADRs which are
certificates issued by a U.S. depositary (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. Because ADRs trade on United States securities
exchanges, the Adviser does not treat them as foreign securities. However, they
are subject to many of the risks of foreign securities (described above) such as
changes in exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's investment objective and
policies and its ability to invest in foreign securities, the Fund may invest in
securities of private issuers or governments located in emerging 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). For these purposes, 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;
or (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.
RISK FACTORS REGARDING LOWER RATED SECURITIES: The Fund may invest to a limited
extent in lower rated fixed income securities or comparable unrated securities.
Investments in such securities while generally providing greater income and
opportunity for gain than investments in higher rated securities, usually entail
greater risk of principal and income (including the possibility of default or
bankruptcy of the issuers of such securities), and involve greater volatility of
price (especially during periods of economic uncertainty or change) than
investments in higher rated securities and because yields may vary over time, no
specified level of income can ever be assured. In particular, securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or
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<PAGE> 14
BBB by Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service,
Inc. ("Fitch") or comparable unrated securities (commonly known as "junk bonds")
are considered speculative. For a description of these ratings, see Appendix C
to this Prospectus. These lower rated high yielding fixed income securities
generally tend to reflect 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 fixed income securities are also affected by changes in interest
rates). 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. Changes
in the value of securities subsequent to their acquisition will not affect cash
income or yield to maturity to the Fund but will be reflected in the net asset
value of shares of the Fund. 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 at their fair value to meet redemption requests or to
respond to changes in the market. No minimum rating standard is required by the
Fund. To the extent the Fund invests in these lower rated fixed income
securities, the achievement of its investment objective may be more dependent on
the Adviser's own credit analysis than in the case of a fund investing in higher
quality bonds. While the Adviser may refer to ratings issued by established
credit rating agencies, it is not a policy of the Fund to rely exclusively on
ratings issued by these agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or by Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. Government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
dividends or interest on the securities loaned and would also receive either
interest (through investment of cash collateral) or a fee (if the collateral is
U S. Government securities).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement, the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, the Fund has adopted certain procedures which are
intended to minimize any such risk.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, the Fund will
take delivery of such securities. In general, the Fund does not pay for the
securities until received and does not start earning interest
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<PAGE> 15
on the obligations until the contractual settlement date. While awaiting
delivery of the obligations purchased on such bases, the Fund will establish a
segregated account consisting of cash, short-term money market instruments or
high quality debt securities equal to the amount of the commitments to purchase
"when-issued" securities. See the SAI for additional information regarding
"when-issued" securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, 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 decreasing the level of liquidity 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 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.
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 SAI for further
information on these securities.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS -- The Fund may enter
into transactions in options, futures and forward contracts on a variety of
instruments and indexes, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross income.
The types of instruments to be purchased and sold by the Fund are described in
the SAI, which should be read in conjunction with the following section. In
addition, the SAI contains a further discussion of the nature of the
transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options
and purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or to
protect the values 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 the portfolio security underlying
the option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Fund's position, the option may be exercised and the Fund will be required
to purchase or sell the underlying security at a disadvantageous price, 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.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds
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<PAGE> 16
the exercise price of the call. However, the Fund retains the risk of
depreciation in value of securities on which it has written call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations 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 premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices. The Fund may write options
on stock indices for the purpose of increasing its gross income and 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 AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS: The Fund may enter into interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, futures contracts on
indices and foreign currency futures contracts are collectively referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect the
Fund's current or intended stock investments from broad fluctuations in stock
prices, and foreign currency futures contracts are purchased or sold to attempt
to hedge against the effects of exchange rate changes on the Fund's current or
intended investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result of
a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the adverse effects of such changes may be offset, in whole or
part, by gains on the sale of Futures Contracts. Conversely, the increased cost
of portfolio securities to be acquired, caused by a general rise in the stock
market, a general decline in interest rates or a rise in the dollar value of
foreign currencies, may be offset, in whole or part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and it will be required to make and
maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options to buy or
sell interest rate futures contracts and options on stock index futures
contracts. (Unless otherwise specified, options on interest rate futures
contracts and options on stock index futures contracts are collectively referred
to as "Options on Futures Contracts.") Such investment strategies will be used
for hedging and non-hedging purposes, subject to applicable law. Put and call
Options on Futures Contracts may be traded by the
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<PAGE> 17
Fund in order to protect against declines in the values of portfolio securities
or against increases in the cost of securities to be acquired. Purchases of
Options on Futures Contracts may present less risk in hedging the 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 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. In addition, if an option is exercised, the Fund
may suffer a loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY: The Fund may enter into forward foreign
currency exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date at a price set at the time of the contract (a
"Forward Contract"). The Fund will enter into Forward Contracts for hedging and
non-hedging purposes including transactions entered into for the purpose of
profiting from anticipated changes in foreign currency exchange rates.
Transactions in Forward Contracts entered into for hedging purposes may 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.
The Fund may also enter into Forward Contracts for "cross hedging" purposes,
e.g., the purchase or sale of a Forward Contract on one type of currency as a
hedge against adverse fluctuations in the value of a second type of currency. 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. 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. Such transactions, however, may be
considered speculative and could involve significant risk of loss, as set forth
below. The Fund has established procedures consistent with statements of the
Securities and Exchange Commission (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.
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 the Futures and Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
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 could 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 plus related transaction costs. As in
the case of Forward Contracts, certain options on foreign currencies are traded
over-the-counter and involve risks which may not be present in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS:
Although the Fund will enter into certain transactions in Futures Contracts,
Options on Futures Contracts, Forward Contracts and options for hedging
purposes, such transactions do involve certain risks. For example, a lack of
correlation between the index or instrument underlying an option, Futures
Contract or Forward Contract and the assets being hedged, or unexpected adverse
price movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. 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.
As noted, the Fund may also enter into transactions in such instruments (except
for options on foreign currencies) for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater risk.
In particular, in entering into such transactions,
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<PAGE> 18
the Fund may experience losses which are not offset by gains on other portfolio
positions, thereby reducing its gross income. In addition, the markets for such
instruments may be extremely volatile from time to time, as discussed in the
SAI, which could increase the risks incurred by the Fund in entering into such
transactions.
Transactions in options may be entered into on U.S. 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 U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES: During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash 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. Government or any of its agencies, authorities
or instrumentalities and related repurchase agreements. See Appendix D to this
Prospectus for a description of certain short-term obligations.
The investment objective and policies discussed above may be changed without
shareholder approval.
ADDITIONAL RISK FACTORS
The net asset value of the shares of an open-end investment company which may
invest to a limited extent in fixed income securities changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
fixed income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed income portfolio can be expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of the Fund, such changes will not
affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to the
income received by the Fund from its investments, which would in any case be
reduced by the Fund's expenses before it is distributed to shareholders.
In addition, the use of options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may result in the
loss of principal, particularly where such instruments are traded for other than
hedging purposes (e.g., to enhance current yield).
The portfolio of the Fund is aggressively managed and, therefore, the value of
its shares is subject to greater fluctuation and investments in its shares
involve the assumption of a higher degree of risk than would be the case with an
investment in a conservative equity fund or a growth fund investing entirely in
proven growth equities.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Fund
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<PAGE> 19
may promptly convert such currencies into dollars at the then-current exchange
rate. Under certain circumstances, however, such as where the Adviser believes
that the applicable exchange rate is unfavorable at the time the currencies are
received or the Adviser anticipates, for any other reason, that the exchange
rate will improve, the Fund may hold such currencies for an indefinite period of
time.
In addition, the Fund may be required to receive delivery of the foreign
currency underlying forward foreign currency 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. The Fund may
also hold foreign currency in anticipation of purchasing foreign securities. The
Fund may also elect to take delivery of the currencies underlying options or
forward contracts if, in the judgment of the Adviser, it is in the best interest
of the Fund to do so. In such instances as well, the Fund may promptly convert
the foreign currencies to dollars at the then-current exchange rate, or may hold
such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, 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 reduce any profits or increase any losses sustained by the
Fund from the sale or redemption of securities, and could reduce the dollar
value of interest of securities, and could reduce the dollar value of interest
or dividend payments received. In addition, the holding of currencies could
adversely affect the Fund's profit or loss on currency options or forward
contracts, as well as its hedging strategies.
Costs may be incurred in connection with conversions between various currencies.
Foreign brokerage commissions are generally higher than in the United States and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. See the SAI for further
discussion of foreign securities and the holding of foreign currency as well as
the associated risks.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Fund due to subsequent
declines in value of the portfolio security, a decrease in the level of
liquidity in the Fund's portfolio, or, if the Fund has entered into a contract
to sell the security, possible liability to the purchaser. Certain markets may
require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economics. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economics of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected
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<PAGE> 20
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.
The Fund has registered as a "non-diversified" investment company. As a result,
the Fund is limited as to the percentage of its assets that may be invested in
the securities of any one issuer only by its own investment restrictions and the
diversification requirements of the Internal Revenue Code of 1986, as amended
(the "Code"). U.S. Government securities are not subject to any investment
limitation. Since the Fund may invest a relatively high percentage of its assets
in the securities of a limited number of issuers, the Fund may be more
susceptible to any single economic, political or regulatory occurrence.
Given the above average investment risk inherent in the Fund, investment in
shares of the Fund should not be considered a complete investment program and
may not be appropriate for all investors.
PORTFOLIO TRADING
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a portion
of the Fund's operating expenses (e.g., fees charged by the custodian of the
Fund's assets). For the fiscal year ended August 31, 1995, the Fund had a
portfolio turnover rate in excess of 100%. 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 lesser portfolio turnover rate. For a further discussion
of portfolio trading, see the SAI.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of their shares
will vary as the aggregate value of the Fund's portfolio securities increases or
decreases. Moreover, any dividends the Fund pays will increase or decrease in
relation to the income received from its investments.
------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). 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. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Kenneth J. Enright, a Vice President of
the Adviser, has been the Fund's portfolio manager since September 1, 1993. Mr.
Enright has been employed by the Adviser since 1986. 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, in an amount equal to 0.75% of the Fund's average daily net
assets for its then-current fiscal year.
For the Fund's fiscal year ended August 31, 1995, MFS received management fees
under the Advisory Agreement of $2,505,884 (0.75% of the Fund's average daily
net assets).
13
<PAGE> 21
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS Institutional 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 various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., also provide investment
advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $41.5 billion on behalf of approximately 1.8 million investor
accounts as of November 30, 1995. As of such date, the MFS organization managed
approximately $17.3 billion of assets invested in equity securities and
approximately $20.4 billion of assets invested in fixed income securities.
Approximately $3.3 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.), which in
turn is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D.
Scott, John 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 the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James R.
Bordewick, Jr. and James O. Yost, all of whom are officers of MFS, are officers
of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypothekenund Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, 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,
certain dividend disbursing agency and other services for the Fund.
14
<PAGE> 22
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at the public offering price through any
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
The Fund offers two classes of shares (Class A and Class B shares) which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
<TABLE>
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF: DEALER ALLOWANCE
------------------------------- AS A PERCENTAGE
OFFERING NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................................ 5.75% 6.10% 5.00%
$50,000 but 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 will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following two circumstances, Class A shares are also offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that either
(a) the employer has at least 25 employees or (b) the aggregate purchases
by the retirement plan of Class A shares of the MFS Funds will be in an
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
In the case of such purchases, MFD will pay a commission to dealers as follows:
1% 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 the period
with respect to such account. In addition, with respect to sales to retirement
plans under the second circumstance described above, MFD may pay a commission,
on sales in excess of $5 million to certain retirement plans, of 1% to certain
dealers which, at MFD's invitation, enter into an agreement with MFD in which
the dealer agrees to return any commission
15
<PAGE> 23
paid to it on the sale (or on a pro rata portion thereof) if the shareholder
redeems his or her shares within a period of time after purchase as specified by
MFD.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or
16
<PAGE> 24
opinion is not available. In such event, Class B shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). The Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, for example, when
such purchase is contrary to the best interests of the Fund's other shareholders
or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
17
<PAGE> 25
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange
18
<PAGE> 26
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will usually occur on that day if all the requirements set
forth above have been complied with at that time and subject to the Fund's right
to reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. A shareholder should read the
prospectus of the other MFS Fund and consider the differences in objectives,
policies and restrictions 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. Special procedures, privileges and
restrictions with respect to exchanges may apply to market timers who enter into
an agreement with MFD, as set forth in such agreement. See
"Purchases -- General -- Right to Reject Purchase Orders/Market Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or a
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described
19
<PAGE> 27
in this section, proceeds of a redemption are normally mailed or wired on the
next business day following the date of receipt of the order for redemption. The
Shareholder Servicing Agent may be liable for any losses resulting from
unauthorized telephone transactions if it does not follow reasonable procedures
designated to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A 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 purchases by
certain retirement plans of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC and (ii) the
amount of redemption equal to the then-current value of Reinvested Shares is not
subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 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 SAI
regarding this privilege.
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<PAGE> 28
IN-KIND DISTRIBUTIONS. Subject to 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 received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plans"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class B
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under each Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expense incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
Distribution Plans have substantially identical provisions with respect to their
operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
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<PAGE> 29
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). See
"Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under the Class A Distribution Plan
do not exceed 0.35% per annum of the average daily net assets of the Fund
attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value without
an initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.35% and 1.00%
per annum, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income for any
calendar year to its shareholders as dividends on an annual basis. In
determining the net investment income available for distributions, the Fund may
rely on projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period. The Fund may make
one or more distributions during the calendar year to its shareholders from any
long-term capital gains, and may also make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. See "Tax Status" below and "Shareholder Services -- Distribution Options."
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B shares because expenses
attributable to Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund has elected to be treated and 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 not expected that the Fund will
be required to pay any federal income or excise taxes, although foreign-source
income earned 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 the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or in additional shares. A portion
of the dividends received from the Fund (but none of the Fund's capital gain
distributions) may qualify for the dividends received deduction for
22
<PAGE> 30
corporations. Shortly after the end of each calendar year, each shareholder will
receive information for tax purposes on the Fund's dividends and distributions
for that 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.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments that have been subject to 30%
withholding. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on such Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets and dividing the difference by the number of outstanding shares of the
class outstanding. Assets in the Fund's portfolio are valued on the basis of
their current values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value of each class of shares is
effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of eight series of the Trust, has two classes of shares, entitled
Class A and Class B 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 shares of
that particular series. Shareholders are entitled to one vote for each share
held and shares of each series would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but shares
of all series would vote together in the election of Trustees and ratification
of selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under its Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above under "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a
23
<PAGE> 31
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance (e.g., fidelity
bonding and errors and omissions insurance) existed and the Trust itself was
unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in a class of shares of the Fund made at the maximum public
offering price of shares of that class with all distributions reinvested and
which, if quoted for periods of six years or less, will give effect to the
imposition of the CDSC assessed upon 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. The Fund's
total rate of return quotations are based on historical performance and are not
intended to indicate future performance. 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 total rate of return, see the SAI. For further
information about the Fund's performance for the fiscal year ended August 31,
1995, please see the Fund's Annual Report. A copy of the Annual Report may be
obtained without charge by contacting the Shareholder Servicing Agent (see back
cover for address and phone number). In addition to information provided in
shareholder reports, the Fund may, in its discretion, from time to time, make a
list of all or a portion of its holdings available to investors upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividends and other distributions reinvested in additional shares. Any request
to change a distribution option must be received by the Shareholder Servicing
Agent by the record date for a dividend or distribution in order to be effective
for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of
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<PAGE> 32
paper work. The programs involve no extra charge to shareholders (other than a
sales charge in the case of certain Class A share purchases) and may be changed
or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of all classes of all MFS Funds
or the MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("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 participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder if such fund is available for
sale. Under the Automatic Exchange Plan, exchanges of at least $50 each may be
made to up to four different funds. A shareholder should consider the objectives
and policies of a fund and review its prospectus before electing to exchange
money into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged, and
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining 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 -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated January 1, 1996, contains more detailed information about
the Fund, including, but not limited to, information related to (i) investment
objective, policies and restrictions, (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, (vii) the method used to calculate total rate of return
quotations and (viii) various services and privileges provided by the Fund for
the benefit of its shareholders, including additional information with respect
to the exchange privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
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<PAGE> 35
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA Owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. (the "Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
A-2
<PAGE> 36
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
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<PAGE> 37
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 38
APPENDIX B
DESCRIPTION OF INDUSTRY SECTORS
The Fund seeks to achieve its investment objective by varying the
weighting of its portfolio among the following 13 industry sectors (i.e.,
industry groupings).
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design,
production and sale of automobiles, automobile parts, mobile homes and
related products, and in the design, construction, renovation and
refurbishing of residential dwellings. The value of automobile industry
securities is affected by foreign competition, consumer confidence, consumer
debt and installment loan rates. The housing construction industry is
affected by the level of consumer confidence, consumer debt, mortgage rates
and the inflation outlook.
(2) BASIC MATERIALS AND CONSUMER STAPLES SECTOR: companies engaged in
providing consumer goods and services such as: the design, processing,
production and storage of packaged, canned, bottled and frozen foods and
beverages; and the design, production and sale of home furnishings,
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the permissibility
of using various food additives and production methods, which regulations
could affect company profitability. Also, the success of food- and
fashion-related products may be strongly affected by fads, marketing
campaigns and other factors affecting supply and demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research,
manufacture or sale of products or services related to the defense and
aerospace industries, such as: air transport; data processing or
computer-related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch vehicles
and spacecraft; units for guidance, propulsion and control of flight
vehicles; and airborne and ground-based equipment essential to the test,
operation and maintenance of flight vehicles. Since such companies rely
largely on U.S. (and other) governmental demand for their products and
services, their financial conditions are heavily influenced by federal (and
other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geo-thermal, oil shale and solar
sources of energy. The business activities of companies comprising this
sector may include: production, generation, transmission, marketing, control
or measurement of energy or energy fuels; provision of component parts or
services to companies engaged in such activities; energy research or
experimentation; environmental activities related to the solution of energy
problems; and activities resulting from technological advances or research
discoveries in the energy field. The value of such companies' securities
varies based on the price and supply of energy fuels and may be affected by
events relating to international politics, energy conservation, the success
of exploration projects, and the tax and other regulatory policies of
various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services to
consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities
brokerage companies; leasing companies; and firms in all segments of the
insurance field (such as multiline, property and casualty, and life
insurance). These kinds of companies are subject to extensive governmental
regulations, some of which regulations are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as a
result of volatile interest rates and general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture or
sale of products or services used in connection with health care or
medicine, such as: pharmaceutical companies; firms that design, manufacture,
sell or supply medical, dental and optical products, hardware or services;
companies involved in biotechnology, medical diagnostic and biochemical
research and development; and companies involved in the operation of health
care facilities. Many of these companies are subject to government
regulation, which could affect the price and availability of their products
and services. Also, products and services in this sector could quickly
become obsolete.
(7) INDUSTRIAL GOODS AND SERVICES SECTOR: companies engaged in the
research, development, manufacture or marketing of products, processes or
services related to the agriculture, chemicals, containers, forest products,
non-ferrous metals, steel and pollution control industries, such as:
synthetic and natural materials, for example, chemicals, plastics,
B-1
<PAGE> 39
fertilizers, gases, fibers, flavorings and fragrances; paper; wood products;
steel and cement. Certain companies in this sector are subject to regulation
by state and federal authorities, which could require alteration or
cessation of production of a product, payment of fines or cleaning of a
disposal site. In addition, since some of the materials and processes used
by these companies involve hazardous components, there are risks associated
with their production, handling and disposal. The risk of product
obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or
distribution of goods or services in the leisure industry, such as:
television and radio broadcast or manufacture; motion pictures and
photography; recordings and musical instruments; publishing; sporting goods,
camping and recreational equipment; sports arenas; toys and games; amusement
and theme parks; travel-related services and airlines; hotels and motels;
fast food and other restaurants; and gaming casinos. Many products produced
by companies in this sector -- for example, video and electronic
games -- may quickly become obsolete.
(9) RETAILING SECTOR: companies engaged in the retail distribution of
home furnishings, food products, clothing, pharmaceuticals, leisure products
and other consumer goods, such as: department stores; supermarkets; and
retail chains specializing in particular items such as shoes, toys or
pharmaceuticals. The value of securities in this sector will fluctuate based
on consumer spending patterns, which depend on inflation and interest rates,
level of consumer debt and seasonal shopping habits. The success or failure
of a particular company in this highly competitive sector will depend on
such company's ability to predict rapidly changing consumer tastes.
(10) TECHNOLOGY SECTOR: companies which are expected to have or develop
products, processes or services which will provide or will benefit
significantly from technological advances and improvements or future
automation trends in the office and factory, such as: semiconductors;
computers and peripheral equipment; scientific instruments; computer
software; telecommunications; and electronic components, instruments and
systems. Such companies are sensitive to foreign competition and import
tariffs. Also, many products produced by companies in this sector may
quickly become obsolete.
(11) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and
trucking firms. Revenues of companies in this sector will be affected by
fluctuations in fuel prices resulting from domestic and international
events, and government regulation of fares.
(12) UTILITIES SECTOR: companies in the public utilities industry and
companies deriving a substantial majority of their revenues through
supplying public utilities such as: companies engaged in the manufacture,
production, generation, transmission and sale of gas and electric energy;
and companies engaged in the communications field, including telephone,
telegraph, satellite, microwave and the provision of other communication
facilities to the public. The gas and electric public utilities industries
are subject to various uncertainties, including the outcome of political
issues concerning the environment, prices of fuel for electric generation,
availability of natural gas, and risks associated with the construction and
operation of nuclear power facilities.
(13) FOREIGN SECTOR: companies whose primary business activity takes
place outside of the United States. The securities of foreign companies
would be heavily influenced by the strength of national economies, inflation
levels and the value of the U.S. dollar versus foreign currencies.
Investments in the Foreign Sector will be subject to certain risks not
generally associated with domestic investments.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
B-2
<PAGE> 40
APPENDIX C
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE
NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, DEBT INSTRUMENTS WITH THE SAME
MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE DEBT INSTRUMENTS 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 risk 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 some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. 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 or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
C-1
<PAGE> 41
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated 'AAA' has the highest rating assigned by S&P'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: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-'rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
C-2
<PAGE> 42
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
C-3
<PAGE> 43
APPENDIX D
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
D-1
<PAGE> 44
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Moody and Fitch's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
D-2
<PAGE> 45
<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-4500
Distributor MFS[R] MANAGED SECTORS FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1996
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
MFS[R] MANAGED SECTORS FUND
500 Boylston Street
Boston, MA 02116
MMS-1 1/96/81M 08/208
</TABLE>
<PAGE> 46
LOGO
<TABLE>
<S> <C>
MFS(R) MANAGED STATEMENT OF
SECTORS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1996
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 14
Trustees.............................................................................. 14
Officers.............................................................................. 15
Investment Adviser.................................................................... 15
Investment Advisory Agreement......................................................... 15
Custodian............................................................................. 16
Shareholder Servicing Agent........................................................... 16
Distributor........................................................................... 16
4. Portfolio Transactions and Brokerage Commissions...................................... 17
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs.................................................... 19
Exchange Privilege.................................................................... 21
Tax-Deferred Retirement Plans......................................................... 21
6. Tax Status............................................................................ 22
7. Distribution Plans.................................................................... 23
8. Determination of Net Asset Value and Performance...................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 27
Appendix A............................................................................ 28
</TABLE>
MFS MANAGED SECTORS FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Fund's Prospectus, dated January 1, 1996. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 47
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Managed Sectors Fund, a
non-diversified series of
MFS Series Trust I (the
"Trust"). The Fund was known
as MFS Lifetime Managed
Sectors Fund and was a
separate open-end
diversified management
company, organized as a
Massachusetts business trust
in 1986 and known as Life-
time Managed Sectors Trust
prior to August 3, 1992. The
Fund became a series of the
Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1996, as
amended or supplemented from
time to time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
The investment objective, policies and techniques are described in the
Prospectus. In addition, certain of the Fund's investment policies are described
in greater detail below.
SECURITIES LENDING
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will 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 cash 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 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 20% of the value of the Fund's total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (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 SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is 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 and any gain would not be tax-exempt. When the
time comes to pay for "when-issued" or "forward delivery" securities, the Fund
will meet its obligations from the then-available cash flow on the sale of
securities, or, although it would not normally expect to do so, from the sale of
the "when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
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
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these securities. The underlying assets (e.g., loans) are also subject to
prepayments which shorten the securities' weighted average life and may lower
their return.
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 on underlying assets to make payments, 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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member firms
(or subsidiaries thereof) of the Exchange, 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, including accrued interest, 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 the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, 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.
FOREIGN SECURITIES
The Fund may invest up to 50% (and expects generally to invest between 0% and
25%) of its total assets in foreign securities which are not traded on a U.S.
exchange (not including American Depositary Receipts). As discussed in the
Prospectus, investing in foreign securities generally presents a greater degree
of risk than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As a
result of its investments in foreign securities, the Fund may receive interest
or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of time. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a direction
adverse to the Fund's position. Such losses could reduce any profits or increase
any losses sustained by the Fund from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depositary (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 depositary which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositaries. Under the terms of most sponsored arrangements,
depositaries agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depositary of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depositary 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
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<PAGE> 49
to the local depositary 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
traded in foreign currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write covered
call and put options and purchase call and put options on securities. Call and
put options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options written by the Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high quality debt securities. Such transactions permit the Fund
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
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 the Fund determines to write will
depend 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. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the Fund's maximum gain
will be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the security
and the exercise price, less related transaction costs. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received, less
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<PAGE> 50
related transaction costs. If the market price of the underlying security
declines or otherwise is below the exercise price, the Fund may elect to close
the position or retain the option until it is exercised, at which time the Fund
will be required to take delivery of the security at the exercise price; the
Fund's return will be the premium received from the put option minus the amount
by which the market price of the security is below the exercise price, which
could result in a loss. Out-of-the-money, at-the-money and in-the-money put
options may be used by the Fund in the same market environments that 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, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and 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 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 the security remains stable and neither the
call nor the put is exercised. In those instances 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, 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 capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Fund solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions 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 purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such increase
occurs, the call option will permit the Fund to purchase the securities at the
exercise price, or to close out the options at a profit. The premium paid for
the call 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 sufficiently, the option may expire worthless to the
Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike options," grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Fund than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for the
purchase of the option may be determined at the termination, rather than the
initiation, of the option. If the premium is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security over the
term of the option and adjustments made to the strike price of the option, and
(ii) the option purchaser may default on its obligation to pay the premium at
the termination of the option.
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. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
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
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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, short-term money market instruments or high quality debt securities in
a segregated account with its custodian. The Fund may cover put options on stock
indices by maintaining cash, short-term money market instruments or high quality
debt securities with a value equal to the exercise price in a segregated account
with its custodian, or by holding a put on the same stock index and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where the
exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by the Fund in cash, short-term money
market instruments or high quality debt securities 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, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index, writing
covered put options on indices will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities of
particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into
interest rate futures contracts, stock index futures contracts and/or foreign
currency futures contracts. (Unless otherwise specified, interest rate futures
contracts, futures contracts on indices and foreign currency futures contracts
are collectively referred to as "Futures Contracts.") Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
is delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the
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Futures Contract fluctuates, making positions in the Futures Contract more or
less valuable -- a process known as "marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad fluctuations
in stock prices. 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 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 entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases 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 termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
Interest rate futures contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Fund's current or intended
investments in fixed income securities. For example, if the Fund owned long-term
bonds and interest rates were expected to increase, the Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could then be
used to buy long-term bonds on the cash market. 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. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows the Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell futures contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract
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<PAGE> 53
market as the underlying Futures Contract, and, like Futures Contracts, are
subject to regulation by the Commodities Futures Trading Commission ("CFTC") and
the performance guarantee of the exchange clearinghouse. In addition, Options on
Futures Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call Option on a Futures Contract written by the Fund, the
Fund will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of 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 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 the 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 instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease 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 changes in interest or exchange rates, the Fund could
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for hedging
purposes similar to those described above in connection with foreign currency
futures contracts. In particular, a Forward Contract to sell a currency may be
entered into in lieu of the sale of a foreign currency futures contract where
the Fund seeks to protect against an anticipated increase in the exchange rate
for a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into a
Forward Contract to purchase a given currency to protect against a projected
increase in the dollar value of securities denominated in such currency which
the Fund intends to acquire. The Fund also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in connection with a
fixed income security denominated in a foreign currency. In addition, the Fund
may enter into Forward Contracts for "cross hedging" purposes; e.g., the
purchase or sale of a Forward Contract on one type of currency as a hedge
against adverse fluctuations in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forgo all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices, but will usually seek to close out positions
in such contracts by entering into offsetting transactions, which will
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<PAGE> 54
serve to fix the Fund's profit or loss based upon the value of the contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, 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 and could involve significant risk of loss.
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 quality debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or Forward Contracts, will be utilized. 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 does
decline, the Fund will have the right to sell such currency for a fixed amount
in dollars and will 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 will 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.
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 could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund also may be required to forgo all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Fund's portfolio. In the
case of futures and options based on an index, 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. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. 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.
For example, if the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset
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<PAGE> 55
by the put option. It is also possible that there may be a negative correlation
between the index or obligation underlying an option or Futures Contract in
which the Fund has a position and the portfolio securities the Fund is
attempting to hedge, which could result in a loss on both the portfolio and the
hedging instrument. In addition, the Fund may enter into transactions in Forward
Contracts or options on foreign currencies in order to hedge against exposure
arising from the currencies underlying such forwards. In such instances, the
Fund will be subject to the additional risk of imperfect correlation between
changes in the value of the currencies underlying such forwards or options and
changes in the value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in options or
futures on narrow-based indices for hedging purposes, movements in the value of
the index should, if the hedge is successful, correlate closely with the portion
of the Fund's portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the 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 options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
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 date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
options on currencies and Options on Futures Contracts, the Fund is subject to
the risk of market movements between the time that the option is exercised and
the time of performance thereunder. This could increase the extent of any loss
suffered by the Fund in connection with such transactions.
In writing a covered call option on a security, index or Futures Contract, the
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where the Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Fund may be
required to forgo the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the hedging
transactions.
It should also be noted that the Fund may enter into transactions in options
(except for options on foreign currencies), Futures Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging purposes, but also
for non-hedging purposes intended to increase portfolio returns. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Fund will only write
covered options, such that cash or securities necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, the method
of covering an option employed by the Fund may not fully protect it against risk
of loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates, equity prices or interest rates do not move in the direction or to the
extent anticipated. In this regard, the foreign currency may be extremely
volatile from time to time, as discussed in the Prospectus and in this Statement
of Additional Information, and the use of such transactions for non-hedging
purposes could therefore involve significant risk of loss.
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With respect to the writing of straddles on securities, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where the Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes when
it purchases an Option on a Futures Contract is the premium paid for the option,
plus related transaction costs. In order to profit from an option purchased,
however, it may be necessary to exercise the option and to liquidate the
underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in
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connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which will
not be reflected in the forward, futures or options markets until the following
day, thereby making it more difficult for the Fund to respond to such events in
a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
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. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
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The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if as a result more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby ensuring that the leveraging effect of such futures is minimized.
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 held by a fund, cannot
exceed 15% 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 as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is 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 test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
------------------------
THE POLICIES STATED ABOVE ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT
SHAREHOLDER APPROVAL, AS MAY THE FUND'S INVESTMENT OBJECTIVE.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or of a class or series, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or of a series or
class, as applicable, present at a meeting if holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy). Except for Investment Restriction (1), these
investment restrictions and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market
value) in excess of 15% of its total assets, in each case taken at the lower
of cost or market value. For the purpose of this restriction, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies, and payments
of initial and variation margin in connection therewith, are not considered a
pledge of assets.
(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 of companies, such as real estate investment trusts,
which deal in real estate or interests therein and securities secured by real
estate), or mineral leases, commodities or commodity contracts (except
contracts for the future or forward delivery of securities or foreign
currencies and related options, and except Futures Contracts and Options on
Futures Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate or mineral leases,
commodities or commodity contracts acquired as a result of the ownership of
securities.
(4) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market value).
Not more than 10% of the Fund's total assets (taken at market value) may be
invested in repurchase agreements maturing in more than seven days. The Fund
may purchase all or a portion of an issue of debt securities distributed
privately to financial institutions. For these purposes the purchase of
short-term commercial paper or a portion or all of an issue of debt securities
which are part of an issue to the public shall not be considered the making of
a loan.
(5) Purchase the securities of any issuer if (as to 50% of the value of its
total assets) such purchase, at the time thereof, would cause more than 5% of
its total assets (taken at market value) to be invested in the securities of
such issuer, other than U.S. Government securities.
(6) Purchase voting securities of any issuer if (as to 50% of the value of
its total assets) such purchase, at the time thereof, would cause more than
10% of the outstanding voting securities of such issuer to be held by the
Fund. For this purpose all indebtedness of an issuer shall be deemed a
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single class and all preferred stock of an issuer shall be deemed a single
class.
(7) Invest for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value.
(9) 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 purchases and sales of securities and the Fund may make
margin deposits in connection with options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies.
(10) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it 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 equivalent conditions.
(11) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase such securities if such purchase at
the time thereof would cause more than 10% of its total assets (taken at
market value) to be invested in the securities of such issuers; and, provided
further, that the Fund will not purchase securities issued by an open-end
investment company.
(12) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing,
purchasing and selling puts, calls or combinations thereof with respect to
securities, indexes of securities or foreign currencies, and with respect to
Futures Contracts.
(13) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and Options
on Futures Contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior security.
As a non-fundamental policy, the Fund will not knowingly invest in securities
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 15% of the Fund's net assets (taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years'
continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be changed without
shareholder approval.
3. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust 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 its operations.
The Trustees and officers of the Trust 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
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
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; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. Address: 110 Broad Street, Boston,
Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
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J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
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 (prior 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, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.* Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES 0. YOST* Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current years service and amortize past service cost.
Set forth in Appendix A -- hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of November 30, 1995, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
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 liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a wholly owned subsidiary of Sun Life of Canada (U.S.) which
is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
INVESTMENT ADVISORY AGREEMENT
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (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, in an amount equal to the sum of
0.75% of the Fund's average daily net assets.
For the fiscal year ended August 31, 1995, the nine-month period ended August
31, 1994 and the fiscal year ended November 30, 1993, MFS received fees under
the Advisory Agreement of $2,505,884, $1,952,229 and $2,065,624, respectively.
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 reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (other than those assumed by the
Adviser or MFD) including Trustees fees
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discussed above; governmental fees; interest charges; taxes; membership dues in
the Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing share certificates, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the 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 are borne by the Fund except that the
Fund's Distribution Agreement with MFD requires MFD to pay for prospectuses that
are to be used for sales purposes. 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. Payment by the
Fund of brokerage commissions for brokerage and research services of value to
the Adviser in serving its clients is discussed under the caption "Portfolio
Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 1996,
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 provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price 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 as in the best
interests of the Fund and the shareholders the custodial arrangements with Chase
Manhattan Bank, N.A., for securities of the Fund held outside the United States.
The Custodian also serves as the dividend and distribution disbursing agent of
the Fund. The Custodian has contracted with the Adviser for the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September 10,
1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively. 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. The Custodian has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend and
distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
dated as of January 1, 1995 (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to the
receipt or payment of money with respect to a period or periods prior to January
1, 1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
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CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) 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 SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge
the dealer retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD pays a commission to dealers who initiate and
are responsible for purchases of $1 million or more as described in the
Prospectus.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Funds shares.
During the fiscal year ended August 31, 1995, MFD received sales charges of
$16,545 and dealers received sales charges of $102,485 (as their concession on
gross sales charges of $119,030) for selling Class A shares of the Fund; the
Fund received $3,843,850 representing the aggregate net asset values of such
shares. During the nine-month period ended August 31, 1994, MFD received sales
charges of $18,287 and dealers received sales charges of $111,235 (as their
concession on gross sales charges of $129,522) for selling Class A shares of the
Fund; the Fund received $3,347,931 representing the aggregate net asset values
of such shares. During the period September 20, 1993 through November 30, 1993,
MFD received sales charges of $1,060 and dealers received sales charges of
$6,107 (as their concession on gross sales charges of $7,167) for selling Class
A shares of the Fund; the Fund received $222,849 representing the aggregate net
asset value of such shares.
During the fiscal year ended August 31, 1995, the nine-month period ended August
31, 1994, and the fiscal year ended November 30, 1993 the CDSC imposed on
redemptions of Class B shares was approximately $175,565, $221,844 and $362,000,
respectively.
The Distribution Agreement will remain in effect until August 1, 1996 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 such 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
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers,
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<PAGE> 63
unless in its opinion, better prices are available elsewhere. In the case of
securities purchased from underwriters, the cost of such securities generally
includes a fixed underwriting commission or concession. Securities firms or
futures commission merchants may receive brokerage commissions on transactions
involving options, Futures Contracts and Options on Futures Contracts and the
purchase and sale of underlying securities upon exercise of options. The
brokerage commissions associated with buying and selling options may be
proportionately higher than those associated with general securities
transactions. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for the
Fund by the Adviser. At present no other recapture arrangements are in effect.
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
the Adviser's overall responsibilities to the Fund or to its 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 purchasing or selling securities, and the
availability 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 purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $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).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the fiscal year ended November 30, 1995, the Fund paid total brokerage
commissions of $1,220,258. For the nine-month period ended August 31, 1994, the
Fund paid total brokerage commissions of $1,382,311. For the fiscal year ended
November 30, 1993, the Fund paid total brokerage commissions of $790,279. Not
all of the Fund's transactions are equity security transactions which involve
the payment of brokerage commissions. During the fiscal year ended August 31,
1995, the Fund acquired and sold securities issued by Charles Schwab Corp., a
regular broker-dealer of the Fund.
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 MFS or any subsidiary of MFS. 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, it is believed that the Fund's ability to participate
in volume transactions will produce better executions for the Fund.
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<PAGE> 64
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or 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 all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case of purchases of $1 million or more), the shareholder
may obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Fund's Account Application or filing a separate Letter of
Intent application (available from the Shareholder Servicing Agent) within 90
days of the commencement of purchases. Subject to acceptance by MFD and the
conditions mentioned below, each purchase will be made at a public offering
price applicable to a single transaction of the dollar amount specified in the
Letter of Intent application. The shareholder or his dealer must inform MFD that
the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month 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 that shareholder's new investment,
together with the current offering price value of all the holdings of all
classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level (see "Purchases" in the
Prospectus for the sales charges on quantity purchases). For example, if a
shareholder owns shares with a current offering price value of $75,000 and
purchases an additional $25,000 of Class A shares of the Fund, the sales charge
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares made 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 "Free Amount"; (ii) to the extent necessary, any "Reinvested
Shares"; and (iii) to the extent necessary, the "Direct Purchase" subject to the
lowest CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in
the Prospectus). The CDSC will be waived in the case of redemptions of Class B
shares pursuant to a SWP but will not be waived in the case of SWP redemptions
of Class A shares which are subject to a CSDC. To the extent that redemptions
for such periodic withdrawals exceed dividend income reinvested in the account,
19
<PAGE> 65
such redemptions will reduce and may eventually exhaust the number of shares in
the shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be received in full and fractional shares of the Fund at
the net asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate value
of at least $5,000 either must be held on deposit by, or certificates for such
shares must be deposited with, the Shareholder Servicing Agent. With respect to
Class A shares, maintaining a withdrawal plan concurrently with an investment
program would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee or
change the 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 in the Fund may be made at
any time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of the
other MFS Funds (if available for sale) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to four different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan 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
the month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of 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 such shares are
acquired through direct purchase of reinvested dividends) who have redeemed
their shares have a one-time right to reinvest the redemption proceeds in the
same class of shares
20
<PAGE> 66
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 the 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 or shares of another
MFS Fund at net asset value pursuant to the exchange privilege described below.
Such a reinvestment must be made within 90 days of the redemption and is limited
to the amount of the redemption proceeds. If the shares credited for any CDSC
paid are then redeemed within six years of the initial purchase, in the case of
Class B shares or 12 months of the initial purchase in the case of certain Class
A shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain period
of time in the same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of any loss realized on the
original redemption for federal income tax purposes. Please see your tax adviser
for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class of
any of the other MFS Funds (if available for sale) at net asset value. Exchanges
will be made only after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent.
Each Exchange Request must be in proper form (i.e., if in writing signed by the
record owner(s) exactly as the shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If an Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all of the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to 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 investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the MFS Funds, 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 state-specific
shares of each series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are available for purchase
by all types of tax-deferred retirement plans. MFD makes available through
investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
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<PAGE> 67
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the 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.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local income taxes, on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains (whether paid 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 gain distributions) is normally eligible for the dividends
received deduction for corporations if the recipient otherwise qualifies for
that deduction with respect to its holding of Fund shares. Availability of the
deduction to particular corporate shareholders is subject to certain limitations
and deducted amounts may be subject to the alternative minimum tax and result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of net long-term capital gains over net short-term capital losses), whether paid
in cash or reinvested in additional shares, are taxable to the Fund's
shareholders as long-term capital gains for federal income tax purposes,
regardless of how long they have owned shares in the Fund. Fund dividends
declared in October, November, or December, payable to shareholders of record in
such a month, and paid the following January will be taxable to shareholders as
if received on December 31 of the year in which they are declared. The Fund will
notify shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of a distribution
may thus pay the full price for the shares and then effectively receive a
portion of the purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders.
Any investment in zero coupon securities, deferred interest bonds, certain
stripped securities, and certain securities purchased at a market discount will
cause the Fund 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.
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 that day, and any gain or loss
associated with such 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
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<PAGE> 68
tax elections exist for straddles that may alter the effects of these rules. The
Fund will limit its activities in options, Futures Contracts, and Forward
Contracts, to the extent necessary to meet the requirements of Subchapter M of
the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund generally will be
treated as ordinary income or losses. The holding of foreign currencies and
investment by the Fund in certain "passive foreign investment companies" may be
limited in order to avoid imposition of taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to its shareholders foreign tax credits or deductions with
respect to foreign taxes paid by the Fund. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate or an exemption from foreign tax on such income; the Fund intends to
qualify for treaty reduced rates 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.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments made to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower treaty rate may be permitted. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period applicable to such
claims. The Fund is also required in certain circumstances to apply backup
withholding at a rate of 31% on taxable dividends and redemption proceeds paid
to any shareholder (including a Non-U.S. person) who does not furnish to the
Fund certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to payments
which have been subject to 30% withholding. Distributions received from the Fund
by Non-U.S. Persons may also be subject to tax under the laws of their own
jurisdictions.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
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 Fund's expense ratio to the extent that the Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
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<PAGE> 69
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1995, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Distribution Plan $ 449,075 $ 53,341 $ 395,734
Class B Distribution Plan $2,058,107 $ 66,557 $1,991,550
</TABLE>
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1996, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. 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.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays (or
the days on which they are observed): New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination is made once during each such day as of the
close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Forward Contracts will be valued using a pricing model taking into
consideration market data from an external pricing source. Use of the pricing
services has been approved by the Board of Trustees. All other securities,
futures contracts and options in the Fund's portfolio (other than short-term
obligations) for which the principal market is one or more securities or
commodities exchanges (whether domestic or foreign) will be valued at the last
reported sale price or at the settlement price prior to the determination (or if
there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, Futures Contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Debt securities (other than
short-term obligations) in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yields, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Short-
term obligations, if any, in the Fund's portfolio are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Short-term
securities with a remaining maturity in excess of 60 days will be valued based
upon dealer supplied valuations. Portfolio securities and over-the-counter
options and Forward Contracts, for which there are no quotations or valuations
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD, in its
capacity as the Fund's distributor, prior to the close of the business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and 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 current maximum sales charge
(currently 5.75% ) and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year perform-
24
<PAGE> 70
ance and which may or may not reflect the effect of the maximum sales charge or
CDSC. The average annual total rate of return for Class B shares, reflecting the
CDSC, for the one-year and five-year periods ended August 31, 1995 and for the
period from December 29, 1986 (the Fund's commencement of investment operations)
to August 31, 1995 was 21.20%, 16.70% and 14.75%, respectively. The average
annual total rates of return for Class B shares, not giving effect to the CDSC,
for the one-year and five year periods ended August 31, 1995 and for the period
from December 29, 1986 (the Fund's commencement of investment operations) to
August 31, 1995 was 25.19%, 16.91% and 14.75%, respectively. The Fund's average
annual total rate of return for Class A shares, reflecting the initial sales
charges, for the one-year period ended August 31, 1995 and for the period from
September 20, 1993 (commencement of offering of this class of shares) to August
31, 1995, was 18.85% and 11.46%, respectively. The Fund's average annual total
rate of return for Class A Shares not reflecting the initial sales charges, for
the one-year period ended August 31, 1995 and for the period from September 20,
1993 (commencement of offering of this class of shares) to August 31, 1995, was
26.12% and 14.91%, respectively.
PERFORMANCE RESULTS -- The performance results for Class B shares below, based
on an assumed initial investment of $10,000 in Class B shares, cover the period
from December 29, 1986 through December 31, 1994. It has been assumed that
dividend and capital gain distributions were reinvested in additional shares.
Any performance results or total rate of return quotation provided by the Fund
should not be considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate total rates of return should be considered when
comparing the total rate of return of the Fund to total rates of return
published for other investment companies or other investment vehicles. Total
rate of return reflects the performance of both principal and income. Current
net asset value and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
<TABLE>
MFS MANAGED SECTORS FUND B
<CAPTION>
YEAR ENDED DIRECT CAPITAL GAIN DIVIDEND TOTAL
DECEMBER 31 INVESTMENT REINVESTMENT REINVESTMENT VALUE
----------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C>
1986 $ 9,846 $ 0 $ 0 $ 9,846
1987 11,846 0 42 11,888
1988 12,353 0 178 12,531
1989 17,230 0 301 17,531
1990 14,876 0 260 15,136
1991 23,738 0 414 24,152
1992 23,707 971 413 25,091
1993 20,276 5,339 400 26,015
1994 18,092 5,924 1,078 25,094
<FN>
EXPLANATORY NOTES: The results shown in the table take into account the Rule
12b-1 fees but not the CDSC. No adjustment has been made for any income taxes
payable by shareholders.
</TABLE>
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 Saloman 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
may use charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The Fund may
advertise examples of the effects of periodic investment plans, including the
principle of dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against a loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
25
<PAGE> 71
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS
AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any series
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Trustees have currently
authorized shares of the Fund and seven 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 two classes of shares of the Fund, Class A shares and Class B
shares. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
the Fund, shareholders of each class are entitled to share pro rata in the net
assets of the Fund allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue additional series
or classes of shares, in which case the shares of each class would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances 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 Trust's shares. Shares have no pre-emptive or conversion
rights (except as described 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 or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or 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
26
<PAGE> 72
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 willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1995, the Statement of Assets and
Liabilities at August 31, 1995, the Statement of Operations for the year ended
August 31, 1995, the Statement of Changes in Net Assets for the year ended
August 31, 1995, nine months ended August 31, 1994 and the year ended November
30, 1993, the Financial Highlights table for the year ended August 31, 1995,
nine months ended August 31, 1994 and the year ended November 30, 1993 and for
each of the years in the seven-year period ended November 30, 1993, the Notes to
Financial Statements and the Independent Auditors' Report, each of which is
included in the Annual Report to shareholders of the Fund, are incorporated by
reference into this SAI and have been so incorporated in reliance upon the
report of Deloitte & Touche LLP independent auditors, as experts in accounting
and auditing. A copy of the Annual Report accompanies this SAI.
27
<PAGE> 73
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,500 $ 685 10 $226,221
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 3,950 1,700 14 147,274
Dr. Lawrence Cohn.................... 3,500 350 18 133,524
Sir David Gibbons.................... 3,500 1,251 13 132,024
Abby M. O'Neill...................... 3,275 491 10 125,924
Walter E. Robb, III.................. 3,950 1,912 15 147,274
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 3,950 395 20 147,274
Ward Smith........................... 3,950 609 13 147,274
<FN>
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 75.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 36 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $9.7 billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24.4
billion).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,950 $443 $ 738 $1,033 $ 1,475
3,230 485 808 1,131 1,615
3,510 527 878 1,229 1,755
3,790 569 948 1,327 1,895
4,070 611 1,018 1,425 2,035
4,350 653 1,088 1,523 2,175
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
28
<PAGE> 74
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)MANAGED SECTORS
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
LOGO MMS-13 1/96/.5M 08/208
<PAGE> 75
<PAGE>
Annual Report for
Year Ended
August 31, 1995
[Logo] MFS [SM]
THE FIRST NAME IN MUTUAL FUNDS
MFS [R] Managed Sectors Fund
[A photo of a keyboard.]
<PAGE>
MFS [R] MANAGED SECTORS FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company
Marshall N. Cohan - Private Investor
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc.
(Investment Advisers)
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc.
(Corporate Financial Consultants)
Arnold D. Scott* - Senior Executive Vice
President and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames* - President, Massachusetts
Financial Services Company
J. Dale Sherratt - President, Insight
Resources, Inc. (Acquisition Planning
Specialists)
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand
Corporation
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Kenneth J. Enright*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Deloitte & Touche LLP
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
touch-tone telephone.
For information on MFS mutual funds, call
your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device for
the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the six months ended August 31, 1995, the stock market advanced strongly
as investors reacted positively to the Federal Reserve Board's apparent success
in engineering a "soft landing" of the domestic economy through a more
restrictive monetary policy. The result of the credit tightening in 1994 and
early 1995 has been a slowdown in economic activity, marked by lower interest
rates and low inflation, with continued positive growth. All of these are
favorable attributes for stocks and investors responded accordingly, pushing all
of the major stock market indices decidedly higher year to date. The breadth of
the markets' upward move has been fairly broad, with particular strength
exhibited in the technology, financial services, health care and transportation
industries. Consensus expectations have recently shifted towards a modest pickup
in economic activity, with stable to slightly higher interest rates and
inflation.
For the 12 months ended August 31, 1995, the stock market, as measured by
the Standard & Poor's 500 Composite Index (a popular, unmanaged index of common
stock performance) returned +21.42%. During this same period, Class A shares of
the Fund provided a total return of +26.12%, while Class B shares had a total
return of +25.19%. Both of these returns assume the reinvestment of
distributions but exclude the effects of any sales charges.
Economic Outlook
Moderate, but sustainable growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, consumer spending
and homebuying were showing renewed strength by August 31, while businesses
continued to work off excess inventories and reduce factory output. Meanwhile,
overseas economies, particularly those of Germany and Japan, have not recovered
as expected, limiting U.S. export growth. However, we believe the Federal
Reserve's consistent and, so far, successful efforts to fight inflation seem to
be giving consumers and businesses enough confidence to help maintain 2 1/2% to
3% real (adjusted for inflation) growth in gross domestic product, at least
through 1995.
Stock Market
After several months of very strong performance in 1995, the stock market became
somewhat volatile in the last few weeks before August 31 as concerns about
interest rates had a negative effect on stock prices. At the same time, the
technology sector, which had been one of the best-performing sectors this year,
came under significant pressure this summer because of concerns that these
stocks had become overpriced relative to expected earnings. Still, the
longer-term outlook for technology and other growth sectors, such as leisure and
household products, remains favorable, as do the prospects for many
small-company stocks because of their growth potential relative to larger
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
companies. Also, companies' increasing emphasis on cost containment, coupled
with their growing use of technology, have helped keep them competitive and
reasonably profitable. Finally, we have been watching with interest the recent
series of corporate mergers in such industries as banking, entertainment, health
care and consumer products. Unlike previous merger waves, which were often
intended to build conglomerates of loosely related or unrelated businesses, this
year's mergers of similar companies seem to be more rationally based on the goal
of helping the merged companies reduce costs and, in general, be more
competitive. Looking ahead, we believe these factors, along with a stabilizing
interest rate environment and a continuation of favorable earnings reports, will
help maintain the stock market's positive momentum.
Portfolio Performance and Strategy
The Fund's investments continue to be concentrated in four of the same sectors
outlined in our February 28, 1995 semiannual report: technology, leisure,
financial services and energy, although the composition of those holdings has
changed to some degree, as have the weightings. Specifically, our investments in
the energy, leisure and financial services sectors were reduced, while our
holdings in technology were increased modestly, primarily through market
appreciation. The consumer staples sector was eliminated, while retail stocks
became our fifth sector weighting. The retail industry, in general, continues to
be under pressure due to an excess number of stores, while the growth of
disposable consumer income remains modest. The Fund's focus is on the department
store segment, where cost savings driven by consolidation are helping make the
survivors stronger competitors in what will continue to be a difficult
environment. While retail stocks have been laggard performers, their current
valuations are attractive, in our opinion. The Fund has also added to holdings
with more economic sensitivity, such as General Motors, Boise Cascade, Champion
International, AGCO and Tyco International, due to our expectations that the
economy will pick up during the second half of 1995 and into 1996.
The Fund's strong performance during the past six months was aided by its
overweighting in technology (particularly in the media software and
semi-conductor areas), financial services companies (which have exhibited good
earnings growth in the benign interest rate environment, augmented by
expectations of further consolidation) and energy (where worldwide drilling
activity has been stimulated by higher oil prices).
The Fund remains non-diversified and concentrated in the sectors mentioned
above. We continue to search for attractively valued companies, but recognize
the fact that, given the strong market advance year to date, many sector
valuations appear to be approaching fair value, thus precipitating a slightly
more cautious outlook.
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
As always, we will continue to scrutinize all of our holdings and are
confident that the current structure of the Fund is appropriate in the current
market environment.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A photo of A. Keith Brodkin, [A photo of Kenneth J, Enright
Chairman and President.] Portfolio Manager.]
/s/ A. Keith Brodkin /s/ Kenneth J. Enright
A. Keith Brodkin Kenneth J. Enright
Chairman and President Portfolio Manager
September 12, 1995
OBJECTIVE AND POLICIES
The Fund's investment objective is to seek capital appreciation. Dividend
income, if any, is incidental to the Fund's objective. To achieve its objective,
the Fund varies the weighting of its portfolio among 13 equity sectors, which
include autos and housing, basic materials and consumer staples, defense and
aerospace, energy, financial services, foreign securities, health care,
industrial goods and services, leisure, retailing, technology, transportation
and utilities.
As much as 50% of the Fund's assets may be invested in one sector or in cash.
Generally, at least 90% of the Fund's assets will be invested in up to five of
the industry sectors or in cash.
3
<PAGE>
PORTFOLIO MANAGER PROFILE
Ken Enright has been a member of the MFS investment staff since 1986. A graduate
of Boston State College and of the Babson College Graduate School of Business
Administration, he began his career at MFS in the Research Department and was
named Assistant Vice President - Investments in 1987 and Vice President -
Investments in 1988. Mr. Enright became Portfolio Manager of MFS Managed Sectors
Fund in 1993.
<TABLE>
<CAPTION>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1995
Percent of
Ten Largest Holdings Net Assets
================================================================================
<S> <C>
Telephone & Data Systems, Inc. 5.31
- --------------------------------------------------------------------------------
Harrah's Entertainment, Inc. 3.98
- --------------------------------------------------------------------------------
Rogers Communications, Inc. 3.78
- --------------------------------------------------------------------------------
Intel Corp. 3.64
- --------------------------------------------------------------------------------
Electronic Arts, Inc. 3.52
- --------------------------------------------------------------------------------
Occidental Petroleum Corp. 3.16
- --------------------------------------------------------------------------------
Spectrum Holobyte, Inc. 2.87
- --------------------------------------------------------------------------------
AGCO Corp. 2.57
- --------------------------------------------------------------------------------
Snyder Oil Corp. 2.54
- --------------------------------------------------------------------------------
Federated Department Stores, Inc. 2.50
- --------------------------------------------------------------------------------
</TABLE>
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For the year ended August 31, 1995, the distributions from long-term capital
gains are $14,320,735.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Managed Sectors Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the reinvestment
of all dividends and capital gains.
Class A shares were offered effective September 20, 1993. Information on Class A
share performance appears on the next page.
4
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to August 31, 1995)
[Line graph representing the growth of a $10,000 investment for the period from
January 1, 1987 to August 31, 1995. The graph is scaled from $10,000 to $50,000
in $10,000 segments. The years marked are from 1987 to 1995. There are three
lines drawn to scale. One is a solid line representing MFS Managed Sectors Fund
(Class B), a second line of short dashes represents the S&P 500, and a third
line of long dashes represents the Consumer Price Index.]
MFS Managed Sectors Fund $33,505
S&P 500 $30,474
Consumer Price Index $13,834
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
Life of Class
through
1 Year 3 Years 5 Years 8/31/95
==================================================================================================================
<S> <C> <C> <C> <C>
MFS Managed Sectors Fund (Class A) including
5.75% sales charge +18.85% -- -- +11.46%*
- ------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class A) at net
asset value +26.12% -- -- +14.91%*
- ------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class B) with CDSC+ +21.20% +14.18% +16.70% +14.75%#
- ------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class B) without CDSC +25.19% +14.94% +16.91% +14.75%#
- ------------------------------------------------------------------------------------------------------------------
Average specialty/miscellaneous fund +15.69% +17.39% +17.72% +13.18%**
- ------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +21.42% +13.83% +15.09% +13.72%**
- ------------------------------------------------------------------------------------------------------------------
Consumer Price Index++ +2.62% +2.76% +3.05% +3.82%**
- ------------------------------------------------------------------------------------------------------------------
<FN>
* For the period from the commencement of offering of Class A shares, September 20, 1993 to August 31, 1995.
# For the period from the commencement of offering of Class B shares, December 29, 1986 to August 31, 1995.
+ These returns reflect the applicable CDSC of 4%, 3% and 2% for the 1-, 3- and 5-year periods, respectively,
and 0% for the period commencing December 29, 1986.
** Benchmark comparisons begin on January 1, 1987.
++ The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
In the above table, we have included the average annual total returns of all
specialty/miscellaneous funds (including the Fund) tracked by Lipper Analytical
Services, Inc. (an independent firm which reports mutual fund performance) for
the applicable time periods (26, 22, 20 and 18 funds for the 1-, 3- and 5-year
periods ended August 31, 1995, and for the period from January 1, 1987 through
August 31, 1995, respectively). Because these returns do not reflect any
applicable sales charges, we have also included the Fund's results at net asset
value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost.
5
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - August 31, 1995
Common Stocks - 100.2%
================================================================================
Issuer Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Energy - 12.8%
BJ Services Co.* 300,000 $ 7,500,000
Occidental Petroleum Corp. 550,000 11,962,500
Schlumberger Ltd. 62,000 3,999,000
Snyder Oil Corp. 731,000 9,594,375
Tidewater, Inc. 366,900 9,080,775
Weatherford International, Inc.* 477,100 6,261,937
-----------
$48,398,587
- --------------------------------------------------------------------------------
Financial Institutions - 9.5%
Advanta Corp. 135,000 $ 5,045,625
Equitable of Iowa Cos. 190,000 7,077,500
First Interstate Bancorp 46,200 4,412,100
Mellon Bank Corp. 122,700 5,812,913
Torchmark Corp. 135,000 5,400,000
Travelers, Inc. 169,400 8,131,200
-----------
$35,879,338
- --------------------------------------------------------------------------------
Leisure - 22.5%
Argosy Gaming Corp.* 390,000 $ 5,557,500
Brinker International, Inc.* 390,200 6,535,850
Harrah's Entertainment, Inc.* 472,000 15,045,000
Promus Hotel Corp.* 237,000 4,888,125
Rogers Communications, Inc. (Canada)* 1,397,500 14,312,249
Showboat, Inc. 260,000 5,980,000
Sky City Ltd. (New Zealand)* 250,000 3,454,718
Sydney Harbor Casino Ltd. (Australia)* 3,646,000 4,901,281
Telecom Italia S.p.A. (Italy) 4,275,000 4,276,972
Telephone & Data Systems, Inc. 490,000 20,090,000
-----------
$85,041,695
- --------------------------------------------------------------------------------
Retail - 9.6%
Circuit City Stores, Inc. 35,100 $ 1,210,950
Dayton-Hudson Corp. 100,000 7,312,500
Dillard Department Stores, Inc. 175,900 5,430,912
Federated Department Stores, Inc.* 350,000 9,450,000
Gap, Inc. 103,000 3,308,875
Nordstrom, Inc. 98,700 4,071,375
Wal-Mart Stores, Inc. 215,200 5,299,300
-----------
$36,083,912
- --------------------------------------------------------------------------------
Technology - 23.5%
ADT Ltd.* 500,000 $ 6,500,000
Cabletron Systems, Inc.* 75,000 3,965,625
EMC Corp.* 204,700 4,196,350
Electronic Arts, Inc.* 350,000 13,300,000
Intel Corp. 224,000 13,748,000
International Business Machines Corp. 40,000 4,135,000
LSI Logic Corp.* 96,800 4,767,400
Micron Technology, Inc. 60,000 4,612,500
Motorola, Inc. 55,000 4,111,250
National Semiconductor Corp.* 285,000 8,051,250
Nokia AB (Finland) 90,000 6,211,138
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - continued
Common Stocks - continued
================================================================================
Issuer Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Technology - continued
Oracle Systems Corp.* 113,900 $ 4,570,238
Spectrum Holobyte, Inc.* 628,400 10,839,900
------------
$ 89,008,651
- --------------------------------------------------------------------------------
Other - 22.3%
AGCO Corp. 200,000 $ 9,725,000
Boise Cascade Corp. 160,000 6,860,000
Champion International Corp. 70,000 3,963,750
Colgate-Palmolive Co. 60,000 4,080,000
Consolidated Papers, Inc. 50,000 3,025,000
General Motors Corp. 175,000 8,225,000
Johnson & Johnson 70,000 4,830,000
Loral Corp. 75,000 4,106,250
Manor Care, Inc. 200,200 6,481,475
McDonnell Douglas Corp. 88,000 7,062,000
PepsiCo, Inc. 135,000 6,108,750
Tyco International Ltd. 150,000 8,868,750
United Healthcare Corp. 184,000 7,774,000
Western Waste Industries* 149,100 3,373,408
------------
$ 84,483,383
- --------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $312,689,301) $378,895,566
- --------------------------------------------------------------------------------
Short-Term Obligation - 0.1%
================================================================================
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------
Ford Motor Credit Corp., due 9/01/95,
at Amortized Cost $ 235 $ 235,000
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $312,924,301) $379,130,566
Other Assets, Less Liabilities - (0.3)% (991,083)
================================================================================
Net Assets - 100.0% $378,139,483
- --------------------------------------------------------------------------------
<FN>
*Non-income producing security.
</FN>
</TABLE>
See notes to financial statements
7
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
================================================================================
August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $312,924,301) $ 379,130,566
Cash 5,153
Receivable for investments sold 4,238,214
Receivable for Fund shares sold 214,674
Dividends receivable 289,446
Other assets 4,251
-------------
Total assets $ 383,882,304
-------------
Liabilities:
Payable for investments purchased $ 5,189,353
Payable for Fund shares reacquired 151,715
Payable to affiliates -
Management fee 7,705
Shareholder servicing agent fee 1,921
Distribution fee 167,483
Accrued expenses and other liabilities 224,644
-------------
Total liabilities $ 5,742,821
-------------
Net assets $ 378,139,483
=============
Net assets consist of:
Paid-in capital $ 267,105,311
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 66,206,265
Accumulated undistributed net realized gain
on investments and foreign currency transactions 44,897,445
Accumulated net investment loss (69,538)
-------------
Total $ 378,139,483
=============
Shares of beneficial interest outstanding 24,395,528
=============
Class A shares:
Net asset value and redemption price per share
(net assets of $178,366,881/11,473,932 shares of
beneficial interest outstanding) $15.55
======
Offering price per share (100/94.25) $16.50
======
Class B shares:
Net asset value and offering price per share
(net assets of $199,772,602/12,921,596 shares of
beneficial interest outstanding) $15.46
======
</TABLE>
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
8
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Operations
- --------------------------------------------------------------------------------
Year Ended August 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Dividends $ 3,518,412
Interest 236,983
------------
Total investment income $ 3,755,395
------------
Expenses -
Management fee $ 2,505,884
Trustees' compensation 41,069
Shareholder servicing agent fee (Class A) 192,460
Shareholder servicing agent fee (Class B) 452,784
Distribution and service fee (Class A) 449,075
Distribution and service fee (Class B) 2,058,107
Custodian fee 140,537
Printing 77,171
Legal fees 71,578
Postage 56,521
Auditing fees 38,044
Miscellaneous 282,948
------------
Total expenses $ 6,366,178
------------
Net investment loss $ (2,610,783)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including $9,767,521
gain from transactions in securities of
affiliated issuers) $ 52,139,807
Foreign currency transactions 108,098
------------
Net realized gain on investments and
foreign currency transactions $ 52,247,905
------------
Change in unrealized appreciation (depreciation) -
Investments $ 29,148,972
Translation of assets and liabilities in foreign
currencies (242)
------------
Net unrealized gain on investments $ 29,148,730
------------
Net realized and unrealized gain on
investments and foreign currency $ 81,396,635
------------
Increase in net assets from operations $ 78,785,852
============
</TABLE>
See notes to financial statements
9
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Nine Months Ended Year Ended
August 31, 1995 August 31, 1994 November 30, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (2,610,783) $ (1,895,340) $ (4,098,011)
Net realized gain on investments and
foreign currency transactions 52,247,905 21,025,189 71,272,683
Net unrealized gain (loss) on investments and
foreign currency translation 29,148,730 (3,397,459) (57,428,322)
------------- ------------- -------------
Increase in net assets from operations $ 78,785,852 $ 15,732,390 $ 9,746,350
------------- ------------- -------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ (8,991,673) $ (25,297,254) $ --
From net realized gain on investments and
foreign currency transactions (Class B) (14,927,407) (41,826,829) (9,939,582)
------------- ------------- -------------
Total distributions declared to
shareholders $ (23,919,080) $ (67,124,083) $ (9,939,582)
------------- ------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 126,368,710 $ 33,660,185 $ 52,495,365
Issued in connection with the acquisition of
MFS Managed Sectors Fund -- -- 142,671,119
Net asset value of shares issued to shareholders
in reinvestment of distributions 21,847,531 59,894,378 8,938,772
Cost of shares reacquired (160,496,119) (75,771,270) (84,243,954)
------------- ------------- -------------
Increase (decrease) in net assets from
Fund share transactions $ (12,279,878) $ 17,783,293 $ 119,861,302
------------- ------------- -------------
Total increase (decrease) in net assets $ 42,586,894 $ (33,608,400) $ 119,668,070
Net assets:
At beginning of period 335,552,589 369,160,989 249,492,919
------------- ------------- -------------
At end of period (including accumulated
undistributed net investment income (loss)
of $(69,538), $(25,403), and $233,258,
respectively) $ 378,139,483 $ 335,552,589 $ 369,160,989
============= ============= =============
</TABLE>
See notes to financial statements
10
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Nine
Year Ended Months Ended Period Ended Year Ended
August 31, August 31, November 30, August 31,
1995 1994 1993* 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 13.41 $ 15.50 $ 15.68 $ 13.35
-------- -------- -------- --------
Income from investment operations # -
Net investment loss $ (0.05) $ (0.03) $ (0.02) $ (0.14)
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 3.22 0.77 (0.16) 3.20
-------- -------- -------- --------
Total from investment operations $ 3.17 $ 0.74 $ (0.18) $ 3.06
-------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments
and foreign currency transactions $ (1.03) $ (2.83) $ -- $ (0.95)
-------- -------- -------- --------
Net asset value - end of period $ 15.55 $ 13.41 $ 15.50 $ 15.46
-------- -------- -------- --------
Total return** 26.12% 5.12%++ (5.99)%+ 25.19%
Ratios (to average net assets)/Supplemental data:
Expenses 1.46% 1.52%+ 1.59%+ 2.18%
Net investment loss (0.34)% (0.26)%+ (0.75)%+ (1.06)%
Portfolio turnover 115% 76% 106% 115%
Net assets at end of period (000 omitted) $178,367 $121,498 $136,179 $199,773
<FN>
* For the period from the commencement of offering of Class A shares, September 20, 1993 to November 30, 1993.
+ Annualized.
++ Not annualized.
** Total returns for Class A shares do not include the applicable sales charge. If the charge had been included,
the results would have been lower.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
11
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
=================================================================================================================
Nine Months Ended Year Ended November 30,
August 31, -------------------------------------------
1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 15.49 $ 15.42 $ 13.00 $ 9.23
-------- -------- -------- --------
Income from investment operations # -
Net investment loss $ (0.10) $ (0.25) $ (0.24) $ (0.12)
Net realized and unrealized gain on
investments and foreign currency
transactions 0.75 0.94 2.66 3.89
-------- -------- -------- --------
Total from investment operations $ 0.65 $ 0.69 $ 2.42 $ 3.77
-------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments
and foreign currency transactions $ (2.79) $ (0.62) $ -- $ --
-------- -------- -------- --------
Net asset value - end of period $ 13.35 $ 15.49 $ 15.42 $ 13.00
======== ======== ======== ========
Total return 4.47%++ 4.50% 18.62% 40.85%
Ratios (to average net assets)/Supplemental data:
Expenses 2.26%+ 2.21% 2.37% 2.44%
Net investment loss (1.01)%+ (1.55)% (1.85)% (1.00)%
Portfolio turnover 76% 106% 22% 59%
Net assets at end of period (000 omitted) $214,055 $232,982 $249,493 $190,232
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights - continued
=================================================================================================================
Year Ended November 30,
-------------------------------------------------------------
1990 1989 1988 1987*
- -----------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.32 $ 7.86 $ 6.94 $ 6.50
-------- -------- -------- --------
Income from investment operations # -
Net investment income (loss) $ (0.03) $ 0.03 $ 0.09 $ 0.03
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (2.06) 3.51 0.89 0.42
-------- -------- -------- --------
Total from investment operations $ (2.09) $ 3.54 $ 0.98 $ 0.45
-------- -------- -------- --------
Less distributions declared to shareholders
from net investment income $ -- $ (0.08) $ (0.06) $ (0.01)
-------- -------- -------- --------
Net asset value - end of period $ 9.23 $ 11.32 $ 7.86 $ 6.94
======== ======== ======== ========
Total return (18.46)% 45.35% 14.06% 7.47%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.50% 2.52% 2.31% 2.25%+
Net investment income (loss) (0.27)% 0.37% 1.08% 0.09%+
Portfolio turnover 79% 84% 146% 163%
Net assets at end of period (000 omitted) $152,132 $180,416 $137,311 $134,762
<FN>
* For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Managed Sectors Fund (the Fund) is a non-diversified series of MFS Series
Trust I (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Short-term obligations, which
mature in 60 days or less, are valued at amortized cost, which approximates
market value. Securities for which there are no such quotations or valuations
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend and interest payments received in additional securities are recorded on
the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended August 31, 1995, $2,566,648 was reclassified from
accumulated net investment loss to accumulated net realized gain on investments,
due to differences between book and tax accounting for currency transactions and
the offset of short-term capital gains against accumulated net investment loss.
This change had no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75% of
average daily net assets. The Fund pays no compensation directly to its Trustees
who are officers of the investment adviser, or to officers of the Fund, all of
whom receive remuneration for their services to the Fund from MFS. Certain of
the officers and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all of its independent Trustees and Mr.
Bailey.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Included in Trustees' compensation is a net periodic pension expense of $11,495
for the year ended August 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$16,545 for the year ended August 31, 1995, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $53,341 for the year
ended August 31, 1995. Fees incurred under the distribution plan during the year
ended August 31, 1995 were 0.35% of average daily net assets attributable to
Class A shares on an annualized basis.
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $66,557 for the year ended August 31,
1995. Fees incurred under the distribution plan during the year ended August 31,
1995 were 1.00% of average daily net assets attributable to Class B shares on an
annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended August 31, 1995 were $175,565 for Class B
shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of average daily net assets of each class of shares at an effective
annual rate of up to 0.15% and up to 0.22% attributable to Class A and Class B
shares, respectively.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations, aggregated
$383,303,967 and $416,468,370, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $313,265,190
============
Gross unrealized appreciation $ 74,036,428
Gross unrealized depreciation 8,171,052
------------
Net unrealized appreciation $ 65,865,376
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares Year Ended Nine Months Ended Period Ended
August 31, 1995 August 31, 1994 November 30, 1993*
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Shares sold 3,546,423 $50,859,620 723,889 $10,294,043 120,486 $ 1,946,843
Shares issued in
connection with
the acquisition of
MFS Managed
Sectors Fund -- -- -- -- 9,100,413 142,671,119
Shares issued to
shareholders in
reinvestment of
distributions 694,041 8,168,939 1,680,518 22,115,635 -- --
Shares reacquired (1,829,247) (24,588,500) (2,124,598) (28,117,869) (437,993) (6,986,200)
---------- ----------- ---------- ----------- --------- ------------
Net increase 2,411,217 $34,440,059 279,809 $ 4,291,809 8,782,906 $137,631,762
========== =========== ========== =========== ========= ============
<FN>
* For the period from the commencement of offering of Class A shares, September 20, 1993 to November 30, 1993.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Year Ended Nine Months Ended Year Ended
August 31, 1995 August 31, 1994 November 30, 1993
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Shares sold 5,728,388 $75,509,090 1,769,946 $23,366,142 3,337,222 $ 50,548,522
Shares issued to
shareholders in
reinvestment of
distributions 1,162,148 13,678,592 2,868,472 37,778,743 584,152 8,938,772
Shares reacquired (10,002,205) (135,907,619) (3,645,250) (47,653,401) (5,063,674) (77,257,754)
----------- ------------ ---------- ----------- ---------- ------------
Net increase
(decrease) (3,111,669) $(46,719,937) 993,168 $13,491,484 (1,142,300) $(17,770,460)
=========== ============ ========== =========== ========== ============
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August 31,
1995 was $3,247.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended August 31,
1995 is set forth below.
<TABLE>
<CAPTION>
Additions Dispositions
--------- ------------ Interest
Beginning Ending Realized and
Share/Par Share/Par Share/Par Share/Par Gain Dividend Ending
Affiliate Amount Amount Cost Amount Cost Amount (Loss) Income Value
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sierra On-Line, Inc. 401,900 150,600 $811,181 552,500 $8,724,244 -- $9,767,521 -- --
</TABLE>
(8) Acquisitions
At close of business on September 20, 1993, the Fund acquired all of the assets
and liabilities of MFS Managed Sectors Fund (MMS). The acquisition was
accomplished by a tax-free exchange of 9,100,413 Class A shares of the Fund
(valued at $142,671,119) for the 10,372,042 shares of MMS. MMS's net assets on
that date ($142,671,119), including $23,513,889 of unrealized appreciation, were
combined with those of the Fund. The aggregate net assets of the Fund after the
acquisition were $397,298,434.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of
MFS Managed Sectors Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Managed Sectors Fund as of August 31, 1995,
the related statement of operations for the year then ended, the statement of
changes in net assets for the year then ended, the nine months ended August 31,
1994, and the year ended November 30, 1993, and the financial highlights for the
year ended August 31, 1995, the nine months ended August 31, 1994, and each of
the years ended in the seven-year period ended November 30, 1993. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Managed Sectors
Fund at August 31, 1995, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 6, 1995
------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
18
<PAGE>
IT'S EASY TO CONTACT US
MFS AUTOMATED INFORMATION
ACCOUNT INFORMATION:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
MARKET OUTLOOK:
Call 1-800-637-4458 any time for the MFS outlook
on the bond and stock markets.
MFS PERSONAL SERVICE
ACCOUNT SERVICE:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
PRODUCT INFORMATION:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
IRA SERVICE:
Call 1-800-637-1255 any business day
from 8 a.m. to 6 p.m. Eastern time.
SERVICE FOR THE HEARING-IMPAIRED:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
MFS MAILING ADDRESSES
FOR PERSONAL ACCOUNTS:
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
FOR IRA ACCOUNTS:
MFS Service Center, Inc.
J.W. McCormack Station
P.O. Box 4501
Boston, MA 02101-9817
19
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds, shown on the facing page, falls into the eight general
categories below. All offer full-time professional management, a diversified
portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through investments
in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital through
investments in debt securities with
remaining maturities of five years or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income tax
through investments in debt securities issued by states and municipalities.[1]
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state and
its municipalities.[1]
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.[2]
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature [3] on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message anytime).
[1] A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
[2] Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain a
stable net asset value.
[3] Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
<PAGE>
THE MFS FAMILY OF FUNDS [R]
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
STOCK
================================================================================
Massachusetts Investors Trust
- --------------------------------------------------------------------------------
Massachusetts Investors Growth Stock Fund
- --------------------------------------------------------------------------------
MFS [R] Capital Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Emerging Growth Fund
- --------------------------------------------------------------------------------
MFS [R] Gold & Natural Resources Fund
- --------------------------------------------------------------------------------
MFS [R] Growth Opportunities Fund
- --------------------------------------------------------------------------------
MFS [R] Managed Sectors Fund
- --------------------------------------------------------------------------------
MFS [R] OTC Fund
- --------------------------------------------------------------------------------
MFS [R] Research Fund
- --------------------------------------------------------------------------------
MFS [R] Value Fund
STOCK AND BOND
================================================================================
MFS [R] Total Return Fund
- --------------------------------------------------------------------------------
MFS [R] Utilities Fund
- --------------------------------------------------------------------------------
BOND
================================================================================
MFS [R] Bond Fund
- --------------------------------------------------------------------------------
MFS [R] Government Mortgage Fund
- --------------------------------------------------------------------------------
MFS [R] Government Securities Fund
- --------------------------------------------------------------------------------
MFS [R] High Income Fund
- --------------------------------------------------------------------------------
MFS [R] Intermediate Income Fund
- --------------------------------------------------------------------------------
MFS [R] Strategic Income Fund
(formerly MFS [R] Income & Opportunity Fund)
- --------------------------------------------------------------------------------
LIMITED MATURITY BOND
================================================================================
MFS [R] Government Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Limited Maturity Fund
- --------------------------------------------------------------------------------
MFS [R] Municipal Limited Maturity Fund
- --------------------------------------------------------------------------------
WORLD
================================================================================
MFS [R] World Asset Allocation Fund
- --------------------------------------------------------------------------------
MFS [R] World Equity Fund
- --------------------------------------------------------------------------------
MFS [R] World Governments Fund
- --------------------------------------------------------------------------------
MFS [R] World Growth Fund
- --------------------------------------------------------------------------------
MFS [R] World Total Return Fund
- --------------------------------------------------------------------------------
NATIONAL TAX-FREE BOND
================================================================================
MFS [R] Municipal Bond Fund
- --------------------------------------------------------------------------------
MFS [R] Municipal High Income Fund
(closed to new investors)
- --------------------------------------------------------------------------------
MFS [R] Municipal Income Fund
- --------------------------------------------------------------------------------
STATE TAX-FREE BOND
================================================================================
Alabama, Arkansas, California, Florida, Georgia, Louisiana, Maryland,
Massachusetts, Mississippi, New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
- --------------------------------------------------------------------------------
MONEY MARKET
================================================================================
MFS [R] Cash Reserve Fund
- --------------------------------------------------------------------------------
MFS [R] Government Money Market Fund
- --------------------------------------------------------------------------------
MFS [R] Money Market Fund
- --------------------------------------------------------------------------------
<PAGE>
MFS [R] MANAGED Bulk Rate
SECTORS FUND U.S. Postage
P A I D
500 Boylston Street Permit #55638
Boston, MA 02116 Boston, MA
[LOGO]
MMS-2 10/95/48M 8/208
<PAGE> 76
PROSPECTUS
JANUARY 1, 1996
MFS(R) CASH CLASS A SHARES OF BENEFICIAL INTEREST
RESERVE FUND CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R))
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Expense Summary........................................................................... 2
2. The Fund.................................................................................. 3
3. Condensed Financial Information........................................................... 4
4. Investment Objective and Policies......................................................... 5
5. Investment Techniques..................................................................... 6
6. Management of the Fund.................................................................... 7
7. Information Concerning Shares of the Fund................................................. 8
Purchases............................................................................ 8
Exchanges............................................................................ 10
Redemptions and Repurchases.......................................................... 11
Distribution Plans................................................................... 13
Distributions........................................................................ 14
Tax Status........................................................................... 15
Description of Shares, Voting Rights and Liabilities................................. 16
Performance Information.............................................................. 16
8. Shareholder Services...................................................................... 17
APPENDIX A................................................................................ A-1
APPENDIX B................................................................................ B-1
APPENDIX C................................................................................ C-1
APPENDIX D................................................................................ D-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MFS CASH RESERVE FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of MFS Cash Reserve Fund (the "Fund") is to provide as
high a level of current income as is considered consistent with the preservation
of capital and liquidity. The Fund is a diversified series of MFS Series Trust I
(the "Trust"), an open-end management investment company. The minimum initial
investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF MUTUAL FUNDS ARE SUBJECT TO
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND
WILL FLUCTUATE IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU
REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information (the "SAI"), dated January 1, 1996, as
amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 18 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number).
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 77
<TABLE>
1. EXPENSE SUMMARY
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases
(as a percentage of offering price).................. None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)............................. None 4.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee reduction)(1)............... 0.45% 0.45%
Rule 12b-1 Fees........................................ 0.00%(2) 1.00%(3)
Other Expenses......................................... 0.45% 0.48%
----- -----
Total Operating Expenses (after fee reduction)(4)...... 0.90% 1.93%
<FN>
- ---------------
(1) The Adviser has voluntarily agreed to reduce its advisory fee to 0.45% per
annum of the Fund's average daily net assets. This fee reduction may be
rescinded at any time without notice to shareholders. Absent this reduction,
management fees would have been 0.55%.
(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/services fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares (see "Distribution Plans"). Distribution and service expenses paid
under this Plan may cause long-term shareholders to pay more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge. Payment of the 0.25% per annum service fee will
commence on the date that the value of the net assets of the Fund
attributable to Class A shares first equals or exceeds $40 million. Payment
of the 0.10% per annum distribution fee will commence on such date as the
Trustees of the Trust may determine (see "Distribution Plans").
(3) The Fund has adopted a Distribution Plan for its Class B shares (the "Class
B Distribution Plan") in accordance with Rule 12-1 under the 1940 Act which
provides that it will pay distribution/service fees aggregating up to 1.00%
per annum of the average daily net assets attributable to the Class B shares
(see "Distribution Plans"). Distribution and service expenses paid under
this Plan, together with any contingent deferred sales charge (a "CDSC")
payable upon redemption of Class B shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge.
(4) Absent the fee reduction, "Total Operating Expenses" would have been 1.00%
for Class A shares and 2.03% for Class B shares.
</TABLE>
EXAMPLE OF EXPENSES
-----------------------
<TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
PERIOD CLASS A CLASS B
------ ------- ---------------
<S> <C> <C> <C>
(1)
1 year.............................................. $ 9 $ 60 $ 20
3 years............................................. 29 91 61
5 years............................................. 50 124 104
10 years............................................. 111 199(2) 199(2)
<FN>
- ---------------
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
2
<PAGE> 78
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying CDSCs -- "Purchases"; (ii)
management fees -- "Investment Adviser"; and (iii) 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.
Each class of shares of the Fund has been created primarily for the convenience
of shareholders seeking a temporary investment vehicle pending an investment in
the same class of shares of a Fund in the MFS Family of Funds. However, other
money market funds managed by MFS have lower expense ratios than the Fund and,
unlike the Fund, do not have Distribution Plans and, with respect to Class B
shares, impose no CDSC upon redemption.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust presently consists of
eight series of shares (each of which is offered through a separate prospectus
except that five are offered through a single prospectus), each of which
represents a portfolio with separate investment objectives and policies. Shares
of the Fund are continuously sold to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Two classes of shares of the Fund
currently are offered to the general public. Class A shares are offered at net
asset value without an initial sales charge and are subject to a Distribution
Plan providing for a distribution fee and a 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 a distribution fee and a service fee
which are greater than the Class A distribution fee and service fee. Class B
shares will convert to Class A shares approximately eight years after purchase.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the officers
of the Trust are responsible for the Fund's operations. The Adviser manages the
portfolio from day to day in accordance with the Fund's investment objective and
policies. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3
<PAGE> 79
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since the inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, as
experts in accounting and auditing. The Fund's current independent auditors are
Deloitte & Touche LLP.
<TABLE>
FINANCIAL HIGHLIGHTS
--------------------
CLASS A AND CLASS B SHARES
--------------------------
<CAPTION>
NINE NINE YEAR ENDED
YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED MONTHS ENDED NOVEMBER 30,
AUGUST 31, AUGUST 31, NOVEMBER 30, AUGUST 31, AUGUST 31, --------------------
1995 1994 1993* 1995 1994 1993 1992
----------- ----------- ------------ ---------- ------------ -------- --------
CLASS A CLASS B
------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ -------- -------- -------- --------
Net investment income#............. $ 0.05 $ 0.02 $ 0.01 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Less distributions declared to
shareholders from net investment
income........................... (0.05) (0.02) (0.01) (0.04) (0.01) (0.01) (0.02)
------- ------ ------ -------- -------- -------- --------
Net asset value -- end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ -------- -------- -------- --------
Total return....................... 4.91% 2.89%+ 2.28%+ 3.81% 1.79%+ 1.16% 1.79%
Ratios (to average net assets)/
Supplemental data#:
Expenses......................... 0.90% 0.86%+ 0.92%+ 1.93% 1.94%+ 2.00% 2.22%
Net investment income............ 4.94% 3.11%+ 2.26%+ 3.69% 1.88%+ 1.19% 1.83%
Net assets at end of period (000
omitted)......................... $ 10,852 $ 2,156 $ 49 $166,519 $213,635 $155,274 $125,439
<FN>
- ---------------
+ Annualized.
* For the period from the commencement of offering of Class A shares, September 7, 1993 to November
30, 1993.
# The investment adviser did not impose a portion of its management fee for the periods indicated. If
this fee had been incurred by the Fund, the net investment income per share and the ratios would
have been:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income.......... $0.05 $0.02 $0.01 $0.04 $0.01 $0.01 $0.02
Ratios (to average net asset):
Expenses..................... 1.00% 0.96%+ 1.02%+ 2.03% 2.04%+ 2.10% 2.32%
Net investment income........ 4.84% 3.01%+ 2.16%+ 3.59% 1.78%+ 1.09% 1.73%
</TABLE>
4
<PAGE> 80
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987**
---- ---- ---- ---- ------
CLASS B
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------
Net investment income#......................... $ 0.04 $ 0.06 $ 0.07 $ 0.06 $ 0.04
Less distributions declared to shareholders
from net investment income................... (0.04) (0.06) (0.07) (0.06) (0.04)
-------- -------- -------- -------- -------
Net asset value -- end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------
Total return................................... 4.56% 6.12% 7.34% 5.85% 4.42%+
Ratios (to average net assets)/Supplemental
data#:
Expenses..................................... 2.04% 2.23% 2.24% 2.06% 2.06%+
Net investment income........................ 4.53% 6.06% 7.10% 5.59% 5.59%+
Net assets at end of period (000 omitted)...... $161,040 $203,314 $146,885 $139,518 $83,845
<FN>
- ---------------
+ Annualized.
** For the period from the commencement of investment operations, December 29, 1986 to November 30,
1987.
# The investment adviser did not impose all of its management fee for the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and the ratios would have
been:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income...................... $0.04 -- -- -- --
Ratios (to average net asset):
Expenses................................. 2.13% -- -- -- --
Net investment income.................... 4.44% -- -- -- --
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide as high a level of current income as is considered
consistent with the preservation of capital and liquidity. The Fund seeks to
achieve its investment objective by investing primarily (i.e., at least 80% of
its assets under normal circumstances) in the following instruments:
(i) obligations issued or guaranteed as to interest and principal by the
U.S. Government or any agency, authority or instrumentality thereof
(including repurchase agreements collateralized by such securities);
(ii) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100 million; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation ("FDIC"), provided that not more than 10% of
the total assets of the Fund will be invested in such insured obligations;
(iii) commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Ratings Group ("S&P") or by Fitch Investors Service, Inc.
("Fitch") or P-1 by Moody's Investors Service, Inc. ("Moody's"), if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue
rated AA or better by S&P or Aa or better by Moody's or Fitch; and
(iv) short-term (maturing in 13 months or less) corporate obligations which
at the date of investment are rated AA or better by S&P or Aa or better by
Moody's or Fitch.
The Fund may also invest up to 20% of its total assets in debt instruments not
specifically described in (i) through (iv) above, provided that such instruments
are deemed by the Trustees to be of comparable high quality and liquidity. The
Fund may invest its assets in the U.S. dollar-denominated securities of foreign
issuers and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). Since the portfolio of the
Fund may contain such securities, an investment therein may involve a greater
degree of risk than an investment in a fund which invests only in debt
obligations of U.S. domestic issuers, due to the possibility that there may be
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. The Fund may
invest up to 75% of its assets in all finance companies as a group, all banks
and bank holding companies as a group and all utility companies as a group, when
in the opinion
5
<PAGE> 81
of the Adviser yield differentials and money market conditions suggest such
investments are advisable and when cash is available for such investment and
instruments are available for purchase which fulfill the Fund's objectives in
terms of quality and marketability.
For a further description of the instruments and ratings discussed above and a
description of the risks associated with such investments, see Appendices B, C
and D to this Prospectus.
All the assets of the Fund will be invested in obligations which mature in less
than 13 months and generally these investments will be held to maturity;
however, securities collateralizing repurchase agreements may have maturities in
excess of 13 months. The Fund will, to the extent feasible, make portfolio
investments primarily in anticipation of or in response to changing economic and
money market conditions and trends. Under regulations currently in effect, the
average maturity of the investments of the Fund may not exceed 90 days. The Fund
does not intend to enter into options transactions.
For a discussion of the manner in which the Fund will calculate its yield, see
the SAI.
The investment objective and policies described above may be changed without
shareholder approval.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U.S.
government securities).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn additional income on available cash or as a temporary defensive measure.
Under a repurchase agreement the Fund acquires securities subject to the
seller's agreement to repurchase at a specified time and price. If the seller
becomes subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's right to liquidate the securities
may be restricted (during which time the value of the securities could decline).
As discussed in the SAI, the Fund has adopted certain procedures which are
intended to minimize any such risk.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. This may result in increases or decreases
in the Fund's current income available for distribution to the Fund's
shareholders and in the holding by the Fund of debt securities which sell at
moderate to substantial premiums or discounts from face value. The Fund will
engage in portfolio trading if it believes a transaction, net of costs
(including custodian charges), will help in attaining its investment objective.
(See "Portfolio Transactions and Brokerage Commissions" in the SAI.)
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the 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 other investment company clients of MFD, as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a portion
of the Fund's operating expenses (e.g., fees charged by the custodian of the
Fund's assets). For a further discussion of portfolio trading, see the SAI.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating
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<PAGE> 82
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.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993, as amended (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Geoffrey L. Kurinsky has been
the Fund's portfolio manager since January 1, 1992. Mr. Kurinsky, a Senior Vice
President of the Adviser, has been an Investment Analyst with the Adviser since
1987. Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives an annual management fee, computed and paid monthly, in an amount equal
to 0.55% of the Fund's average daily net assets for its then-current fiscal
year. The Adviser agreed voluntarily to reduce its fee with respect to the Fund
to 0.45% of the Fund's average daily net assets. This temporary fee reduction
for the Fund may be rescinded at any time by the Adviser, upon written notice to
the Fund, as to fees accruing after the date of such rescission. For the Fund's
fiscal year ended August 31, 1995, MFS received management fees under the
Advisory Agreement of $1,134,567 (0.55% of the Fund's average daily net assets)
before a reduction of $206,280.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Union
Standard Trust, MFS Variable Insurance Trust, MFS Institutional 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 various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Asset Management, Inc., provide investment
advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $41.5 billion on behalf of approximately 1.8 million investor
accounts as of November 30, 1995. As of such date, the MFS organization managed
approximately $17.3 billion of assets invested in equity securities and
approximately $20.4 billion of assets invested in fixed income securities.
Approximately $3.3 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a wholly owned subsidiary of Sun Life Assurance Company of
Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin,
Jeffrey L. Shames, Arnold D. Scott, John 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 the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James R.
Bordewick, Jr., and James O. Yost, all of whom are officers of MFS, are officers
of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypothekenund Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment
7
<PAGE> 83
expertise of Foreign & Colonial, and Foreign & Colonial will have access to the
extensive U.S. equity investment expertise of MFS. One or more MFS investment
analysts are expected to work for an extended period with Foreign & Colonial's
portfolio managers and investment analysts at their offices in London. In
return, one or more Foreign & Colonial employees are expected to work in a
similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, 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,
certain dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Shares of the Fund may be purchased at net asset value through any dealer and
other financial institution ("dealers") having selling agreements with MFD.
Dealers may charge their customers fees relating to investments in the Fund.
The Fund offers two classes of shares which bear distribution fees in different
forms and amounts and which, in the case of Class B shares, are offered subject
to a CDSC as described below:
CLASS A SHARES: Class A shares are offered at net asset value per share.
<TABLE>
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as a percentage of the lesser of the original
purchase price or redemption proceeds as follows:
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
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<PAGE> 84
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). The Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, for example, when
such purchase is contrary to the best interests of the Fund's other shareholders
or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS
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<PAGE> 85
Funds sold by such dealer during a specified sales period. In addition, from
time to time, MFD, at its expense, may provide additional commissions,
compensation or promotional incentives ("concessions") to dealers which sell
shares of the Fund. Such concessions provided by MFD may include financial
assistance to dealers in connection with preapproved conferences or seminars,
sales or training programs for invited registered representatives, payment for
travel expenses, including lodging, incurred by registered representatives for
such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding one or more MFS Funds, and/or other dealer-sponsored
events. From time to time, MFD may make expense reimbursements for special
training of a dealer's registered representatives in group meetings or to help
pay the expenses of sales contests. Other concessions may be offered to the
extent not prohibited by state laws or any self-regulatory agency, such as the
NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the Class B shares
in an account for which payment has been received by the Fund (i.e., an
established account) may be exchanged for Class B shares of any of the other MFS
Funds (if available for sale) at net asset value. Class A shares may be
exchanged for Class A shares of any of the other MFS Funds at net asset value
plus their normal sales charge (if available for sale). However, this sales
charge will not apply to: (i) shares exchanged from the Fund acquired by an
exchange from any other MFS Fund; (ii) shares exchanged from the Fund acquired
by automatic investment of dividends from any other MFS Fund; or (iii) shares
exchanged from the Fund where the shares being exchanged would have, at the time
of purchase, been eligible for purchase at net asset value without the
imposition of a sales charge had the shareholder made a direct investment in the
MFS Fund into which the exchange is being made. 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). Each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If the Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange, the exchange usually will occur
on that day if all the requirements set forth above have been complied with at
that time. 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
10
<PAGE> 86
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 and Repurchases -- Redemptions By Telephone." The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers. Special procedures, privileges and restrictions with respect to
exchanges may apply to market timers who enter into an agreement with MFD, as
set forth in such agreement (see "Purchases").
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption), normally $1.00, or by selling such shares to the
Fund through a dealer (a repurchase). Certain redemptions and repurchases are,
however, subject to a CDSC. See "Contingent Deferred Sales Charge" below. When a
shareholder withdraws an amount from his account, the shareholder is deemed to
have tendered for redemption a sufficient number of full and fractional shares
in his account to cover the amount withdrawn. The proceeds of a redemption or
repurchase will normally be available within seven days, except for shares
purchased or received in exchange for shares purchased by check (including
certified checks or cashier's checks). Payment of redemption proceeds may be
delayed for up to 15 days from the purchase date in an effort to assure that
such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or a
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designated to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER
11
<PAGE> 87
PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND COMMUNICATES IT TO MFD
BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE SHAREHOLDER WILL RECEIVE THE
NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY THE AMOUNT OF ANY APPLICABLE
CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD.
REDEMPTION BY CHECK: Only Class A shares may be redeemed by check. A shareholder
owning Class A shares of the Fund may elect to have a special account with State
Street Bank and Trust Company (the "Bank") for the purpose of redeeming Class A
shares from his or her account by check. The Bank will provide each Class A
shareholder, upon request, with forms of checks drawn on the Bank. Only
shareholders having accounts in which no share certificates have been issued
will be permitted to redeem shares by check. Checks may be made payable in any
amount not less than $500. Shareholders wishing to avail themselves of this
redemption by check privilege should so request on their Account Application,
must execute signature cards (for additional information, see the Account
Application) with signature guaranteed in the manner set forth under the caption
"Signature Guarantee" below, and must return any Class A share certificates
issued to them. Additional documentation will be required from corporations,
partnerships, fiduciaries or other such institutional investors. All checks must
be signed by the shareholder(s) of record exactly as the account is registered
before the Bank will honor them. The shareholders of joint accounts may
authorize each shareholder to redeem by check. The check may not draw on monthly
dividends which have been declared but not distributed. SHAREHOLDERS WHO
PURCHASE CLASS A SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR CASHIER'S
CHECKS) MAY WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY HAVE BEEN ON THE
FUND'S BOOKS FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK FOR
PAYMENT, A SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED TO
COVER THE AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME
TAX REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK, PLUS ANY APPLICABLE
CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD IS GREATER THAN
THE VALUE OF CLASS A SHARES HELD IN THE SHAREHOLDER'S ACCOUNT, THE CHECK WILL BE
RETURNED UNPAID, AND THE SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. TO AVOID
DISHONOR OF CHECKS DUE TO FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE
ADVISED AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD
NOT BE USED TO CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE
SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE
CHECK CLEARS. There is presently no charge to the shareholder for the
maintenance of this special account or for the clearance of any checks, but the
Fund and the Bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class B shares ("Direct
Purchases") will be subject to a CDSC for a period of six years. 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 of Class B shares, the amount by which the value of
a shareholder's Class B shares account represented by Direct Purchases exceeds
the sum of the six calendar year aggregations 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 Class B shares, (i) any Free Amount is not subject to the CDSC and
(ii) the amount of redemption equal to the then-current value of Reinvested
Shares is not subject to the CDSC, but (iii) any amount of the redemption in
excess of the aggregate of the then-current value of Reinvested Shares and the
Free Amount is subject to a CDSC. The CDSC will first be applied against the
amount of Direct Purchases which will result in any such charge being imposed at
the lowest possible rate. The CDSC to be imposed upon redemptions will be
calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
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SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their Class
B shares have a one-time right to reinvest the redemption proceeds in Class B
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, a CDSC
will be imposed upon redemption. Shareholders of the Fund who have acquired
Class A shares of the Fund by exchange from any other MFS Fund or by automatic
investment of dividends from other MFS Funds and who have redeemed such Class A
shares have a one-time right to reinvest the redemption proceeds in Class A
shares of any of the MFS Funds (if shares of that 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 Reinvestment Privilege. If the Class A shares
credited for any CDSC paid are then redeemed within twelve months of the initial
purchase, a CDSC will be imposed upon redemption. Such purchases under the
Reinstatement Privilege are subject to all limitations in the SAI regarding this
privilege.
IN-KIND DISTRIBUTIONS. Subject to 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 received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plans"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A or Class B
shares, as appropriate) (the "Designated Class") annually in order that MFD may
pay expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under each Distribution Plan for which there is
no dealer of record or for which
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qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plans, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the separate Distribution Plans. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expense incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
Distribution Plans have substantially identical provisions with respect to their
operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered at net asset
value without an initial sales charge. See "Purchases -- Class A Shares" above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). See
"Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under the Class A Distribution Plan
do not exceed 0.35% per annum of the average daily net assets of the Fund
attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value without
an initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.00% and 1.00%
per annum, respectively. Payment of the 0.25% per annum service fee will
commence on the date that the net assets of the Fund attributable to Class A
shares first equals or exceeds $40 million. Payment of the 0.10% per annum Class
A distribution fee will commence on such date as the Trustees of the Trust may
determine.
DISTRIBUTIONS
The net income 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 during
each such day as of the close of regular trading on such Exchange. All the net
income, as defined in the SAI, of each class so determined is declared as a
dividend to shareholders of record of that class at the time of
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<PAGE> 90
such determination. Shares purchased become entitled to dividends declared as of
the first day following the date of investment. Dividends are generally
distributed with respect to each class of shares on the last business day of
each month in the form of additional shares of that class at the rate of one
share (and fraction thereof) for each one dollar (and fraction thereof) of
dividend income attributable to that class, or, at the election of the
shareholder, in cash; except that if a shareholder redeems the entire amount in
his account with the Fund at any time during the month, all dividends declared
by the Fund during the month through the date of redemption will be paid to him
at the same time as the proceeds from the redemption of his shares. (For
taxation information on distributions, see "Tax Status" below.) Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B shares because expenses attributable to Class
B shares will generally be higher.
Securities are valued at amortized cost, which the Trustees have determined in
good faith constitutes fair value for the purposes of complying with the 1940
Act. This valuation method will continue to be used until such time as the
Trustees determine that it does not constitute fair value for such purposes. The
determination of the net income of each class of shares of the Fund is made each
day just prior to the determination of the net asset value per share of each
class of shares of the Fund (i.e., the value of the net assets attributable to
that class divided by the number of shares of the class outstanding). The net
income of each class of shares is declared as a dividend each time the net
income of the class is determined. Consequently, the net asset value per share
of each class of shares remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in the Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of the Fund in his
account.
It is expected that each class of shares of the Fund will have a positive net
income at the time of each determination thereof. If for any reason the net
income of the Fund determined at any time is a negative amount, the Fund will
first offset the negative amount with respect to each shareholder account from
the dividends declared during the month with respect to such account. Then, to
the extent necessary, the Fund will reduce the number of its outstanding shares
by treating each of its shareholders as having contributed to its capital that
number of full and fractional shares in the account of such shareholder which
represents his proportion of such excess. Each shareholder will be deemed to
have agreed to such contribution in these circumstances by his investment in the
Fund. This procedure will permit the net asset value per share of each class of
shares of the Fund to be maintained at a constant $1.00 per share.
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 has elected to be treated and 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 set out in the Code. It is expected that the Fund will not
be required to pay any entity level federal income or excise taxes, although
foreign-source income earned 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 the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or in additional shares. Since the
investment income of the Fund is derived from interest rather than dividends, no
portion of the dividends or distributions paid by the Fund will qualify for the
dividends received deduction for corporations. Shareholders may not have to pay
state or local taxes on dividends derived from interest on U.S. Government
obligations. Investors should consult with their tax advisors in this regard.
Shortly after the end of each calendar year, each shareholder will receive a
statement setting forth the federal income tax status of all dividends and
distributions for that year including the portion taxable as ordinary income,
the portion, if any, taxable as long-term capital gains, the portion
representing interest on U.S. Government obligations, 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.
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
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate
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may be permitted under an applicable treaty. The Fund is also required in
certain circumstances to apply backup withholding at a rate of 31% on taxable
dividends paid to any shareholder (including a shareholder who is neither a
citizen nor a resident of the U.S.) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments which
have been subject to 30% withholding. Prospective investors should read the
Fund's Account Application for additional information regarding backup
withholding of federal income tax and should consult their own tax advisers as
to the tax consequences of an investment in the Fund.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of eight series of the Trust, has two classes of shares, entitled
Class A and Class B 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 shares of each class 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 or selection of Trustees and
accountants. Additionally, each class of shares of a series will vote separately
on any material increases in the fees under its Distribution Plan or on any
other matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Declaration
of Trust provides that a Trustee may be removed from office in certain instances
(see "Description of Shares, Voting Rights and Liabilities" in the SAI).
Each share of each class of the Fund represents an equal proportionate interest
in the Fund, subject to the liabilities of that class, with each other share of
the Fund. Shares have no pre-emptive or conversion rights (except as set forth
in "Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should a series of the Fund be liquidated, the 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.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business 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 (e.g., fidelity bonding and errors and omissions insurance)
existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its yield and effective yield for each
class of shares. Both yield and effective yield are based on historical earnings
and are not intended to indicate future performance. The yield of a class of
shares of the Fund refers to the income allocable to that class generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then annualized; that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in the class of shares of the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield and effective yield calculations for Class B shares assumes no CDSC is
paid. These yield quotations should not be considered as representative of the
yield of a class of shares of the Fund in the future.
The yield of shares of the Fund will vary based on the type, quality, and
maturities of the securities held in the portfolio, and fluctuations in
short-term interest rates; in addition to the foregoing, the yield of a
particular class will vary based on changes in the expenses of the Fund and
expenses allocated to particular classes. For a discussion of the manner in
which the Fund will calculate its yield, see the SAI. For further information
about the Fund's performance for the fiscal year ended August 31, 1995, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder
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<PAGE> 92
Servicing Agent (see back cover for address and phone number.) In addition to
information provided in shareholder reports, the Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available to
investors upon request.
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.
Cancelled checks, if any, will be sent to shareholders monthly. At the end of
each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends reinvested in additional shares. This option will be assigned
if no other option is specified.
-- Dividends in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares at the net asset value in effect at the close of business on
the record date. Dividends and capital gain distributions in amounts less than
$10 will automatically be reinvested in additional shares of the Fund. If a
shareholder has elected to receive dividends and/or capital gain distributions
in cash and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividends and other distributions
reinvested in additional shares. Any request to change a distribution option
must be received by the Shareholder Servicing Agent by a reasonable period of
time prior to the payment date for a dividend in order to be effective for that
dividend. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders and
may be changed or discontinued at any time by a shareholder or the Fund.
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 distributions of dividends 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
in shares of the same class of another MFS Fund, if shares of such fund are
available for sale (and without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP 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.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange Plan
provides for automatic exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder if such fund is available for sale. Under the Automatic
Exchange Plan, exchanges at least $50 each may be made to up to four different
funds. A shareholder should consider the objectives and policies
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<PAGE> 93
of a fund and review its prospectus before electing to exchange money into such
fund through the Automatic Exchange Plan. No transaction fee is imposed in
connection with exchange transactions under the Automatic Exchange Plan.
However, exchanges of shares of MFS Money Market Fund, MFS Government Money
Market Fund and Class A shares of the Fund will be subject to any applicable
sales charge. For federal and (generally) state income tax purposes, an exchange
treated as a sale of the shares exchanged and, therefore, could result in a
capital gain or loss to the shareholder making the exchange. See the SAI for
further information concerning the Automatic Exchange Plan. Investors should
consult their tax advisers for information regarding the potential capital gain
and loss consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of taxdeferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated January 1, 1996, contains more detailed information about
the Fund, including, but not limited to, information related to (i) investment
techniques and restrictions, (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 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
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the contingent
deferred sales charge is waived for Class B shares:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner; and
- Distributions made on or after the IRA owner has attained the age of
70 1/2 years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Distributions made on or after the 401(a) or ESP Plan participant, as
applicable, has attained the age of 70 1/2 years old, but only with
respect to the minimum distribution under applicable Code rules;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
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- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ( the "Shareholder Servicing
Agent");
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds; and
- The sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant;
- Distributions made on or after the SRO Plan participant has attained the
age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Death or disability of a SAR-SEP Plan participant; and
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules.
6. CERTAIN TRANSFERS OF REGISTRATION. Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
8. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
9. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent.).
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APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the Bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
B-1
<PAGE> 97
APPENDIX C
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
C-1
<PAGE> 98
APPENDIX D
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.
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.
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.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
D-1
<PAGE> 99
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 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.
D-2
<PAGE> 100
<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-4500
Distributor MFS[R] CASH RESERVE FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1996
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[LOGO]
MFS[R] CASH RESERVE FUND
500 Boylston Street
Boston, MA 02116
MCR-1 1/96/36M 01/201
</TABLE>
<PAGE> 101
LOGO
MFS[R] CASH STATEMENT OF
RESERVE FUND[SM] ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds[R]) January 1, 1996
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Definitions........................................................................... 2
2. Investment Techniques................................................................. 2
3. Investment Restrictions............................................................... 2
4. Management of the Fund................................................................ 4
Trustees.......................................................................... 4
Officers.......................................................................... 4
Investment Adviser................................................................ 5
Custodian......................................................................... 6
Shareholder Servicing Agent....................................................... 6
Distributor....................................................................... 6
5. Portfolio Transactions and Brokerage Commissions...................................... 6
6. Shareholder Services.................................................................. 7
Investment and Withdrawal Programs................................................ 7
Exchange Privilege................................................................ 9
Tax-Deferred Retirement Plans..................................................... 9
7. Tax Status............................................................................ 10
8. Net Income and Distributions.......................................................... 11
9. Performance Information............................................................... 11
10. Distribution Plans.................................................................... 13
11. Description of Shares, Voting Rights and Liabilities.................................. 14
12. Independent Auditors and Financial Statements......................................... 14
Appendix A............................................................................ 15
</TABLE>
MFS CASH RESERVE FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Fund's Prospectus, dated January 1, 1996. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 102
<TABLE>
1. DEFINITIONS
<S> <C> <C>
"Fund" -- MFS(R) Cash Reserve Fund, a
series of MFS Series Trust I
(the "Trust"), a
Massachusetts business
trust. The Trust was previ-
ously known as "MFS Lifetime
Managed Sectors Fund" prior
to August 1, 1993. On August
3, 1992, the Trust changed
its name from "Lifetime
Managed Sectors Trust." The
Fund is the successor to MFS
Lifetime Money Market Fund,
which was reorganized as a
series of the Trust on
September 7, 1993.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1996, as
amended or supplemented from
time to time.
</TABLE>
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment policies are described in greater
detail below.
SECURITIES LENDING
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will 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 cash 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 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 20% of the value of the Fund's total assets.
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 Exchange,
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, including accrued
interest, 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 the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, 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.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the Fund's shares (which, as used
in this SAI means the lesser of (i) more than 50% of the outstanding shares of
the Trust (or of a series or a class, as applicable) or (ii) 67% or more of the
outstanding shares of the Trust (or of a series or a class, as applicable)
present at a meeting if holders of more than 50% of the outstanding shares of
the Trust (or of a series or a class, as applicable) are represented in person
or by proxy). Except for Investment Restriction (1), these investment
restrictions and policies are adhered to at the time of purchase or utilization
of assets; a subsequent change in circumstances will not be considered to result
in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for
2
<PAGE> 103
extraordinary or emergency purposes, or pledge, mortgage or hypothecate an
amount of its assets (taken at market value) in excess of 15% of its total
assets, in each case taken at the lower of cost or market value.
(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) Invest more than 25% of its total assets (taken at market value) in any
one industry; provided, however, that (a) there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities and (b) the Fund may invest up to 75% of its
assets in all finance companies as a group, all bank and bank holding
companies as a group and all utility companies as a group when in the opinion
of the Adviser yield differentials and money market conditions suggest and
when cash is available for such investment and instruments are available for
purchase which fulfill the Fund's objective in terms of quality and
marketability.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein and securities secured by real
estate), or mineral leases, commodities or commodity contracts in the ordinary
course of its business. The Fund reserves the freedom of action to hold and to
sell real estate or mineral leases, commodities or commodity contracts
acquired as a result of the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market value).
Not more than 10% of the Fund's total assets (taken at market value) may be
invested in repurchase agreements maturing in more than seven days. The Fund
may purchase all or a portion of an issue of debt securities distributed
privately to financial institutions. For these purposes the purchase of
short-term commercial paper or a portion or all of an issue of debt securities
which are part of an issue to the public shall not be considered the making of
a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than securities issued
or guaranteed by the United States, any state or political subdivision
thereof, or any political subdivision of any such state, or any agency or
instrumentality of the United States, any state or political subdivision
thereof, or any political subdivision of any such state.
(7) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if
such purchase, at the time thereof, would cause the Fund to hold more than 10%
of any class of securities of such issuer. For this purpose all indebtedness
of an issuer maturing in less than one year shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value.
(10) 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 purchases and sales of securities.
(11) Make short sales of securities.
(12) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase such securities if such purchase at
the time thereof would cause more than 10% of its total assets (taken at
market value) to be invested in the securities of such issuers; and, provided
further, that the Fund will not purchase securities issued by an open-end
investment company.
(13) Write, purchase or sell any put or call option.
(14) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
As a non-fundamental policy, the Fund will not knowingly invest in securities
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 10% of the Fund's total assets (taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years'
continuous operation.
3
<PAGE> 104
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the management of the Fund's assets,
and the officers of the Trust are responsible for its operations. The Trustees
and officers of the Trust 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
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
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; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. Address: 110 Broad Street, Boston,
Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President (since
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 prior to April 1992. Address: 5875
Landerbrook Drive, Mayfield Heights, Ohio
OFFICERS
W. THOMAS LONDON*, Treasurer
Massachusetts Financial Services Company, Senior Vice President
STEPHEN E. CAVAN*, Secretary and Clerk
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.*, Assistant Secretary
Massachusetts Financial Services Company, Vice President and Associate General
Counsel
JAMES O. YOST*, Assistant Treasurer
Massachusetts Financial Services Company, Vice President
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940, as
amended (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 is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current years service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under, the retirement plan.
As of November 30, 1995, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
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 liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
4
<PAGE> 105
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS, together with its predecessor organizations, has a history of money
management dating from 1924. MFS is a wholly owned subsidiary of Sun Life of
Canada (U.S.) which in turn is a wholly owned subsidiary of Sun Life Assurance
Company of Canada ("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (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, in an amount equal to the sum of
0.55% of the Fund's average daily net assets. The Adviser agreed voluntarily to
reduce its fee with respect to the Fund to 0.45% of the Fund's average daily net
assets. This temporary fee reduction for the Fund may be rescinded at any time
by the Adviser, upon written notice to the Fund, as to fees accruing after the
date of such rescission.
For the Fund's fiscal years ended August 31, 1995, the nine-month period ended
August 31, 1994 and the fiscal year ended November 30, 1993, the Advisor
received management fees under the Fund's Advisory Agreement of $1,134,567,
$806,328 and $665,052 (before reductions of $206,280, $147,532 and $111,576),
respectively.
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 reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (other than those assumed by MFS or
MFD) including: Trustee fees discussed above; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
that Fund; fees and expenses of independent auditors, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing share certificates, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the 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 are borne by the Fund except that the Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. 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. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of the Adviser for the
fiscal year ended August 31, 1995, see "Statement of Operations" in the Fund's
Annual Report to shareholders dated August 31, 1995 incorporated by reference
into this SAI. Payment by the Fund of brokerage commissions for brokerage and
research services of value to the Adviser in serving its clients is discussed
under the caption "Portfolio Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs (with the exception of
the services, facilities and personnel provided by the Shareholder Servicing
Agent or the Custodian, see below).
The Advisory Agreement with the Fund will remain in effect until August 1, 1996,
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 provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
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CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of shares of each class and public offering price of shares of the
Fund. The Custodian does not determine the investment policies of the Fund or
decide which securities the Fund will buy or sell. The Fund may, however, invest
in securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund. The Custodian has contracted with the
Adviser for the Adviser to perform certain accounting functions related to
options transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Fund, dated as of September 10,
1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively. 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. The Custodian has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend and
distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated as of
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where the SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares is their net asset value
next computed after the sale.
CLASS B SHARES: MFD acts as agent in selling Class B shares of the Fund to
dealers. The public offering price of Class B shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the fiscal year ended August 31, 1995, the nine-month period ended August
31, 1994 and the fiscal year ended November 30, 1993, the Contingent Deferred
Sales Charge (the "CDSC") imposed on redemption of Class B shares was $769,924,
$535,000 and $780,000, respectively.
The Distribution Agreement will remain in effect until August 1, 1996 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 such 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.
5. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. From time to time, soliciting
dealer fees are available to the Adviser on the tender of the Fund's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer
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fees are in effect recaptured for the Fund by the Adviser. At present no other
recapture arrangements are in effect.
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
the Adviser's overall responsibilities to the Fund or to its 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 purchasing or selling securities, and the
availability 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 purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $20,000 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin and 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).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
Most of the transactions of the Fund are principal transactions and thus do not
involve the payment of brokerage commissions. For the Fund's fiscal year ended
August 31, 1995, the nine-month period ended August 31, 1994 and the fiscal year
ended November 30, 1993, no brokerage commissions were paid by the Fund.
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 MFS or any subsidiary of MFS. 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, it is believed that the Fund's ability to participate
in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available programs designed to enable shareholders to add to
their investment or withdraw from it with a minimum of paper work, as described
below. The programs involve no extra charge to shareholders and may be changed
or discontinued at any time by a shareholder or the Fund.
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
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additional purchase minimums. Distributions will be invested at net asset value
(exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP generally
are limited to 10% of the value of the account at the time of the establishment
of the SWP. SWP 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 "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP, but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC (e.g., Class A shares purchased by exchange from
another MFS Fund that imposes a CDSC). To the extent that redemptions for such
periodic withdrawals exceed dividend income reinvested in the account, such
redemptions will reduce and may eventually exhaust the number of shares in the
shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be received in full and fractional shares of the Fund at
the net asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate value
of at least $5,000 either must be held on deposit by, or certificates for such
shares must be deposited with, the Shareholder Servicing Agent. The shareholder
may deposit into the account additional shares of the Fund, change the payee or
change the 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 in the Fund may be made at
any time either 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.
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) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic monthly or quarterly exchanges of
funds from the shareholder's Fund account for investment in the same class of
shares of other MFS funds, selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to four
different funds effective on the seventh day of each month or of every third
month, depending on whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in the Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of the Fund will be subject
to any applicable sales charge. Changes in amounts to be exchanged to each fund,
the funds to which exchanges are to be made and the timing of exchanges (monthly
or quarterly), or termination of a shareholder's participation in the Automatic
Exchange Plan will be made after instructions in writing or by telephone (an
"Exchange Change Request") are received by the Shareholder Servicing Agent in
proper form (i.e., if in writing signed by the record owner(s) exactly as shares
are registered; if by telephone proper account identification is given by the
dealer or shareholder of record). Each Exchange Change Request (other than
termination of participation in the program) must involve at least $50.
Generally, if an Exchange Change Request is received by telephone or in writing
before the close of business on the last business day of the month, the Exchange
Change Request will be effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
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The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Holders of Class B shares 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 the Fund in the case where such
shares 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 such shares of the fund
are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
the 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 for certain Class A share purchases, a CSDC 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 any loss realized on the original redemption for federal
income tax purposes. Please consult your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below and the
limitations described under "Exchanges" in the Prospectus, some or all of the
shares in an account for which payment has been received by the Fund (i.e., an
established account) may be exchanged for the shares of the same class of any
other MFS Fund (if available for sale) at net asset value. Exchanges will be
made 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 the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If an Exchange Request is received by the
Shareholder Servicing Agent in writing or by telephone on any business day prior
to the close of regular trading on the Exchange, the exchange usually will occur
on that day if all of the requirements set forth above have been complied with
at that time. However, payment of the redemption proceeds by the Fund, and thus
the purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best interest of
all its shareholders. Investment dealers which have satisfied criteria
established by MFD may also communicate a shareholder's Exchange Request to MFD
by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of the Fund acquired through direct purchase and dividends
reinvested prior to June 1, 1992) have the right to exchange their shares for
shares of the MFS Funds, subject to the conditions, if any, set forth in their
respective prospectuses. In addition, unitholders of the MFS Fixed Fund (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
Shares of the Fund are available for purchase by all types of tax-deferred
retirement plans. MFD makes available through invest-
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ment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by MFD, the
trustee or the custodian, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. 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 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. As long as
the Fund qualifies as a regulated investment company under the Code, it will not
be subject to any Massachusetts excise or income taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local income taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains, whether paid to shareholders in cash or additional
shares, are taxable to the Fund's shareholders as ordinary income for federal
income tax purposes regardless of how long they have owned shares in the Fund.
Since the investment income of the Fund is derived from interest rather than
dividends, no portion of the dividends paid by the Fund will qualify for the
dividends-received deduction for corporations. Dividends of the Fund that are
declared in October, November, or December to shareholders of record in such a
month, and paid the following January will be taxable to shareholders as if
received on December 31 of the year in which they are declared. The Fund will
notify shareholders regarding the federal tax status of its distributions after
the end of each calendar year.
Special tax considerations apply with respect to foreign investments of the
Fund. For example, foreign exchange gains and losses realized by the Fund
generally will be treated as ordinary income or losses. Investment by the Fund
in certain "passive foreign investment companies" may be limited in order to
avoid imposition of a tax on the Fund.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source; the Fund does not
expect to be able to pass through to shareholders foreign tax credits or
deductions with respect to such foreign taxes. The United States has entered
into tax treaties with many foreign countries that may entitle the Fund to a
reduced rate of foreign tax or an exemption from foreign tax on such income; the
Fund intends to qualify for treaty reduced rates of tax where available. It is
impossible, however, 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.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold tax at the rate of 30% on any dividends or other payments made to
Non-U.S. Persons that are subject to such withholding regardless of whether a
lower treaty rate may be permitted. Any amounts overwithheld may be recovered by
such persons by filing a claim for refund with the U.S. Internal Revenue Service
within the time period applicable to such claims. The Fund is also required in
certain circumstances to apply backup withholding at a rate of 31% on taxable
dividends paid to any shareholder (including a Non-U.S. Person) who does not
furnish to the Fund certain information and certifications or who is otherwise
subject to backup withholding. However, backup withholding will not be applied
to payments which have been subject to 30% withholding. Distributions received
from the Fund by Non-U.S. Persons may also be subject to tax under the laws of
their own jurisdiction.
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
10
<PAGE> 111
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such dividends for state and local income tax purposes as well as
regarding the tax consequences of an investment in the Fund.
8. NET INCOME AND DISTRIBUTIONS
As described in "Distributions" in the Prospectus, the net income attributable
to each class of shares of the Fund is determined each day during which the
Exchange is open for trading. (As of the date of this SAI, the Exchange is open
for trading every weekday except for the following holidays (or the days on
which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) (For
taxation information on distributions, see "Tax Status" above.)
For this purpose, the net income attributable to each class of shares of the
Fund (from the time of the immediately preceding determination thereof) shall
consist of (i) all interest income attributable to that class accrued on the
portfolio assets of the Fund, (ii) less all actual and accrued expenses
attributable to that class determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and losses and
net unrealized appreciation or depreciation on the assets of the Fund
attributable to that class. Interest income shall include discount earned
(including both original issue and market discount) on discount paper accrued
ratably to the date of maturity. Securities are valued at amortized cost, which
the Trustees have determined in good faith constitutes fair value for the
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the Trustees determine that it does not constitute
fair value for such purposes. The Fund will limit its portfolio investments to
those U.S. dollar-denominated instruments which the Board of Trustees determines
present minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so rated, of
comparable quality as determined by the Board of Trustees. The Fund has also
agreed to maintain a dollar weighted average maturity of 90 days or less and to
invest only in securities maturing in 13 months or less. The Board of Trustees
has established procedures designed to stabilize the net asset value per share
of each class of the Fund, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Trustees determine that a deviation from
the $1.00 per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, they will take
corrective action as they regard as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize capital
gains or losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
Since the net income is declared as a dividend each time the net income is
determined, the net asset value per share of each class (i.e., the value of the
net assets of the Fund attributable to that class divided by the number of
shares of the class outstanding) remains at $1.00 per share immediately after
each such determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend income, is
reflected by an increase in the number of shares in his account.
It is expected that each class of shares of the Fund will have a positive net
income at the time of each determination thereof. If for any reason the net
income determined at any time is a negative amount, which could occur, for
instance, upon default by an issuer of a portfolio security, the Fund would
first offset the negative amount with respect to each shareholder account from
the dividends declared during the month with respect to each such account. If
and to the extent that such negative amount exceeds such declared dividends at
the end of the month (or during the month in the case of an account liquidated
in its entirety), the Fund could reduce the number of its outstanding shares by
treating each shareholder of the Fund as having contributed to its capital that
number of full and fractional shares of the Fund in the account of such
shareholder which represents his proportion of such excess. Each shareholder of
the Fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the Fund. This procedure would permit the net
asset value per share of each class of the Fund to be maintained at a constant
$1.00 per share.
9. PERFORMANCE INFORMATION
The Fund will provide current annualized and effective annualized yield
quotations based on the daily dividends of each class of shares of the Fund.
These quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders.
Any current yield quotation of each class of the Fund which is used in such a
manner as to be subject to the provisions of Rule 482(d) under the Securities
Act of 1933, as amended, shall consist of an annualized historical yield,
carried at least to the nearest hundredth of one percent, based on a specific
seven calendar day period and shall be calculated by dividing the net change in
the value of an account having a balance of one share of that class at the
beginning of the period by the value of the account at the beginning of the
period and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both the
original share and any such additional shares, but would not reflect any
realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any effective
yield quotation of each class of the Fund so used shall be calculated by
compounding the current yield quotation for such period by multiplying such
quotation by 7/365, adding 1 to the product, raising the sum to a power equal to
365/7, and subtracting 1 from the result. These yield quotations should not be
considered as representative of the yield of each class of the Fund in the
future since the yield will vary based on the type, quality and maturities
11
<PAGE> 112
of the securities held in its portfolio, fluctuations in short-term interest
rates and changes in the Fund's expenses.
The current annualized yield of the Fund for the seven-day period ended August
31, 1995 (the end of the Fund's fiscal year) was 4.94% for Class A shares and
3.84% for Class B shares. The effective annualized yield of the Fund for such
period was 5.06% for Class A shares and 3.92% for Class B shares.
PERFORMANCE RESULTS -- The performance results below, based on an assumed
initial investment in Class B shares of $10,000, cover the period from December
29, 1986 through December 31, 1994. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. Any performance
results or total rate of return quotation provided by the Fund should not be
considered as representative of the performance of the Fund in the future since
the net asset value of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods used
to calculate total rates of return should be considered when comparing the total
rate of return of the Fund to total rates of return published for other
investment companies or other investment vehicles. Total rate of return reflects
the performance of both principal and income. Current yield and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
<TABLE>
<CAPTION>
MFS CASH RESERVE B
CAP GAIN DIVIDEND
YEAR ENDED DIRECT REINVEST- REINVEST- TOTAL
DECEMBER 31 INVESTMENT MENT MENT VALUE
- ----------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1986* $10,000 0 $ 0 $10,000
1987 10,000 0 428 10,428
1988 10,000 0 1,049 11,049
1989 10,000 0 1,847 11,847
1990 10,000 0 2,578 12,578
1991 10,000 0 3,115 13,115
1992 10,000 0 3,327 13,327
1993 10,000 0 3,484 13,484
1994 10,000 0 3,801 13,801
-----
<FN>
- ------------------
*For the period from the start of business, December 29, 1986, through December
31, 1986.
</TABLE>
EXPLANATORY NOTES: The results take into account the annual distribution fee but
not the CDSC. No adjustment has been made for any income taxes payable by
shareholders.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
12
<PAGE> 113
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
10. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A and Class B
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 Fund's expense ratio to the extent that the Fund's fixed costs are
spread over a larger net asset base. Also, an increase in net assets may lessen
the adverse effect that could result were the Fund required to liquidate
portfolio securities to meet redemptions. There is, however, no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid; (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amounts as may be determined from time to time by MFD;
or (ii) to any insurance company which has entered into an agreement with the
Fund and MFD that permits such insurance company to purchase Class A shares from
the Fund at their net asset value in connection with annuity agreements issued
in connection with the insurance company's separate accounts. Dealers may from
time to time be required to meet certain other criteria in order to receive
service fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense equipment.
<TABLE>
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1995, the Fund paid the following Distribution
Plan expenses:
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
DISTRIBUTION PLANS BY FUND BY MFD BY DEALERS
- ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Class B Distribution
Plan.................. $2,015,342 $1,560,531 $454,811
</TABLE>
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1996, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distribution Plans entered
into between the Fund or MFD and other organizations must be approved by the
Board of
13
<PAGE> 114
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 of any penalty, by vote of a majority of the Distribution Plan Qualified
Trustees or by vote of the holders of a majority of the respective class of the
Fund's shares. 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 "interest person" has any financial interest in any of the
Distribution Plans or in any related agreement.
11. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permit the Trustees of the Trust 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 seven other series. The Declaration
of Trust, as amended, 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 two classes of shares of the Fund, Class A
shares and Class B shares. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances 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 Trust's shares. Shares have no pre-emptive or conversion
rights (except as set forth in "Purchases-Conversion of Class B Shares" in the
Prospectus). The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated, the
Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the 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 it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or 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 willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
12. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are 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 Portfolio of Investments at August 31, 1995, the Statement of Assets and
Liabilities at August 31, 1995, the Statement of Operations for the year ended
August 31, 1995, the Statement of Changes in Net Assets for the year ended
August 31, 1995, the nine months ended August 31, 1994 and the year ended
November 30, 1993, the Financial Highlights for the year ended August 31, 1995,
the nine months ended August 31, 1994, for each of the years in the seven year
period ended November 30, 1993 and for the period December 29, 1986 to November
30, 1987, the Notes to Financial Statements and the Independent Auditors'
Report, each of which is included in the Annual Report to shareholders of the
Fund, are incorporated by reference into this SAI and have been so incorporated
in reliance upon the report of Deloitte & Touche LLP, independent auditors, as
experts in accounting and auditing. A copy of the Annual Report accompanies this
SAI.
14
<PAGE> 115
<TABLE>
APPENDIX A
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,500 $ 685 10 $226,221
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 3,950 1,700 14 147,274
Dr. Lawrence Cohn.................... 3,500 350 18 133,524
Sir David Gibbons.................... 3,500 1,251 13 132,024
Abby M. O'Neill...................... 3,275 491 10 125,924
Walter E. Robb, III.................. 3,950 1,912 15 147,274
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 3,950 395 20 147,274
Ward Smith........................... 3,950 609 13 147,274
<FN>
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 75.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 36 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $9.7 billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24.4
billion).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 or more
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,950 $ 443 $ 738 $1,033 $1,475
3,230 485 808 1,131 1,615
3,510 527 878 1,229 1,755
3,790 569 948 1,327 1,895
4,070 611 1,018 1,425 2,035
4,350 653 1,088 1,523 2,175
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to the Trustees.
</TABLE>
15
<PAGE> 116
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank & Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
CASH RESERVE
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
LOGO MCR-13 1/96.5M 01/201
<PAGE> 117
<PAGE>
[logo] MFS
THE FIRST NAME IN MUTUAL FUNDS Annual Report for
Year Ended
August 31, 1995
MFS(R) CASH RESERVE FUND
Front cover
A photo of a columned building
<PAGE>
<TABLE>
<S> <C>
MFS(R) CASH RESERVE FUND
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company
CUSTODIAN
Marshall N. Cohan - Private Investor State Street Bank and Trust Company
Lawrence H. Cohn, M.D. - Chief of Cardiac AUDITORS
Surgery, Brigham and Women's Hospital; Deloitte & Touche LLP
Professor of Surgery, Harvard Medical School
INVESTOR INFORMATION
The Hon. Sir J. David Gibbons, KBE - Chief For MFS stock and bond market outlooks,
Executive Officer, Edmund Gibbons Ltd.; call toll free: 1-800-637-4458 anytime from
Chairman, Bank of N.T. Butterfield & Son Ltd. a touch-tone telephone.
Abbey M. O'Neill - Private Investor; For information on MFS mutual funds,
Director, Rockefeller Financial Services, Inc. call your financial adviser or, for an
(Investment Advisers) information kit, call toll free:
1-800-637-2929 any business day from
Walter E. Robb, III - President and Treasurer, 9 a.m. to 5 p.m. Eastern time (or leave
Benchmark Advisors, Inc. (Corporate a message anytime).
Financial Consultants)
INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President and Secretary, Massachusetts P.O. Box 2281
Financial Services Company Boston, MA 02107-9906
For general information,
Jeffrey L. Shames* - President, Massachusetts call toll free:
Financial Services Company 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
J. Dale Sherratt - President, Insight Resources,
Inc. (Acquisition Planning Specialists) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
Ward Smith - Former Chairman day from 9 a.m. to 5 p.m. Eastern time.
(until 1994), NACCO Industries; (To use this service, your phone must be
Director, Sundstrand Corporation equipped with a Telecommunications Device for
the Deaf.)
INVESTMENT ADVISER
Massachusetts Financial Services Company For share prices, account balances and
500 Boylston Street exchanges, call toll free: 1-800-MFS-TALK
Boston, MA 02116-3741 (1-800-637-8255) anytime from a touch-tone
telephone.
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Geoffrey L. Kurinsky*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
Short-term interest rates increased dramatically during the past year, despite
the last few months of lower rates. The annualized compounded yield on an
investment in Class A shares of the Fund for the seven-day period ended August
31, 1995 increased from 3.8% to 5.1%, while the annualized compounded yield on
an investment in Class B shares rose from 2.7% to 3.9%.
Economic Environment
Moderate, but sustainable, growth appears to be the hallmark of the economic
expansion's fifth year. After slowing earlier in the summer, consumer spending
and homebuying were showing renewed strength by August 31, while businesses
continued to work off excess inventories and reduce factory output. Meanwhile,
overseas economies, particularly those of Germany and Japan, have not recovered
as expected, limiting U.S. export growth. However, we believe the Federal
Reserve Board's consistent and, so far, successful efforts to fight inflation
seem to be giving consumers and businesses enough confidence to help maintain
2 1/2% to 3% real (adjusted for inflation) growth in gross domestic product, at
least through 1995.
Interest Rates
During the fiscal year ended August 31, 1995, the Federal Reserve voted to
continue to tighten monetary policy by raising the federal funds rate (the
interest rate charged by banks to other banks in need of overnight loans) two
more times. On November 15, 1994, it raised the federal funds rate 75 basis
points (0.75%). Then on February 1, 1995, an increase of 50 basis points (0.50%)
was put into effect. Most recently, however, the Federal Reserve lowered rates
25 basis points (0.25%) on July 6, 1995 (the first easing in nearly three years)
after the economy began to show signs of contracting. As a result, yields on
30-day U.S. Treasury bills rose from just over 4.2% at the end of August 1994 to
5.3% as of August 31, 1995, while yields on 30-day commercial paper increased
from 4.7% to their current level of 5.7% during the same period. With improving
inflation conditions and moderate economic growth, we believe short-term
interest rates may fall somewhat further over the next several months.
Portfolio Performance and Strategy
Because of the trend toward stable to lower short-term interest rates and in an
effort to provide a reasonable level of current income, we have lengthened
maturities in the portfolio. The average maturity of the Fund was 50 days as of
August 31, 1995 versus 30 days as of August 31, 1994.
The portfolio continues to include only the highest-quality corporate, bank
and government securities in order to provide investors with maximum security
against credit risk (although money market funds are neither insured nor
guaranteed by the U.S. government, and there can be no assurance that they will
be able to maintain a stable net asset value). On August 31, 1995, approximately
24% of the Fund's net assets was invested in commercial paper, with the balance
invested in securities issued or guaranteed by the U.S. Treasury or agencies or
instrumentalities of the U.S. government because of the very narrow yield
spreads between government agency obligations and commercial paper. This
emphasis on quality should allow the Fund to continue to help investors to
obtain current income and, at the same time, to preserve capital and liquidity.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
A photo of A. Keith Brodkin, A photo of Geoffrey L. Kurinsky,
Chairman and President. Portfolio Manager.
A. Keith Brodkin Geoffrey L. Kurinsky
Chairman and President Portfolio Manager
September 12, 1995
PORTFOLIO MANAGER PROFILE
Geoff Kurinsky began his career at MFS in 1987 in the Fixed Income Department. A
graduate of the University of Massachusetts and Boston University's Graduate
School of Management, he was named Assistant Vice President in 1988, Vice
President in 1989 and Senior Vice President in 1993. He has managed MFS Cash
Reserve Fund since 1987.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
<PAGE>
OBJECTIVE AND POLICY
The Fund's investment objective is to seek as high a level of current income as
is considered consistent with the preservation of capital and liquidity.
The Fund's investment policy is to invest in money market instruments that
mature in less than 13 months. Securities collateralizing repurchase agreements,
however, may have maturities in excess of 13 months. The Fund invests primarily
in U.S. government securities (including repurchase agreements collateralized by
such securities), obligations of the larger banks, prime commercial paper and
high-grade, short-term corporate obligations. The Fund may also invest in U.S.
dollar-denominated securities of foreign issuers.
PORTFOLIO OF INVESTMENTS - August 31, 1995
Commercial Paper - 23.7%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
American Telephone & Telegraph Co.,
due 9/14/95 $ 4,500 $ 4,490,835
Campbell Soup Co., due 10/19/95 5,000 4,962,200
Coca-Cola Co., due 11/30/95 5,000 4,929,875
Hershey Foods Corp.,
due 10/03/95 - 10/23/95 8,200 8,141,740
Hewlett Packard Co., due 10/03/95 450 447,740
PepsiCo, Inc., due 9/01/95 - 10/03/95 7,200 7,189,902
Philip Morris Cos., Inc., due 9/13/95 7,000 6,986,700
Warner-Lambert Co., due 12/29/95 5,000 4,908,271
- -----------------------------------------------------------------------------
Total Commercial Paper $ 42,057,263
- -----------------------------------------------------------------------------
U.S. Government and Agency Obligations - 78.5%
- -----------------------------------------------------------------------------
Federal Farm Credit Bank,
due 11/16/95 - 11/28/95 $10,000 $ 9,873,795
Federal Home Loan Bank, due 9/06/95 3,100 3,097,554
Federal Home Loan Mortgage Corp.,
due 9/05/95 - 2/20/96 80,850 80,358,689
Federal National Mortgage Assn.,
due 9/15/95 - 2/12/96 43,900 43,436,039
Tennessee Valley Authority, due 10/03/95 2,500 2,487,422
- -----------------------------------------------------------------------------
Total U.S. Government and Agency Obligations $139,253,499
- -----------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $181,310,762
Other Assets, Less Liabilities - (2.2)% (3,939,175)
- -----------------------------------------------------------------------------
Net Assets - 100.0% $177,371,587
- -----------------------------------------------------------------------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
August 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at amortized cost and value $181,310,762
Cash 81,058
Receivable for Fund shares sold 1,250,741
Other assets 3,028
------------
Total assets $182,645,589
------------
Liabilities:
Distributions payable $ 62,963
Payable for Fund shares reacquired 4,971,896
Payable to affiliates -
Management fee 2,346
Shareholder servicing agent fee 1,125
Distribution fee 79,768
Accrued expenses and other liabilities 155,904
------------
Total liabilities $ 5,274,002
------------
Net assets (represented by paid-in capital) $177,371,587
============
Shares of beneficial interest outstanding 177,371,587
============
Class A shares:
Net asset value, redemption price and offering price per share
(net assets of $10,852,198 / 10,852,198 shares of beneficial
interest outstanding) $1.00
=====
Class B shares:
Net asset value, redemption price and offering price per share
(net assets of $166,519,389 / 166,519,389 shares of
beneficial interest outstanding) $1.00
=====
A contingent deferred sales charge may be imposed on
redemptions of Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended August 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest $11,606,334
-----------
Expenses -
Management fee $ 1,134,567
Trustees' compensation 37,510
Shareholder servicing agent fee (Class A) 7,128
Shareholder servicing agent fee (Class B) 443,375
Distribution and service fee (Class B) 2,015,342
Postage 77,236
Custodian fee 43,232
Printing 55,061
Auditing fees 29,159
Legal fees 4,200
Miscellaneous 297,000
-----------
Total expenses $ 4,143,810
Reduction of expenses by investment adviser (206,280)
-----------
Net expenses $ 3,937,530
-----------
Net investment income $ 7,668,804
===========
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended Nine Months Ended Year Ended
August 31, 1995 August 31, 1994 November 30, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 7,668,804 $ 2,788,904 $ 1,447,426
------------ ------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (234,719) $ (23,520) $ (819)
From net investment income (Class B) (7,434,085) (2,765,384) (1,446,607)
------------ ------------ ------------
Total distributions declared to shareholders $ (7,668,804) (2,788,904) (1,447,426)
------------ ------------ ------------
Fund share (principal)transactions at net asset
value of $1.00 per share -
Net proceeds from sales of shares $836,765,789 $514,645,780 $361,353,850
Net asset value of shares issued to shareholders
in reinvestment of distributions 6,352,846 2,337,731 1,295,224
Cost of shares reacquired (881,538,348) (456,515,148) (332,765,233)
------------ ------------ ------------
Total increase (decrease) in net assets $(38,419,713) $ 60,468,36 $ 29,883,841
Net assets:
At beginning of period 215,791,300 155,322,937 125,439,096
------------ ------------ ------------
At end of period $177,371,587 $215,791,300 $155,322,937
============ ============ ============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Nine
Year Ended Months Ended Year Ended
August 31, August 31, November 30,
1995 1994 1993<F2>
- --------------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00
------ ------ ------
Net investment income# $ 0.05 $ 0.02 $ 0.01
Less distributions declared to shareholders from net
investment income (0.05) (0.02) (0.01)
------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00
====== ====== ======
Total return 4.91% 2.89%<F1> 2.28%<F1>
Ratios (to average net assets)/Supplemental data:<F3>
Expenses 0.90% 0.86%<F1> 0.92%<F1>
Net investment income 4.94% 3.11%<F1> 2.26%<F1>
Net assets at end of period (000 omitted) $10,852 $2,156 $49
<FN>
<F1> Annualized.
<F2> For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
<F3> The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had
been incurred by the Fund, the net investment income per share and ratios would have been:
</FN>
Net investment income $ 0.05 $ 0.02 $ 0.01
Ratios (to average net assets):
Expenses 1.00% 0.96%<F1> 1.02%<F1>
Net investment income 4.84% 3.01%<F1> 2.16%<F1>
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Nine
Year Ended Months Ended Year Ended November 30,
August 31, August 31, -------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Net investment income<F2> $ 0.04 $ 0.01 $ 0.01 $ 0.02 $ 0.04
Less distributions declared
to shareholders from net
investment income (0.04) (0.01) (0.01) (0.02) (0.04)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 3.81% 1.79%<F1> 1.16% 1.79% 4.56%
Ratios (to average net assets)/Supplemental data:<F2>
Expenses 1.93% 1.94%<F1> 2.00% 2.22% 2.04%
Net investment income 3.69% 1.88%<F1> 1.19% 1.83% 4.53%
Net assets at end of period
(000 omitted) $166,519 $213,635 $155,274 $125,439 $161,040
<FN>
<F1> Annualized.
<F2> The investment adviser did not impose a portion of its management fee for the periods indicated. If this
fee had been incurred by the Fund, the net investment income per share and ratios would have been:
</FN>
Net investment income $ 0.04 $ 0.01 $ 0.01 $ 0.02 $ 0.04
Ratios (to average net assets):
Expenses 2.03% 2.04%<F1> 2.10% 2.32% 2.13%
Net investment income 3.59% 1.78%<F1> 1.09% 1.73% 4.44%
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
----------------------------------------------
1990 1989 1988 1987<F2>
- ------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------
Net investment income $ 0.06 $ 0.07 $ 0.06 $ 0.04
Less distributions declared to shareholders from net
investment income (0.06) (0.07) (0.06) (0.04)
------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
Total return 6.12% 7.34% 5.85% 4.42%<F1>
Ratios (to average net assets)/Supplemental data:
Expenses 2.23% 2.24% 2.06% 2.06%<F1>
Net investment income 6.06% 7.10% 5.59% 5.59%<F1>
Net assets at end of period (000 omitted) $203,314 $146,885 $139,518 $83,845
<FN>
<F1> Annualized.
<F2> For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Cash Reserve Fund (the Fund) is a diversified series of MFS Series Trust I
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
(2) Significant Accounting Policies
Investment Valuations - Money market instruments are valued at amortized cost,
which the Trustees have determined in good faith constitutes fair value. The
Fund's use of amortized cost is subject to the Fund's compliance with certain
conditions as specified under Rule 2a-7 of the Investment Company Act of 1940.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return annually
using tax accounting methods required under provisions of the Code which may
differ from generally accepted accounting principles, the basis on which these
financial statements are prepared. Accordingly, the amount of net investment
income and net realized gain reported on these financial statements may differ
from that reported on the Fund's tax return and, consequently, the character of
distributions to shareholders reported in the financial highlights may differ
from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A and
Class B shares. The two classes of shares differ in their respective shareholder
servicing agent, distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata, based on the average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed and paid monthly at an annual rate of 0.55% of
average daily net assets. The investment adviser did not impose a portion of its
fee, which is reflected as a reduction of expenses in the Statement of
Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees. Included in Trustees' compensation is a net
periodic pension expense of $8,263 for the year ended August 31, 1995.
Distributor - The Trustees have adopted a separate distribution plan for Class A
and Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. Payments under the Class A distribution
plan will commence when the value of the net assets of the Fund attributable to
Class A shares first equals or exceeds $40 million.
The Class B distribution plan provides that the Fund will pay MFD a monthly
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B shares. MFD will
pay to securities dealers that enter into a sales agreement with MFD all or a
portion of the service fee attributable to Class B shares. The service fee is
intended to be additional consideration for services rendered by the dealer with
respect to Class B shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $49,025 for Class B
shares for the year ended August 31, 1995. Fees incurred under the distribution
plan during the year ended August 31, 1995 were 1.00% of average daily net
assets attributable to Class B shares on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 1995 were
$769,924.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares, at an
effective annual rate of up to 0.15% and 0.22% attributable to Class A and Class
B shares, respectively.
(4) Portfolio Securities
Purchases and sales of money market investments, exclusive of securities subject
to repurchase agreements, aggregated $1,963,560,145 and $2,008,039,485,
respectively.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares at net asset value of $1.00 per share, were as
follows:
Class A Shares
Year Ended Nine Months Ended Year Ended
August 31, 1995 August 31, 1994 November 30, 1993*
- ------------------------------------------------------------------------------
Shares sold 21,839,588 5,460,125 137,859
Shares issued to
shareholders in
reinvestment of
distributions 211,125 20,023 197
Shares reacquired (13,354,949) (3,372,483) (89,287)
----------- ---------- -------
Net increase
(decrease) 8,695,764 2,107,665 48,769
=========== ========== =======
<PAGE>
Class B Shares
Year Ended Nine Months Ended Year Ended
August 31, 1995 August 31, 1994 November 30, 1993
- ------------------------------------------------------------------------------
Shares sold 814,926,201 509,185,655 361,215,991
Shares issued to
shareholders in
reinvestment of
distributions 6,141,721 2,317,708 1,295,027
Shares reacquired (868,183,399) (453,142,665) (332,675,946)
------------ ------------ ------------
Net increase
(decrease) (47,115,477) 58,360,698 29,835,072
============ ============ ============
*For the period from commencement of offering of Class A shares, September 7,
1993 to November 30, 1993.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August 31,
1995 was $2,118.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Cash Reserve Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Cash Reserve Fund (one of the series
constituting MFS Series Trust I) as of August 31, 1995, the related statement of
operations for the year then ended, the statement of changes in net assets for
the year ended August 31, 1995, the nine months ended August 31, 1994 and the
year ended November 30, 1993, and the financial highlights for the year ended
August 31, 1995, the nine-months ended August 31, 1994 and for each of the years
in the seven-year period ended November 30, 1993. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Cash Reserve
Fund at August 31, 1995, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 6, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
THE MFS FAMILY OF FUNDS(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK LIMITED MATURITY BOND
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Emerging Growth Fund
- ---------------------------------------------------- WORLD
MFS(R) Gold & Natural Resources Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Governments Fund
MFS(R) OTC Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Growth Fund
MFS(R) Research Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Total Return Fund
MFS(R) Value Fund ----------------------------------------------------
- ----------------------------------------------------
NATIONAL TAX-FREE BOND
STOCK AND BOND ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Municipal Income Fund
BOND ----------------------------------------------------
- ----------------------------------------------------
MFS(R) Bond Fund STATE TAX-FREE BOND
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) High Income Fund Mississippi, New York, North Carolina,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Strategic Income Fund Texas, Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) ----------------------------------------------------
- ----------------------------------------------------
MONEY MARKET
----------------------------------------------------
MFS(R) Cash Reserve Fund
----------------------------------------------------
MFS(R) Government Money Market Fund
----------------------------------------------------
MFS(R) Money Market Fund
----------------------------------------------------
</TABLE>
<PAGE>
MFS(R) CASH -----------------
RESERVE FUND
BULK RATE
U.S. POSTAGE
500 Boylston Street P A I D
Boston, MA 02116 PERMIT #55638
BOSTON, MA
-----------------
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MCR-2 10/95 17M 01/201
<PAGE> 118
PROSPECTUS
January 1, 1996
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
- --------------------------------------------------------------------------------
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 Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
THE FUND MAY INVEST UP TO 70% OF ITS NET ASSETS (AND EXPECTS TO INVEST NOT MORE
THAN 50% OF ITS NET ASSETS) IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK
BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN
HIGHER RATED SECURITIES. THESE BONDS MAY BE ISSUED BY DOMESTIC AND FOREIGN
CORPORATE ISSUERS, AS WELL AS BY FOREIGN GOVERNMENTS AND THEIR POLITICAL
SUBDIVISIONS AND BY ISSUERS OF MUNICIPAL OBLIGATIONS. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES --
EMERGING MARKET SECURITIES", "INVESTMENT OBJECTIVE AND POLICIES -- MUNICIPAL
OBLIGATIONS" AND "RISK FACTORS -- LOWER RATED FIXED INCOME SECURITIES."
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information (the "SAI"), dated January 1, 1996,
as amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 31 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number).
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.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 119
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Expense Summary........................................................................... 3
2. The Fund.................................................................................. 4
3. Condensed Financial Information........................................................... 5
4. Investment Objective and Policies......................................................... 6
5. Risk Factors.............................................................................. 14
6. Management of the Fund.................................................................... 17
7. Information Concerning Shares of the Fund................................................. 18
Purchases............................................................................ 18
Exchanges............................................................................ 22
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.............................................................. 28
Expenses............................................................................. 29
8. Shareholder Services...................................................................... 29
APPENDIX A................................................................................ A-1
APPENDIX B................................................................................ B-1
APPENDIX C................................................................................ C-1
</TABLE>
2
<PAGE> 120
<TABLE>
1. EXPENSE SUMMARY
<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 (after expense reduction)............ 0.30%(2) 1.00%(3) 1.00%(3)
Other Expenses....................................... 0.60% 0.67% 0.60%
---- ---- ----
Total Operating Expenses (after expense reduction)... 1.50%(4) 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" below.
(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. See "Information Concerning Shares of the Fund--Distribution Plans"
below. Distribution fees under this Plan, equal to 0.20% per annum of the
average daily net assets attributable to Class A shares, are currently being
waived in order to maintain "Total Operating Expenses" for Class A shares at
1.50% per annum (see footnote (4) below). Distribution expenses paid under
this Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge.
(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. Distribution
expenses paid under these Plans, together with any CDSC payable upon
redemption of Class B shares, may cause long-term shareholders to pay more
than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge.
(4) MFS has agreed to bear, for an indefinite period, expenses of Class A shares
of the Fund such that the aggregate expenses of the Fund's Class A shares do
not exceed 1.50% of the Fund's average daily net assets attributable to
Class A shares on an annualized basis. This arrangement may be terminated or
revised by MFS at any time. See "Information Concerning Shares of the
Fund--Expenses" below. Absent this expense arrangement, "Total Operating
Expenses" for the Fund's Class A shares would have been 1.70%.
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (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
5 years........................................ 125 142 122 118
10 years........................................ 218 241(2) 241(2) 253
<FN>
- ---------------
(1)Assumes no redemption.
(2)Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
3
<PAGE> 121
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 eight
series of shares (each of which is offered through a separate prospectus, except
that five series are offered through a single prospectus), each of which
represents a portfolio with separate investment objectives and 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 Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any applicable
CDSC.
4
<PAGE> 122
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for the period from the commencement
of investment of operations, July 22, 1994 to August 31, 1995 and should be read
in conjunction with the financial statements included in the Fund's Annual
Report to Shareholders which are incorporated by reference into the SAI, in
reliance upon the report of the Fund's independent auditors, given on their
authority as experts in accounting and auditing. The Fund's independent auditors
are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
CLASS A, B AND C SHARES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1995 1994* 1995 1994* 1995 1994*
------- ------- ------- ------- ------- -------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period....... $ 15.33 $ 15.00 $ 15.31 $ 15.00 $ 15.31 $ 15.00
Income from investment operations#:
Net investment income.................... $ 0.55sec. $ 0.04sec. $ 0.43 $ 0.02sec. $ 0.46 $ 0.03sec.
Net realized and unrealized gain on
investments and foreign currency
transactions........................... 1.17 0.29 1.17 0.29 1.16 0.28
------- ------- ------- ------- ------- -------
Total from investment operations.... $ 1.72 $ 0.33 $ 1.60 $ 0.31 $ 1.62 $ 0.31
------- ------- ------- ------- ------- -------
Less distributions declared to shareholders
--
From net investment income............... $ (0.37) $ -- $ (0.28) $ -- $ (0.30) $ --
From net realized gain on investments and
foreign currency transactions.......... (0.05) -- (0.05) -- (0.05) --
------- ------- ------- ------- ------- -------
Total distributions declared
to shareholders................... $ (0.42) $ -- $ (0.33) $ -- $ (0.35) $ --
------- ------- ------- ------- ------- -------
Total asset value -- end of period........... $ 16.63 $ 15.33 $ 16.58 $ 15.31 $ 16.58 $ 15.31
======= ======= ======= ======= ======= =======
Total return++............................... 11.48% 2.20%++ 10.65% 2.07%++ 10.72% 2.07%++
Ratios (to average net assets)/Supplemental
data:
Expenses................................. 1.47%sec. 1.50%+sec. 2.24% 2.57%+sec. 2.18% 2.50%+sec.
Net investment income.................... 3.49%sec. 2.43%+sec. 2.75% 1.39%+sec. 2.91% 1.68%+sec.
Portfolio turnover........................... 118% 1% 118% 1% 118% 1%
Net assets at end of period (000 omitted).... $58,663 $25,254 $83,601 $26,495 $19,325 $3,435
<FN>
- ---------------
* For the period from the commencement of investment operations, July 22, 1994 to August
31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
++ Total returns for Class A shares do not include the applicable sales charge. If the
charge had been included, the results would have been lower.
</TABLE>
<TABLE>
sec. The Investment Adviser and/or the distributor did not impose a portion of their
management fee and/or distribution fee, respectively, for the periods indicated. If
these fees had been incurred by the Fund, the net investment income per share and the
ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income................. $0.52 $0.02 -- $0.01 -- $0.02
Ratios (to average net assets):
Expenses.......................... 1.67% 2.62%+ -- 3.21%+ -- 3.18%+
Net investment income............. 3.29% 1.31%+ -- 0.75%+ -- 1.00%+
</TABLE>
5
<PAGE> 123
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- 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, 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 -- 25%, Foreign Equity Securities -- 45%, U.S. Investment
Grade Fixed Income Securities -- 0%, U.S. High Yield Fixed Income Securities --
10% and Foreign Fixed Income Securities -- 20%. 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.
6
<PAGE> 124
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.
DEFENSIVE INVESTING: When the Adviser believes that investing for temporary
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: Consistent with the Fund's investment objective and
policies and its ability to invest in foreign securities, the Fund may invest in
securities of private issuers or governments located in emerging 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). For these purposes, 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;
or (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.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Jordan, 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
7
<PAGE> 125
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 (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 SAI 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
8
<PAGE> 126
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 SAI.
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 SAI.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, precious metals, 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.
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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.
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 SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. For a further description of SMBS and the risks related to
transactions therein, see the SAI.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
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 liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
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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 decreasing the level of liquidity 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 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, U.S.
Treasury securities or an irrevocable letter of credit maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
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 SAI.
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
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assets (the "SEC illiquidity ceiling"). Although the Adviser disagrees with this
position, the Adviser intends to limit the Fund's writing of over-the-counter
options in accordance with the following procedure. Except as provided below,
the Fund intends to write over-the-counter options only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts the Fund has in place with such primary dealers will
provide that the Fund has the absolute right to repurchase an option it writes
at any time at a price which represents the fair market value, as determined in
good faith through negotiation between the parties, but which in no event will
exceed a price determined pursuant to a formula in the contract. Although the
specific formula may vary between contracts with different primary dealers, the
formula will generally be based on a multiple of the premium received by the
Fund for writing the option, plus the amount, if any of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may also
include a factor to account for the difference between the price of the security
and the strike price of the option if the option is written out-of-the-money.
The Fund will treat all or a portion of the formula as illiquid for purposes of
the SEC illiquidity ceiling. The Fund may also write over-the-counter options
with non-primary dealers, 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
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may 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
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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 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
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counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI regarding the risks involved in these activities.
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. For the fiscal year ended August 31,
1995, the Fund had a portfolio turnover rate in excess of 100%. 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 MFD as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. From time to time,
the Adviser may direct certain portfolio transactions to broker-dealer firms
which, in turn, have agreed to pay a portion of the Fund's operating expenses
(e.g., fees charged by the Custodian of the Fund's assets). For a further
discussion of portfolio trading, see "Portfolio Transactions and Brokerage
Commissions" in the SAI.
------------------------------
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 SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Restrictions"
in the SAI. 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.
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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 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. 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, a decrease in the
level of liquidity in the Fund's portfolio or, if the Fund has entered into a
contract to sell the security, possible liability to the purchaser. Certain
markets may require payment for securities before delivery and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
on assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by 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. depositary (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. Because ADR's trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, 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
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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 SAI 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.
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 B. 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. 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.
For a chart indicating the composition of the bond portion of the Fund's
portfolio for the fiscal year ended August 31, 1995, with the debt securities
separated into rating categories, see Appendix C to this Prospectus.
16
<PAGE> 134
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.
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.
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.
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; and (iv) 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 Brennan, Jr., a Senior 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.
For the Fund's fiscal year ended August 31, 1995, MFS received fees under the
Advisory Agreement of $748,715 (0.60% of the Fund's average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS(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
17
<PAGE> 135
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 various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Asset Management, Inc., also
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $41.5 billion on behalf of approximately 1.8 million investor
accounts as of November 30, 1995. As of such date, the MFS organization managed
approximately $20.4 billion of assets invested in fixed income securities,
approximately $17.3 billion of assets in equity securities and approximately
$3.3 billion of assets in securities of foreign issuers and non-U.S. dollar
denominated securities of U.S. issuers. MFS is a wholly owned subsidiary of Sun
Life of Canada (U.S.), which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, Arnold D. Scott, John 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.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest publicly
listed bank in Germany, founded in 1835. As part of this alliance, the portfolio
managers and investment analysts of MFS and Foreign & Colonial will share their
views on a variety of investment related issues, such as the economy, securities
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS will have access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial will have
access to the extensive U.S. equity investment expertise of MFS. One or more MFS
investment analysts are expected to work for an extended period with Foreign &
Colonial's portfolio managers and investment analysts at their offices in
London. In return, one or more Foreign & Colonial employees are expected to work
in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, 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
dealer and other financial institutions ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
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<PAGE> 136
The Fund offers three classes of shares(Class A, B and C shares) which bear
sales charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF:
-------------------------------- DEALER
OFFERING NET AMOUNT ALLOWANCE AS A
AMOUNT OF PURHCASE PRICE INVEST PERCENTAGE OF
- -----------------------------------------------------------------------------------------------------------------
<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 will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not subject to an initial sales charge). In the
following two circumstances, Class A shares are also offered at net asset value
without an initial sales charge but subject to a CDSC, equal to 1% of the lesser
of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares; and
(ii) on investments in Class A shares by certain retirement plans subject to the
Employee Retirement Income Security Act of 1974, as amended, if the
sponsoring organization demonstrates to the satisfaction of MFD that either
(a) the employer has at least 25 employees or (b) the aggregate purchases
by the retirement plan of Class A shares of the MFS Funds will be in an
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion.
In the case of such purchases, MFD will pay a commission to dealers as follows:
1% 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 the period
with respect to such account. In addition, with respect to sales to retirement
plans under the second circumstance described above, MFD may pay a commission,
on sales in excess of $5 million to certain retirement plans, of 1% to certain
dealers which, at MFD's invitation, enter into an agreement with MFD in which
the dealer agrees to return any commission paid to it on the sale (or on a pro
rata portion thereof) if the shareholder redeems his or her shares within a
period of time after purchase as specified by MFD.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
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<PAGE> 137
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------- --------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
MFD will pay commissions to dealers of 3.75% of the purchase price of Class B
shares purchased through dealers. MFD will also advance to dealers the first
year service fee payable under the Fund's Class B Distribution Plan (see
"Distribution Plans" below) at a rate equal to 0.25% of the purchase price of
such shares. Therefore, the total amount paid to a dealer upon the sale of Class
B shares is 4% of the purchase price of the shares (commission rate of 3.75%
plus a service fee equal to 0.25% of the purchase price).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Distribution Plan applicable to
Class B shares. See "Distribution Plans" below. However, for purposes of
conversion to Class A shares, all shares in a shareholder's account that were
purchased through the reinvestment of dividends and distributions paid in
respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
20
<PAGE> 138
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 Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). The Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, for example, when
such purchase is contrary to the best interests of the Fund's other shareholders
or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of the Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of the Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Fund and which may change from
time to time. The Fund and MFD each reserve the right to request market timers
to redeem their shares at net asset value, less any applicable CDSC, if either
of these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, Class B and Class C shares. In addition, from time to time,
MFD may pay dealers 100% of the applicable sales charge on sales of Class A
shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, MFD or its affiliates may, from time to time, pay
dealers an additional commission equal to 0.50% of the net asset value of all of
the Class B shares of certain specified MFS Funds sold by such dealer during a
specified sales period. In addition, from time to time, MFD, at its expense, may
provide additional commissions, compensation or promotional incentives
("concessions") to dealers which sell shares of the Fund. Such concessions
provided by MFD may include financial assistance to dealers in connection with
preapproved conferences or seminars, sales or training programs for invited
registered representatives, payment for travel expenses, including lodging,
incurred by registered representatives for such seminars or training programs,
seminars for the public, advertising and sales campaigns regarding one or more
MFS Funds, and/or other dealer-sponsored events. From time to time, MFD may make
expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
21
<PAGE> 139
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). In addition, Class C
shares may be exchanged for shares of the MFS money market fund at net asset
value.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: 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)
22
<PAGE> 140
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 case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
Exchange (generally, 4:00 p.m., Eastern time), the exchange will occur on that
day if all the requirements set forth above have been complied with at that time
and subject to the right to reject purchase orders. No more than five exchanges
may be made in any one Exchange Request by telephone. Additional information
concerning this exchange privilege and prospectuses for any of the other MFS
Funds may be obtained from dealers or the Shareholder Servicing Agent. A
shareholder should read the prospectus of the other MFS Fund and consider the
differences in objectives, policies and restrictions 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. Special
procedures, privileges and restrictions with respect to exchanges may apply to
market timers who enter into an agreement with MFD, as set forth in such
agreement. See "Purchases -- General -- Right to Reject Purchase Orders/Market
Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature
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Guarantee." The proceeds of such a redemption, reduced by the amount of any
applicable CDSC and the amount of any income tax required to be withheld, are
mailed by check to the designated account, without charge, if the redemption
proceeds do not exceed $1,000, and are wired in federal funds to the designated
account if the redemption proceeds exceed $1,000. If a telephone redemption
request is received by the Shareholder Servicing Agent by the close of regular
trading on the Exchange on any business day, shares will be redeemed at the
closing net asset value of the Fund on that day. Subject to the conditions
described in this section, proceeds of a redemption are normally mailed or wired
on the next business day following the date of receipt of the order for
redemption. The Shareholder Servicing Agent may be liable for any losses
resulting from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
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 purchases by
certain retirement plans of Class A shares) or six years (in the case of
purchases of Class B shares). Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC, and (ii) the
amount of redemption equal to the then-current value of Reinvested Shares is not
subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
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REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 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 SAI
regarding this privilege.
IN-KIND DISTRIBUTIONS. Subject to 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 received a distribution in-kind, the shareholder could incur
brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares pursuant to Section 12(b) of the 1940 Act and Rule 12b-1
thereunder (the "Distribution Plans"), after having concluded that there is a
reasonable likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below have not yet been imposed or
are being waived. These circumstances are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A shares,
Class B shares or Class C shares, as appropriate) (the "Designated Class")
annually in order that MFD may pay expenses on behalf of the Fund relating to
the servicing of shares of the Designated Class. The service fee is used by MFD
to compensate dealers which enter into a sales agreement with MFD in
consideration for all personal services and/or account maintenance services
rendered by the dealer with respect to shares of the Designated Class owned by
investors for whom such dealer is the dealer or holder of record. MFD may from
time to time reduce the amount of the service fees paid for shares sold prior to
a certain date. Service fees may be reduced for a dealer that is the holder or
dealer of record for an investor who owns shares of the Fund having an aggregate
net asset value at or above a certain dollar level. Dealers may from time to
time be required to meet certain criteria in order to receive service fees. MFD
or its affiliates are entitled to retain all service fees payable under each
Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the
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Distribution Plans, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the separate
Distribution Plans. While the amount of compensation received by MFD in the form
of distribution fees during any year may be more or less than the expense
incurred by MFD under its distribution agreement with the Fund, the Fund is not
liable to MFD for any losses MFD may incur in performing services under its
distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
Distribution Plans have substantially identical provisions with respect to their
operating policies and their initial approval, renewal, amendment and
termination.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A DISTRIBUTION PLAN. Class A shares are generally offered pursuant to an
initial sales charge, a substantial portion of which is paid to or retained by
the dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.25% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). See "Purchases --
Class A Shares" above. In addition, to the extent that the aggregate service and
distribution fees paid under the Class A Distribution Plan do not exceed 0.50%
per annum of the average daily net assets of the Fund attributable to Class A
shares, the Fund is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares are offered at net asset value without
an initial sales charge but subject to a CDSC. See "Purchases -- Class B Shares"
above. MFD will advance to dealers the first year service fee described above at
a rate equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C DISTRIBUTION PLAN. Class C shares are offered at net asset value without
a sales charge or a CDSC. See "Purchases -- Class C Shares" above. Unlike the
case with respect to the sale of Class A and Class B shares, where the dealer
retains a portion of the initial sales charge (Class A shares) or receives an
up-front payment from MFD (Class B shares), a dealer who sells Class C shares
does not receive any initial payment, but instead receives distribution and
service fees equal, on an annual basis, to 1% of the Fund's average daily net
assets attributable to Class C shares owned by investors for whom the dealer is
the holder or dealer of record.
This ongoing 1% fee is comprised of the 0.25% per annum service fee paid to MFD
under the Class C Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Class C Distribution Plan equal, on an annual basis, to
0.75% of the Fund's average daily net assets attributable to Class C shares.
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CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.30%,
1.00% and 1.00% per annum, respectively. The maximum 0.50% per annum
distribution/service fee with respect to Class A shares 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 total operating expenses for Class A shares to exceed
1.50%, the amount of such distribution/service fee payments in excess of 1.50%
per annum will be waived by MFD. Based on estimated expenses for the Fund's
current fiscal year, MFD anticipates waiving the Fund's Class A
distribution/service fee equal to 0.20% per annum of the average daily net
assets attributable to Class A shares, resulting in a Class A
distribution/service fee equal to 0.30% per annum.
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
any 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 the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from 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 state or local taxes on dividends
derived from interest on U.S. Government obligations. Investors should consult
with their tax advisors in this regard.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all of the Fund's
dividends and distributions for that 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. In certain circumstances, the Fund may also elect to "pass through" to
shareholders foreign income taxes paid by the Fund. Under those circumstances,
the Fund will notify shareholders of their pro rata portion of the foreign
income taxes paid by the Fund; shareholders may be eligible for foreign tax
credits or deductions with respect to those taxes, but will be required to treat
the amount of the taxes as an amount distributed to them and thus includable in
their gross income for federal income tax purposes.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares just before the Fund makes a distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
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The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. However,
backup withholding will not be applied to payments which have been subject to
30% withholding. Prospective investors should read the Account Application for
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences of an investment in
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 SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of eight 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.
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
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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 SAI. For further information about the Fund's
performance for the fiscal year ended August 31, 1995, please see the Fund's
Annual Report. A copy of the Annual Report may be obtained without charge by
contacting the Shareholder Servicing Agent (see back cover for address and phone
number). In addition to information provided in shareholder reports, the Fund
may, in its discretion, from time to time, make a list of all or a portion of
its holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectus, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions, insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Fund; and expenses
of shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Distribution Agreement with
MFD requires MFD to pay for prospectuses that are to be used for sales purposes.
Expenses of the Trust which are not attributable to a specific series of the
Trust are allocated among the series in a manner believed by management of the
Trust to be fair and equitable.
MFS has agreed to pay for an indefinite period, the expenses of the Fund such
that the aggregate operating expenses of the Fund's Class A, Class B and Class C
shares do not exceed, on an annualized basis, 1.50%, 2.57% and 2.50%,
respectively, of its average daily net assets with respect to each such class;
provided, however, that this obligation may be terminated or revised at any time
by MFS without the consent of the Trust or the Fund by notice in writing from
MFS to the Trust on behalf of the Fund.
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).
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ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive 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. 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 having all
dividends and other distributions reinvested in additional shares. Any request
to change a distribution option must be received by the Shareholder Servicing
Agent by the record date for a dividend or distribution in order to be effective
for that dividend or distribution. No interest will accrue on amounts
represented by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of 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, 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.
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DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account 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, an exchange is treated as
a sale of the shares exchanged and, therefore, could result in a capital gain or
loss to the shareholder making the exchange. See the SAI for further information
concerning the Automatic Exchange Plan. Investors should consult their tax
advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- 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 SAI, dated January 1, 1996 contains more detailed information about
the Fund, including, but not limited to, information related to: (i) the Fund's
investment objective and policies, 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.
31
<PAGE> 149
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Asset Management, Inc. ("AMI").
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
A-1
<PAGE> 150
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ( the "Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds.
- The sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
A-2
<PAGE> 151
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
A-3
<PAGE> 152
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(A) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 153
APPENDIX B
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.
B-1
<PAGE> 154
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.
B-2
<PAGE> 155
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.
B-3
<PAGE> 156
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeble events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1 +'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
B-4
<PAGE> 157
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS WORLD ASSET ALLOCATION FUND
FOR FISCAL YEAR ENDED AUGUST 31, 1995
<TABLE>
The table below shows the percentages of the Fund's assets at August 31, 1995
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for securities
not rated by S&P or Moody's) and Duff & Phelps Credit Rating Co. (provided only
for securities not rated by S&P, Moody's or Fitch) and in unrated bonds
determined by MFS to be of comparable quality. For split rated bonds, the higher
of S&P or Moody's is used.
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
------ -------- ------------- -----
<S> <C> <C> <C>
AAA/Aaa...................................... 13.15% -- 13.15%
AA/Aa........................................ 3.34% -- 3.34%
A/A.......................................... -- -- --
BBB/Baa...................................... 2.85% -- 2.85%
BB/Ba........................................ 10.87% -- 10.87%
B/B.......................................... 8.89% -- 8.89%
CCC/Caa...................................... -- -- --
CC/Ca........................................ -- -- --
C/C.......................................... -- -- --
Default...................................... -- -- --
TOTAL................................... 39.10%
</TABLE>
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
C-1
<PAGE> 158
<TABLE>
<S> <C>
[LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-4500
Distributor MFS[R] WORLD ASSET ALLOCATION
FUND
MFS Fund Distributors, Inc.
500 Boylston Street Prospectus
Boston, MA 02116 January 1, 1996
(617) 954-5000
Custodian and Dividend Disbursing Agent
Investors Bank and 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
500 Boylston Street
Boston, MA 02116
MAA-1 1/96/57M 88/288/388
</TABLE>
<PAGE> 159
LOGO
<TABLE>
<S> <C>
MFS(R) WORLD ASSET STATEMENT OF
ALLOCATION FUNDSM ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1996
- --------------------------------------------------------------------------------------------------
</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.............................................................................. 14
Investment Adviser.................................................................... 14
Custodian............................................................................. 15
Shareholder Servicing Agent........................................................... 15
Distributor........................................................................... 16
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 17
Investment and Withdrawal Programs.................................................... 17
Exchange Privilege.................................................................... 20
Tax-Deferred Retirement Plans......................................................... 20
6. Tax Status............................................................................ 21
7. Determination of Net Asset Value and Performance...................................... 22
8. Distribution Plans.................................................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 25
10. Independent Auditors and Financial Statements......................................... 26
APPENDIX A............................................................................ 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 (the "SAI") sets forth information
which may be of interest to investors but which is not necessarily included in
the Fund's Prospectus, dated January 1, 1996. This SAI should be read in
conjunction with the Prospectus, a copy of which may be obtained without charge
by contacting the Shareholder Servicing Agent (see back cover for address and
phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE> 160
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.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1996, as
amended or supplemented from
time to time.
</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: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depositary (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 depositary which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositaries. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depositary of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary 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
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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.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates which represent
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.
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
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the Mortgage Assets may be allocated among the several classes of a series of a
CMO in innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes of
the series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. 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 (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
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,
U.S. Treasury securities or an irrevocable letter of credit maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will 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
cash 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.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
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 Securities and
Exchange Commission ("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
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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, 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
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may expire worthless to the Fund. In addition, in the event that the price of
the security in connection with which an Option was purchased moves in a
direction favorable to the Fund, the benefits realized by the Fund as a result
of such favorable movement will be reduced by the amount of the premium paid for
the Option and related transaction costs.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers and will treat
the assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
YIELD CURVE OPTIONS: The Fund may also enter into options on the 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 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. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling. See "Options
on Securities" above for a discussion of the policies the Adviser intends to
follow to limit the Fund's investment in these securities.
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
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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.
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
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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 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,
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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.
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
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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 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 Commodities Futures
Trading Commission ("CFTC")
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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 of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the leveraging effect of such Futures is
minimized.
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust (or 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
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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;
(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;
(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; or
(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
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
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
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WALTER E. ROBB, III
Benchmark Advisors, Inc. (Corporate Financial Consultants), President and
Treasurer. Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. 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); 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
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
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940 (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 MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustees out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 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 Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued and estimated benefits
payable, under the retirement plan.
As of November 30, 1995, the Trustees and officers, as a group, owned less than
1% of the Trust's shares outstanding on that date.
As of November 30, 1995, Merrill Lynch Pierce Fenner & Smith Inc., P.O. Box
45286, Jacksonville, FL 32232-5286 was the record owner of 5.97% of the
outstanding Class A shares of the Fund and of 11.33% of the outstanding Class B
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 wholly-owned subsidiary of Sun Life of Canada (U.S.), which
is a wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
INVESTMENT ADVISORY AGREEMENT
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
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any time by the Adviser without notice to shareholders as to expenses accruing
after the date of such rescission.
For the fiscal year ended August 31, 1995 and 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 $748,715 and $28,252, respectively.
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 all the Fund's expenses (other than those assumed by MFS or MFD),
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 MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series 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.
The Advisory Agreement will remain in effect until August 1, 1996, 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"). 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 calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and
Class C shares, respectively. In addition, the Shareholder Servicing Agent will
be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. The Custodian has contracted with the
Shareholder Servicing Agent to perform certain dividend and distribution
disbursing functions for the Fund.
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DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement dated
January 1, 1995, as amended and restated (the "Distribution Agreement"). Prior
to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing 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 SAI). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, 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, MFD 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 MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the fiscal year ended August 31, 1995, MFD received sales charges of
$118,898 and dealers received sales charges of $861,026 (as their concession on
gross sales charges of $979,924) for selling Class A shares of the Fund; the
Fund received $27,599,407 representing the aggregate net asset value of such
shares. For the same time period, the Contingent Deferred Sales Charge ("CDSC")
imposed on redemption of Class B shares was $106,698. For the period from
commencement of investment operations on July 22, 1994 to August 31, 1994, MFD
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, 1996, 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
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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 MFD 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
from time to time through such broker-dealers on behalf of the Fund. The Fund's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a 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 fiscal year ended August 31, 1995, the Fund paid brokerage commissions
of $503,757. For the period from commencement of investment operations on July
22, 1994 to August 31, 1994, the Fund paid brokerage commissions of $75,554.
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
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Fund's Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month 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 his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions 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 may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (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 "Free
Amount"; (ii) to the extent necessary, any "Reinvested Shares"; and (iii) to the
extent necessary, the "Direct Purchase" subject to the lowest CDSC (as such
terms are defined in "Contingent Deferred Sales Charge" in the Prospectus). The
CDSC will be waived in the case of redemptions of Class B shares pursuant to a
SWP but will not be waived in the case of SWP redemptions of Class A shares
which are subject to a CDSC. To the extent that redemptions for such periodic
withdrawals exceed dividend income reinvested in the account, such redemptions
will reduce and may eventually exhaust the number of shares in the shareholder's
account. All dividend and capital gain distributions for an account with a SWP
will be reinvested in additional full and fractional shares of the Fund at the
net asset value in effect at the close of business on the record date for such
distributions. To initiate this service, shares having an aggregate value of at
least $5,000 either must be held on deposit by, or certificates for such shares
must be deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and because of the assessment of the CDSC for certain share
redemptions. The shareholder may deposit into the account additional shares of
the Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder
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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 MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of 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 exchanges
of funds from the shareholder's account in an MFS Fund for investment in the
same class of shares of other MFS Funds selected by the shareholder. Under the
Automatic Exchange Plan, exchanges of at least $50 each may be made to up to
four different funds effective on the seventh day of each month or 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
exchange 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 exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including 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
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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 the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS 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 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
MFD 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 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. MFD 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 (the "Code");
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 MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
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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 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 and any distributions from net
short-term capital gains, whether paid in cash or reinvested in additional
shares, are taxable to shareholders as ordinary income for federal income tax
purposes. A portion of the Fund's ordinary income dividends (but none of its
distributions of capital gains) is normally eligible for the dividends-received
deduction for corporations if the recipient otherwise qualifies for that
deduction with respect to its holding of Fund shares. Availability of the
deduction for particular corporate shareholders is subject to certain
limitations, and deducted amounts may be subject to the alternative minimum tax
and result in certain basis adjustments. Distributions of net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses), whether paid in cash or reinvested in additional shares, are taxable to
the Fund's shareholders as long-term capital gains for federal income tax
purposes regardless of how long they have owned shares in the Fund. Fund
dividends declared in October, November or December that are payable to
shareholders of record in such a month, and that are paid the following January
will be taxable to shareholders as if received on December 31 of the year in
which they are declared.
Any dividend or distribution will have the effect of reducing the per share net
asset value of shares in the Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any
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) without payment of
an additional sales charge of Class A shares of the Fund or of another MFS Fund
(or any other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's 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 and 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, certain stripped securities, and
certain securities purchased at a market discount will cause it to realize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
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
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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.
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. No
deduction for such amounts will be permitted to individuals in computing their
alternative minimum tax liability. If the Fund does not qualify or elect to
"pass through" to 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 to Non-U.S. Persons that are subject to
withholding, regardless of whether a lower treaty rate may be permitted. Any
amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period 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 jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. Person) who does not furnish to the Fund certain
information and certifications, or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
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.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once 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-
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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 MFD, 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 average annual total rate of return for Class A shares for the one year
period ended August 31, 1995 was 6.21% including the effect of the sales charge
and 11.48% without the effect of the sales charge. The average annual total rate
of return for Class A shares for the life of the Fund (commencement of
operations on July 22, 1994 to August 31, 1995) was 7.64% including the effect
of the sales charge and 12.48% without the effect of the sales charge. The
average annual total rate of return for Class B shares for the one-year period
ended August 31, 1995 was 6.65% including the effect of the CDSC and 10.65%
without the effect of the CDSC. The average annual total return for Class B
shares for the life of the Fund (commencement of operations on July 22, 1994 to
August 31, 1995) was 8.02% including the effect of the CDSC and 11.59% without
the effect of the CDSC. The average annual total rate of return for Class C
shares for the one year period ended August 31, 1995 was 10.72%. The average
annual total rate of return for Class C shares for the life of the Fund
(commencement of operations on July 22, 1994) to August 31, 1995 was 11.65% for
Class A shares. Certain total rate of return figures for Class A shares 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,
1995 was 1.21%, taking into account certain fee waivers; without these waivers,
the yield would have been 1.02%. The yield calculation for Class B shares for
the 30-day period ended August 31, 1995 was -0-%, taking into account certain
fee waivers; without these waivers, the yield would have been 0.55%. The yield
calculation for Class C shares for the 30-day period ended August 31, 1995 was
- -0-%, taking into account certain fee waivers; without these waivers, the yield
would have been 0.62%.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, 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.
23
<PAGE> 182
The current distribution rate for Class A shares of the Fund for the 30-day
period ended on August 31, 1995 was 2.41%. The current distribution rate for
Class B shares of the Fund based on this 30-day period was 1.99%. The current
distribution rate for Class C shares of the Fund based on this 30-day period was
2.11%.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical 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.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
-- 1984 -- MFS Municipal High Income Fund is the first open-end mutual fund to
seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
8. DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for 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 Distribu-
24
<PAGE> 183
tion Plans are designed to promote sales, thereby increasing the net assets of
the Fund. Such an increase may reduce the Fund's expense ratio to the extent
that the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effect that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer of record for
investors who own Class A shares having an aggregate net asset value less than
$750,000, or such other amount as may be determined from time to time by MFD
(MFD, however, may waive this minimum amount requirement from time to time); or
(ii) to any insurance company which has entered into an agreement with the Fund
and MFD that permits such insurance company to purchase Class A shares from the
Fund at their net asset value in connection with annuity agreements issued in
connection with the insurance company's separate accounts. Dealers may from time
to time be required to meet certain other criteria in order to receive service
fees.
With respect to the Class B Distribution Plan, except in the case of the first
year service fee, no service fees will be paid to any securities dealer who is
the holder or dealer of record for investors who own Class B shares having an
aggregate net asset value of less than $750,000 or such other amount as may be
determined by MFD from time to time. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
any Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plans is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1995, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
DISTRIBUTION PLANS FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Distribution Plan $ 142,783 $ 934 $141,849
Class B Distribution Plan $ 636,183 $477,228 $158,955
Class C Distribution Plan $ 136,422 $ 2,377 $134,045
</TABLE>
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1996, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties of such Plan ("Distribution Plan Qualified Trustees"). Each
of the Distribution Plans also requires that the Fund and MFD each shall provide
the Trustees, and the Trustees shall review, at least quarterly, a written
report of the amounts expended (and purposes therefor) under such Plan. Each of
the Distribution Plans may be terminated at any time by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares (as defined in "Investment
Restrictions"). All agreements relating to any of the Distributions Plans
entered into between the Fund or MFD and other organizations must be approved by
the Board of Trustees, including a majority of the Distribution Plan Qualified
Trustees. Agreements under any of the Distribution Plans must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. 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 seven 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,
25
<PAGE> 184
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 misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax 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, 1995, the Statement of Assets and Liabilities at
August 31, 1995, the Statement of Operations for the year ended August 31, 1995,
the Statement of Changes in Net Assets for the year ended August 31, 1995 and
the period ended August 31, 1994, the Financial Highlights table for the year
ended August 31, 1995 and the period ended 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 SAI. A copy of
the Annual Report accompanies this SAI.
26
<PAGE> 185
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,500 $153 7 $226,221
A. Keith Brodkin..................... 0 0 N/A 0
Marshall N. Cohan.................... 3,950 175 7 147,274
Lawrence H. Cohn..................... 3,500 153 17 133,524
The Hon. Sir J. David Gibbons........ 3,500 153 7 132,024
Abby M. O'Neill...................... 3,275 153 8 125,924
Walter E. Robb, III.................. 3,950 175 7 147,274
Arnold D. Scott...................... 0 0 N/A 0
Jeffrey L. Shames.................... 0 0 N/A 0
J. Dale Sherratt..................... 3,950 175 19 147,274
Ward Smith........................... 3,950 175 11 147,274
<FN>
(1) For fiscal year ended August 31, 1995.
(2) Based on normal retirement age of 75.
(3) For calendar year 1994. All Trustees receiving compensation served as
Trustees of 36 funds within the MFS fund complex (having aggregate net
assets at December 31, 1994, of approximately $9.7 billion) except Mr.
Bailey, who served as Trustee of 56 funds within the MFS fund complex
(having aggregate net assets at December 31, 1994, of approximately $24.4
billion).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,950 $443 $ 738 $1,033 $1,475
3,230 485 808 1,131 1,615
3,510 527 878 1,229 1,755
3,790 569 948 1,327 1,895
4,070 611 1,018 1,425 2,035
4,350 653 1,088 1,523 2,175
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
27
<PAGE> 186
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
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
MFS(R) WORLD ASSET
ALLOCATION FUNDSM
500 BOYLSTON STREET
BOSTON, MA 02116
LOGO MAA-13 1/96/.5M 88/288/388
<PAGE> 187
<PAGE>
[logo] MFS
THE FIRST NAME IN MUTUAL FUNDS Annual Report for
Year Ended
August 31, 1995
MFS(R) WORLD ASSET ALLOCATION FUND
Front cover
A photo of jet planes.
<PAGE>
<TABLE>
<S> <C>
MFS(R) WORLD ASSET ALLOCATION FUND
TRUSTEES SECRETARY
Stephen E. Cavan*
A. Keith Brodkin* - Chairman and President
ASSISTANT SECRETARY
Richard B. Bailey* - Private Investor; James R. Bordewick, Jr.*
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company CUSTODIAN
Investors Bank & Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Ernst & Young LLP
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime from
Executive Officer, Edmund Gibbons Ltd.; a touch-tone telephone.
Chairman, Bank of N.T. Butterfield & Son Ltd.
For information on MFS mutual funds,
Abby M. O'Neill - Private Investor; call your financial adviser or, for an
Director, Rockefeller Financial Services, Inc. information kit, call toll free:
(Investment Advisers) 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
Walter E. Robb, III - President and Treasurer, a message anytime).
Benchmark Advisors, Inc. (Corporate
Financial Consultants) INVESTOR SERVICE
MFS Service Center, Inc.
Arnold D. Scott* - Senior Executive Vice P.O. Box 2281
President and Secretary, Massachusetts Boston, MA 02107-9906
Financial Services Company
For general information, call toll free:
Jeffrey L. Shames* - President, Massachusetts 1-800-225-2606 any business day from
Financial Services Company 8 a.m. to 8 p.m. Eastern time.
J. Dale Sherratt - President, Insight Resources, For service to speech- or hearing-impaired,
Inc. (Acquisition Planning Specialists) call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Ward Smith - Former Chairman (To use this service, your phone must be
(until 1994), NACCO Industries; equipped with a Telecommunications Device for
Director, Sundstrand Corporation the Deaf.)
INVESTMENT ADVISER For share prices, account balances and
Massachusetts Financial Services Company exchanges, call toll free: 1-800-MFS-TALK
500 Boylston Street (1-800-637-8255) anytime from a touch-tone
Boston, MA 02116-3741 telephone.
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
ASSET ALLOCATION COMMITTEE
A. Keith Brodkin*
Jeffrey L. Shames*
John W. Ballen*
Leslie J. Nanberg*
James T. Swanson*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The MFS World Asset Allocation Fund has now been invested for one year. During
the year, Class A shares of the Fund provided a total return of +11.48%, Class
B shares returned +10.65%, and Class C shares returned +10.72%. All of these
returns assume the reinvestment of distributions but exclude the effects of
any sales charges, and compare to the one-year returns for the following
unmanaged indices: +21.42% for the Standard & Poor's 500 Composite Index, a
popular, unmanaged index of common stock performance; +0.79% for the Morgan
Stanley Capital International EAFE Index (an unmanaged international stock
index); +11.30% for the Lehman Brothers Aggregate Bond Index (an unmanaged
index of government and corporate bonds including Treasury, agency, and
corporate bond issues and mortgage-backed securities); and +17.11% for the
J.P. Morgan Non-Dollar Index (an unmanaged international bond index). Also,
the performance for each class of the Fund compares favorably to the +8.05%
average return for the 42 funds in the category of global flexible portfolio
funds (including the Fund) tracked by Lipper Analytical Services, Inc., an
independent firm which reports mutual fund performance.
During this period, we have held to a stance of favoring international
stocks over U.S. stocks, a result of our view that the business cycle in the
United States is in a more mature phase than in the international markets.
This view has caused the Fund to lag the spectacular returns of the U.S. stock
market this year, but we believe still bodes well as the business cycle
proceeds. The Fund has participated in the recent U.S. stock market uptrend
and, in particular, has gained significantly from its holdings in technology
companies such as Intel. Also, our managers kept us largely out of the falling
Japanese market during a period of domestic Japanese stress, and then provided
us with an opportunity to buy some Japanese stocks to take advantage of lower
prices.
Our bond participation has seen gains in the international sovereign bond
market as well as in the domestic high-yield corporate and Treasury markets.
This has been a particularly favorable year for most bond markets.
Changes in emphasis among asset classes of the Fund will continue to occur
at least monthly, and will be made less with a focus to market timing than to
exploiting key advantages in the relative attractiveness of the various
markets. The current strategies of the managers of each portfolio sector may
be found on the following pages.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ James T. Swanson
---------------------- ----------------------
A. Keith Brodkin James T. Swanson
Chairman and President On behalf of the Asset
Allocation Committee
September 12, 1995
<PAGE>
Two pie charts showing the portfolio allocations for the previous quarter and
the current quarter.
PORTFOLIO ALLOCATION
Category Previous Current
U.S. Stocks 15.8% 16.4%
International Stocks 42.7% 43.4%
High Yield Corp. Bonds 11.2% 9.9%
International Bonds 16.4% 19.5%
U.S. Govt. Bonds 9.5% 8.6%
Cash and Cash Equiv. 4.4% 2.2%
U.S. STOCK MARKET -- 15.8%
Our holdings in U.S. equities range across a variety of industries and
incorporate both value and growth strategies. Recent additions to the
portfolio include Intel, a manufacturer of microprocessors; Tyco
International, a manufacturer of fire protection systems; and Promus, a hotel
franchiser. Currently, our top three sectors are leisure (21.3%), technology
(17%) and consumer staples (10.9%). Our current outlook remains optimistic. We
believe business prospects remain positive and that further interest rate
reductions could have a positive impact on the U.S. equity market. -- John
Ballen and John Brennan
<PAGE>
U.S. STOCK MARKET - continued
FIVE LARGEST HOLDINGS AS OF 8/31/95
- --------------------------------------------------------------------------------
Harrah's Entertainment, Inc. (entertainment) 0.8%
- ------------------------------------------------------------------------------
Showboat, Inc. (entertainment) 0.8%
- ------------------------------------------------------------------------------
Intel Corp. (electronics) 0.7%
- ------------------------------------------------------------------------------
Tyco International Ltd. (consumer goods and services) 0.7%
- ------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. (financial institutions) 0.5%
- ------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKETS -- 44.0%
After showing some improvement in 1994, European economic growth has slowed,
while Japan's lengthy recession is continuing, creating selected investment
opportunities. In general, we emphasize stock selection in our international
investments as opposed to country or industry selection. Priority is placed on
companies which we believe will generate above-average earnings growth and
which are trading at attractive valuations, regardless of their home country.
As of August 31, approximately 44% of the portfolio's assets was invested in
international stocks. Currently, 58% of our international stock holdings is in
Europe, 38% in Asia/Pacific and 4% in the Americas (Canada and Latin America).
The largest individual country exposures were in Japan (18%), Sweden (14%) and
the United Kingdom (11%). Roughly 11% of our international holdings was in the
emerging markets, most of which was in Southeast Asia. Recently, the European
weighting has declined slightly with an offsetting increase in Asia/Pacific.
This shift is attributable to several European stocks reaching price
objectives and to our starting to find better investment opportunities in
Asia. Our bottom-up stock-picking approach continues to result in a large
underweighting in Japan (18% versus 40% in the Morgan Stanley Capital
International EAFE Index).
Some of our largest holdings include Astra, a large multinational
pharmaceutical company based in Sweden; Essilor, a French maker of eyeglass
lenses; DDI Corp., the Japanese cellular and long distance telephone operator;
Acerinox, a Spanish stainless steel producer; and Lion Nathan, a large brewer
operating in Australia and New Zealand. -- David Mannheim
FIVE LARGEST HOLDINGS AS OF 8/31/95
- ------------------------------------------------------------------------------
Astra AB (pharmaceuticals - Sweden) 1.8%
- ------------------------------------------------------------------------------
Essilor International (medical and health products - France) 1.7%
- ------------------------------------------------------------------------------
Acerinox S.A. (iron and steel - Spain) 1.4%
- ------------------------------------------------------------------------------
DDI Corp. (telecommunications - Japan) 1.3%
- ------------------------------------------------------------------------------
Australia & New Zealand Bank Group Ltd. (finance - Australia) 1.2%
- ------------------------------------------------------------------------------
<PAGE>
U.S. GOVERNMENT BOND MARKET -- 8.6%
After undergoing a transition from a period of strong 5.1% growth in gross
domestic product in the last quarter of 1994 to 1.1% in the second quarter of
1995, we expect the pace of economic activity to pick up toward the 2% to 3%
level during the second half of 1995. On the inflation front, the continued
decline in unit labor costs suggests the outlook remains positive for stable-
to-lower price levels.
Despite our view that interest rates could move lower, we have reduced the
position in this sector from 10% to 8.6%. Our asset allocation model suggests
that other sectors appear relatively more attractive at this time.
-- Geoffrey L. Kurinsky
LARGEST HOLDINGS AS OF 8/31/95
- ------------------------------------------------------------------------------
U.S. Treasury Note 4.9%
- ------------------------------------------------------------------------------
Federal National Mortgage Association 3.7%
- ------------------------------------------------------------------------------
HIGH-YIELD CORPORATE BOND MARKET -- 9.9%
The high-yield portfolio reflects our expectation that future growth will be
modest. We have begun to trim our exposure to economically sensitive
industries like commodity chemicals. We believe that some cyclical names such
as Wolverine Tube (a manufacturer of copper tubing) offer good investment
value, and that they will continue to generate substantial free cash flow and
be able to repay debt ahead of schedule. We think the outlook is favorable for
bonds in such defensive industries as supermarkets, paging, and health care.
Therefore, we have added to these positions accordingly. Our strategy will
continue to focus on the upper-credit-quality tier of the high-yield market.
-- Joan Batchelder
FIVE LARGEST HOLDINGS AS OF 8/31/95
- ------------------------------------------------------------------------------
Wolverine Tube, Inc. (special products and services) 0.7%
- ------------------------------------------------------------------------------
K-III Communications Corp. (telecommunications) 0.5%
- ------------------------------------------------------------------------------
IMO Industries, Inc. (special products and services) 0.5%
- ------------------------------------------------------------------------------
American Standard, Inc. (building) 0.5%
- ------------------------------------------------------------------------------
Eagle Industries, Inc. (special products and services) 0.5%
- ------------------------------------------------------------------------------
<PAGE>
INTERNATIONAL BOND MARKETS -- 19.5%
Responding to evidence of slowing growth and lower inflation, every major
international bond market generated double-digit local currency returns over
the last 12 months. A weak U.S. dollar resulted in even better performance in
dollar terms. Recently, however, the dollar has surged as coordinated
intervention by major central banks has reinforced the impact of higher U.S.
interest rates relative to Europe and progressed in narrowing the U.S.-Japan
trade imbalance.
The portfolio retains its emphasis on the "hard currency core" bond markets
within Europe, such as Germany. Some of this exposure has been hedged into the
higher-yielding currencies as we seek to capture the improving environment in
those markets. We have also added to our positions in Australia and Canada
because we believe these markets could benefit from slower global growth and a
firmer U.S. dollar. Dollar-denominated Latin American debt has recovered from
the oversold conditions prevailing last spring. Hence, our allocation to this
sector is likely to be trimmed. -- Leslie Nanberg
FIVE LARGEST HOLDINGS AS OF 8/31/95
- ------------------------------------------------------------------------------
United Mexican States (Mexico) 3.8%
- ------------------------------------------------------------------------------
Republic of Poland (Poland) 2.8%
- ------------------------------------------------------------------------------
Federative Republic of Brazil (Brazil) 2.8%
- ------------------------------------------------------------------------------
Republic of Argentina (Argentina) 2.5%
- ------------------------------------------------------------------------------
Republic of Germany (Germany) 1.5%
- ------------------------------------------------------------------------------
PERFORMANCE
The information on the following page illustrates the historical performance
of MFS World Asset Allocation Fund in comparison to various market indicators.
In the graph Class A share results reflect the deduction of the 4.75% maximum
sales charge on the initial investment, while Class B share results reflect
the maximum contingent deferred sales charge (CDSC) of 4%. Class C shares have
no initial sales charge or CDSC but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Benchmark comparisons are
unmanaged and do not reflect the deduction of any fees or expenses. You cannot
invest in an index. All results reflect the reinvestment of all dividends and
capital gains.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Line graph representing the growth of a $10,000 investment for the period from
August 1, 1994 to August 31, 1995. The graph is scaled from $9,000 to $13,000 in
$1,000 segments. The years are marked in 3-month segments from 1994 to 1995.
There are eight lines drawn to scale. One is a solid dark blue line representing
MFS World Asset Allocation Fund (Class A), a second solid light blue line
represents MFS World Asset Allocation Fund (Class B), a third solid line of very
light blue represent MFS World Asset Allocation Fund (Class C), a fourth solid
black line represents the S&P 500, a fifth solid gray line represents the J.P.
Morgan Non-U.S. Global Bond Index, a sixth line of short dark dashes represents
the Lehman Brothers Aggregate Bond Index, a seventh line of short gray dashes
represents the Morgan Stanley Capital International EAFE Index, and an eighth
line of long dashes represents the Consumer Price Index.
MFS World Asset (Class A) $10,843
MFS World Asset (Class B) $10,886
MFS World Asset (Class C) $11,293
S&P 500 $12,638
J.P. Morgan Global Bond $11,646
Lehman Aggregate Bond $11,144
Morgan Stanley $10,320
Consumer Price Index $10,303
AVERAGE ANNUAL TOTAL RETURNS
Life of Class*
through
1 Year 8/31/95
- ------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class A) including
4.75% sales charge + 6.22% + 7.64%
- ------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class A) at net
asset value +11.48% +12.48%
- ------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B) with
CDSC+ + 6.65% + 8.02%
- ------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B) without
CDSC +10.65% +11.59%
- ------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class C)# +10.72% +11.65%
- ------------------------------------------------------------------------------
Average global flexible portfolio fund + 8.05% + 9.30%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +21.42% +24.13%
- ------------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index + 0.79% + 2.95%
- ------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index +11.30% +10.51%
- ------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government Bond Index +17.11% +15.11%
- ------------------------------------------------------------------------------
Consumer Price Index(S) + 2.62% + 2.80%
- ------------------------------------------------------------------------------
*Fund results (all classes) cover the period from the commencement of
investment operations, July 22, 1994 to August 31, 1995. All benchmark
results begin on August 1, 1994.
+These returns reflect the maximum contingent deferred sales charge (CDSC)
of 4%.
#Class C shares have no initial sales charge or CDSC but, along with Class B
shares, have higher annual fees and expenses than Class A shares.
(S)The Consumer Price Index is a popular measure of change in prices.
<PAGE>
In the previous table, we have included the average annual total returns of
all global flexible portfolio funds (including the Fund) tracked by Lipper
Analytical Services, Inc. for the applicable time periods (42 and 40 funds for
the one-year period ended August 31, 1995, and for the period from August 1,
1994 through August 31, 1995, respectively). Because these returns do not
reflect any applicable sales charges, we have also included the Fund's results
at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost. All Class A share results
reflect the applicable expense subsidy which is explained in the Notes to
Financial Statements. Had the subsidy not been in effect, the results would
have been less favorable. The subsidy may be rescinded by MFS at any time.
TAX FORM SUMMARY
In January 1996, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
For the year ended August 31, 1995, distributions from long-term capital gains
are $373,343.
For the year ended August 31, 1995, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
2.58%.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1995
Stocks and Warrants - 59.8%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Foreign Stocks - 44.0%
Australia - 3.1%
Australia & New Zealand Bank Group Ltd.
(Finance) 495,823 $ 2,010,761
Seven Network Ltd. (Media) 635,900 1,623,707
Woolworth Ltd. (Stores) 583,955 1,333,169
------------
$ 4,967,637
- -----------------------------------------------------------------------------
Canada - 1.4%
Avenor, Inc. (Forest and Paper Products) 48,500 $ 1,079,203
Rogers Communications, Inc., "B"
(Telecommunications)* 109,900 1,125,519
------------
$ 2,204,722
- -----------------------------------------------------------------------------
Chile - 0.2%
Santa Isabel S.A., ADR (Supermarkets)*+ 18,000 $ 389,250
- -----------------------------------------------------------------------------
Finland - 0.3%
Aamulehti Yhtymae Oy II (Publishing) 30,000 $ 560,298
- -----------------------------------------------------------------------------
France - 3.2%
Essilor International (Medical and Health
Products) 11,700 $ 1,978,215
Essilor International, ADP (Medical and
Health Products) 5,725 703,568
LVMH Moet-Hennessy (Beverages) 4,000 719,920
Michelin (C.G.D.E.) (Tire and Rubber) 24,600 1,067,869
TOTAL S.A., "B" (Oils) 11,488 674,934
------------
$ 5,144,506
- -----------------------------------------------------------------------------
Germany - 2.8%
BASF AG (Chemicals) 6,700 $ 1,498,372
Hornbach Baumarkt AG (Retail)## 2,060 1,206,812
Schering AG (Pharmaceuticals) 10,000 728,882
Volkswagen AG (Automotive) 3,500 1,070,981
------------
$ 4,505,047
- -----------------------------------------------------------------------------
Hong Kong - 2.1%
Consolidated Electric Power Asia
(Utilities - Electric) 539,000 $ 1,110,610
Giordano International Ltd. (Retail) 1,248,000 1,023,734
Peregrine Investment Holdings (Finance) 433,000 618,108
Varitronix International Ltd.
(Manufacturing) 340,000 630,292
------------
$ 3,382,744
- -----------------------------------------------------------------------------
Italy - 1.2%
Telecom Italia Mobile
(Telecommunications)* 1,023,000 $ 1,023,409
Telecom Italia Mobile S.p.A.
(Telecommunications)* 633,000 932,219
------------
$ 1,955,628
- -----------------------------------------------------------------------------
Japan - 7.8%
Bridgestone Corp. (Tire and Rubber) 74,000 $ 1,091,241
DDI Corp. (Telecommunications) 255 2,156,989
Daiwa House Industrial Co. (Home
Construction) 51,000 788,628
East Japan Railway Co. (Transportation) 230 1,095,238
Kinki Coca-Cola Bottling (Beverages) 93,000 1,123,803
Kirin Beverage Corp. (Beverages) 53,000 749,001
MOS Food Services (Restaurants and
Lodging) 24,000 614,438
Matsushita Electric Industrial Co.
(Electrical Equipment) 73,000 1,143,779
Murata Manufacturing Co. Ltd. (Electrical
Equipment) 22,000 878,647
Nissen Corp. (Retail) 32,800 $ 957,294
Omron Corp. (Electronics) 57,000 1,254,992
Osaka Sanso Kogyo Ltd. (Chemicals) 201,000 710,133
------------
$ 12,564,183
- -----------------------------------------------------------------------------
Malaysia - 0.8%
Maruichi Malaysia Steel Tube (Metals) 99,000 $ 361,221
New Straits Times Press Berhad
(Publishing) 262,000 814,139
Petronas Gas Berhad (Gas)(S)(S)##* 35,400 113,549
------------
$ 1,288,909
- -----------------------------------------------------------------------------
Netherlands - 3.2%
Getronics NV (Computer Software and
Services) 46,579 $ 1,996,725
IHC Caland NV (Transportation - Marine) 28,500 830,080
Nedlloyd Groep NV (Transportation) 26,000 904,290
Royal Dutch Petroleum Co. (Oils) 12,600 1,497,044
------------
$ 5,228,139
- -----------------------------------------------------------------------------
New Zealand - 1.2%
Lion Nathan Ltd. (Beverages) 963,000 $ 1,997,647
- -----------------------------------------------------------------------------
Norway - 0.4%
Tomra Systems (Environmental) 131,800 $ 616,125
- -----------------------------------------------------------------------------
Singapore - 0.6%
Hong Leong Finance (Finance) 329,000 $ 1,000,884
- -----------------------------------------------------------------------------
South Korea - 1.1%
Korea Electric Power Corp., ADR
(Utilities - Electric) 54,000 $ 1,235,250
Korea Mobile Telecom, GDR
(Telecommunications)*## 18,200 574,392
------------
$ 1,809,642
- -----------------------------------------------------------------------------
Spain - 3.8%
Acerinox S.A. (Iron and Steel) 16,400 $ 2,088,579
Acerinox S.A. (Iron and Steel)(S)(S)* 1,640 205,327
Cubiertas y Mzov S.A. (Engineering and
Construction) 20,000 1,240,828
Iberdrola (Utilities - Electric) 154,000 1,182,628
Repsol S.A. (Oils) 43,000 1,349,318
------------
$ 6,066,680
- -----------------------------------------------------------------------------
Sweden - 6.0%
ASEA AB, "B", Free Shares (Electrical
Equipment) 22,600 $ 2,000,464
Astra AB, "B", Free Shares
(Pharmaceuticals) 88,000 2,857,730
Hennes & Mauritz AB, "B" (Retail) 13,200 783,163
Marieberg Tidnings, "A" (Publishing) 40,500 832,405
Skandinaviska Enskilda Banken, "A" (Banks
and Credit Companies) 82,300 426,265
Sparbanken Sverige AB, "A" (Banks and
Credit Companies) 155,200 1,307,839
TV 4 AB (Telecommunications) 74,500 1,439,340
------------
$ 9,647,206
- -----------------------------------------------------------------------------
United Kingdom - 4.8%
ASDA Group PLC (Supermarkets) 929,000 $ 1,565,365
British Steel PLC (Steel) 348,000 973,286
Capital Radio PLC (Broadcasting) 88,000 623,146
Invesco Fund Managers (Finance) 269,100 913,164
MAI PLC (Investment Company) 224,000 971,846
PowerGen PLC (Utilities - Electric) 359,000 1,535,299
Storehouse PLC (Retail) 252,000 1,206,551
------------
$ 7,788,657
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 71,117,904
- -----------------------------------------------------------------------------
U.S. Stocks and Warrants - 15.8%
Agricultural Products - 0.6%
AGCO Corp. 15,000 $ 729,375
Case Corp. 7,200 271,800
------------
$ 1,001,175
- -----------------------------------------------------------------------------
Airlines - 0.2%
Southwest Airlines Co. 11,500 $ 297,562
- -----------------------------------------------------------------------------
Apparel and Textiles - 0.2%
Nike, Inc., "B" 2,600 $ 240,825
- -----------------------------------------------------------------------------
Automotive - 0.5%
General Motors Corp. 16,800 $ 789,600
- -----------------------------------------------------------------------------
Banks and Credit Companies - 0.3%
First Interstate Bancorporation 5,000 $ 477,500
- -----------------------------------------------------------------------------
Business Services - 0.3%
ADT Ltd.* 21,800 $ 283,400
Technology Solutions Co.* 15,000 234,375
------------
$ 517,775
- -----------------------------------------------------------------------------
Cellular Telephones - 0.5%
AirTouch Communications, Inc.* 25,000 $ 812,500
- -----------------------------------------------------------------------------
Chemicals
OSI Specialties, Inc., Warrants* 1,000 $ 2,000
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 0.3%
Microsoft Corp.* 4,500 $ 416,250
- -----------------------------------------------------------------------------
Computer Software - Systems - 0.9%
BMC Software, Inc.* 7,000 $ 298,375
Compuware Corp.* 21,200 479,650
Sybase, Inc.* 21,400 687,475
------------
$ 1,465,500
- -----------------------------------------------------------------------------
Consumer Goods and Services - 1.6%
Philip Morris Cos., Inc. 11,000 $ 820,875
RJR Nabisco Holdings Corp. 22,000 627,000
Tyco International Ltd. 19,000 1,123,375
------------
$ 2,571,250
- -----------------------------------------------------------------------------
Defense Electronics - 0.3%
Loral Corp. 10,000 $ 547,500
- -----------------------------------------------------------------------------
Electrical Equipment - 0.4%
Honeywell, Inc. 15,000 $ 656,250
- -----------------------------------------------------------------------------
Electronics - 0.9%
Advanced Circuits, Inc.* 4,200 $ 88,725
Cypress Semiconductor Corp.* 5,000 228,125
Intel Corp. 19,000 1,166,125
------------
$ 1,482,975
- -----------------------------------------------------------------------------
Entertainment - 2.3%
American Radio Systems* 400 $ 11,400
Argosy Gaming Co.* 21,900 312,075
Casino America, Inc.* 24,100 349,450
Harrah's Entertainment, Inc.* 42,100 1,341,938
Heritage Media Corp., "A"* 8,900 251,425
Rio Hotel & Casino, Inc.* 14,000 182,000
Showboat, Inc. 55,000 1,265,000
------------
$ 3,713,288
- -----------------------------------------------------------------------------
Financial Institutions - 1.0%
Federal Home Loan Mortgage Corp. 13,000 $ 835,250
Student Loan Marketing Assn. 15,000 811,875
------------
$ 1,647,125
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.6%
Hershey Foods Corp. 6,000 $ 359,250
PepsiCo, Inc. 15,000 678,750
------------
$ 1,038,000
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.5%
Boise Cascade Corp. 6,000 $ 257,250
Consolidated Papers, Inc. 4,000 242,000
Kimberly Clark Corp. 3,800 242,725
------------
$ 741,975
- -----------------------------------------------------------------------------
Machinery - 0.3%
York International Corp. 10,300 $ 458,350
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 1.2%
Beverly Enterprises* 35,800 $ 474,350
Genesis Health Ventures, Inc.* 7,200 227,700
Living Centers of America, Inc.* 11,300 344,650
Pacificare Health Systems, Inc., "A"* 2,000 109,500
Pacificare Health Systems, Inc., "B"* 9,100 520,975
Regency Health Services, Inc.* 19,500 224,250
------------
$ 1,901,425
- -----------------------------------------------------------------------------
Photographic Products - 0.3%
Eastman Kodak Co. 8,000 $ 461,000
- -----------------------------------------------------------------------------
Railroads - 0.4%
Wisconsin Central Transportation Corp.* 10,000 $ 595,000
- -----------------------------------------------------------------------------
Restaurants and Lodging - 1.1%
Apple South, Inc. 12,500 $ 306,250
Brinker International, Inc.* 40,000 670,000
HomeTown Buffet, Inc.* 2,300 27,312
Promus Hotel Corp.* 39,000 804,375
------------
$ 1,807,937
- -----------------------------------------------------------------------------
Special Products and Services - 0.2%
Stanley Works 9,000 $ 398,250
- -----------------------------------------------------------------------------
Stores - 0.4%
Federated Department Stores, Inc.* 20,000 $ 540,000
Finlay Enterprises* 1,466 26,388
------------
$ 566,388
- -----------------------------------------------------------------------------
Telecommunications - 0.4%
Cabletron Systems, Inc.* 2,000 $ 105,750
Chipcom Corp.* 15,300 613,913
------------
$ 719,663
- -----------------------------------------------------------------------------
Utilities - Telephone - 0.1%
MCI Communications Corp. 4,200 $ 101,062
- -----------------------------------------------------------------------------
Total U.S. Stocks and Warrants $ 25,428,125
- -----------------------------------------------------------------------------
Total Stocks and Warrants (Identified Cost, $90,215,544) $ 96,546,029
- -----------------------------------------------------------------------------
Bonds - 38.0%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Foreign Denominated - 7.6%
Australia - 0.9%
Government of Australia, 8.75s, 2001 AUD 1,300 $ 984,110
Government of Australia, 12s, 2001 125 108,660
Government of Australia, 10s, 2002 500 398,406
------------
$ 1,491,176
- -----------------------------------------------------------------------------
Canada - 0.9%
Government of Canada, 8.5s, 2000 CAD 700 $ 540,146
Government of Canada, 8.5s, 2002 1,100 850,079
------------
$ 1,390,225
- -----------------------------------------------------------------------------
Denmark - 1.0%
Kingdom of Denmark, 9s, 1998 DKK 4,300 $ 801,811
Kingdom of Denmark, 9s, 2000 4,000 752,751
------------
$ 1,554,562
- -----------------------------------------------------------------------------
France - 0.8%
Government of France, 8s, 1998 FRF 1,390 $ 287,781
Government of France, 7s, 1999 1,300 262,319
Government of France, 7.75s, 2000 3,190 660,447
------------
$ 1,210,547
- -----------------------------------------------------------------------------
Germany - 2.0%
German Unity Fund, 8.5s, 2001 DEM 1,267 $ 954,565
Republic of Germany, 8.5s, 2000 930 700,668
Republic of Germany, 6.5s, 2003 1,832 1,238,597
Republic of Germany, 6.875s, 2005 600 413,011
------------
$ 3,306,841
- -----------------------------------------------------------------------------
Italy - 0.5%
Republic of Italy, 8.5s, 1999 ITL 840,000 $ 479,749
Republic of Italy, 9.5s, 1999 480,000 277,832
------------
$ 757,581
- -----------------------------------------------------------------------------
Netherlands - 1.0%
Government of Netherlands, 6.25s, 1998NLG 230 $ 143,600
Government of Netherlands, 7.75s, 2005 1,120 729,369
Government of Netherlands, 8.25s, 2007 1,190 801,003
------------
$ 1,673,972
- -----------------------------------------------------------------------------
Spain - 0.4%
Kingdom of Spain, 12.25s, 2000 ESP 76,000 $ 634,848
- -----------------------------------------------------------------------------
United Kingdom - 0.1%
United Kingdom Gilts, 7s, 2001 GBP 150 $ 223,128
- -----------------------------------------------------------------------------
Total Foreign Denominated $ 12,242,880
- -----------------------------------------------------------------------------
Foreign - U.S. Dollar Denominated - 11.9%
Argentina - 2.5%
Republic of Argentina, 0s, 2005 $ 6,250 $ 3,812,500
Republic of Argentina, 0s, 2023 500 283,750
------------
$ 4,096,250
- -----------------------------------------------------------------------------
Brazil - 2.8%
Federative Republic of Brazil, 0s, 2006 $ 1,000 $ 617,500
Federative Republic of Brazil, 0s, 2009 4,000 2,175,000
Federative Republic of Brazil, 0s, 2014 1,040 514,998
Federative Republic of Brazil, 0s, 2024 2,000 1,145,000
------------
$ 4,452,498
- -----------------------------------------------------------------------------
Mexico - 3.8%
United Mexican States, "B", 0s, 2019 $ 5,250 $ 3,727,500
United Mexican States, "D", 0s, 2019 3,500 2,485,000
United Mexican States, Value Recovery
Rights 13,460 0
------------
$ 6,212,500
- -----------------------------------------------------------------------------
Poland - 2.8%
Republic of Poland, 2.75s, 2024 $ 9,000 $ 3,735,000
Republic of Poland, 6.813s, 2024 1,000 758,750
------------
$ 4,493,750
- -----------------------------------------------------------------------------
Total Foreign - U.S. Dollar Denominated $ 19,254,998
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - 18.5%
Financial Institutions - 0.3%
American Annuity Group, Inc., 11.125s,
2003 $ 500 $ 523,750
- -----------------------------------------------------------------------------
Industrials - 9.3%
Building - 0.8%
American Standard, Inc., 10.5s, 2005 $ 1,000 $ 772,500
USG Corp., 9.25s, 2001 500 523,750
------------
$ 1,296,250
- -----------------------------------------------------------------------------
Chemicals - 0.9%
Arcadian Partners L.P., 10.75s, 2005## $ 295 $ 305,325
OSI Specialties Holding Co., 0s, 2004 1,000 720,000
UCC Investors Holdings, Inc., 10.5s,
2002 500 507,500
------------
$ 1,532,825
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Fieldcrest Cannon, Inc., 11.25s, 2004 $ 500 $ 521,250
Westpoint Stevens, Inc., 9.375s, 2005 500 482,500
------------
$ 1,003,750
- -----------------------------------------------------------------------------
Entertainment - 0.3%
SCI Television, Inc., 11s, 2005 $ 500 $ 525,000
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Gaylord Container Co., 0s, 2005 $ 200 $ 199,000
Repap New Brunswick, 10.625s, 2005 100 100,500
Riverwood International Corp., 11.25s,
2002 500 542,500
Stone Container Corp., 9.875s, 2001 500 495,625
------------
$ 1,337,625
- -----------------------------------------------------------------------------
Medical and Health Products - 0.1%
Tenet Healthcare Corp., 10.125s, 2005 $ 100 $ 105,000
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 0.7%
Community Health Systems, 10.25s, 2003 $ 500 $ 527,500
Integrated Health Services, Inc.,
10.75s, 2004 500 532,500
------------
$ 1,060,000
- -----------------------------------------------------------------------------
Oil Services - 0.3%
Amerigas Partners L.P., 10.125s, 2007 $ 100 $ 106,000
Global Marine, Inc., 12.75s, 1999 300 330,750
------------
$ 436,750
- -----------------------------------------------------------------------------
Oils - 0.3%
Gulf Canada Resources Ltd., 9.25s, 2004 $ 500 $ 493,750
- -----------------------------------------------------------------------------
Special Products and Services - 2.1%
Eagle Industries, Inc., 0s, 2003 $ 1,000 $ 765,000
IMO Industries, Inc., 12s, 2001 750 776,250
Mark IV Industries, Inc., 8.75s, 2003 250 258,125
Polymer Group, Inc., 12.75s, 2002## 500 510,000
Wolverine Tube, Inc., 10.125s, 2002 1,000 1,055,000
------------
$ 3,364,375
- -----------------------------------------------------------------------------
Steel - 0.3%
AK Steel Holdings Corp., 10.75s, 2004 $ 500 $ 530,000
- -----------------------------------------------------------------------------
Supermarkets - 0.4%
Dominick's Finer Foods, 10.875s, 2005## $ 250 $ 251,250
Ralph's Grocery Co., 11s, 2005 500 470,000
------------
$ 721,250
- -----------------------------------------------------------------------------
Telecommunications - 1.7%
Cablevision Industries Corp., 10.75s,
2002 $ 500 $ 542,500
K-III Communications Corp., 10.625s,
2002 750 791,250
MFS Communications, Inc., 0s, 2004 1,000 745,000
Paging Network, Inc., 8.875s, 2006 750 697,500
------------
$ 2,776,250
- -----------------------------------------------------------------------------
Total Industrials $ 15,182,825
- -----------------------------------------------------------------------------
U.S. Federal Agency - 3.7%
Federal National Mortgage Assn., 8.5s, 2025 $ 5,722 $ 5,904,813
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 4.9%
U.S. Treasury Notes, 6.75s, 2000 $ 5,000 $ 5,128,900
U.S. Treasury Notes, 7.5s, 2005 2,550 2,756,397
------------
$ 7,885,297
- -----------------------------------------------------------------------------
Utilities - Electric - 0.3%
Kenetech Corp., 12.75s, 2002 $ 500 $ 470,000
- -----------------------------------------------------------------------------
Total U.S. Dollar Denominated $ 29,966,685
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $59,668,924) $ 61,464,563
- -----------------------------------------------------------------------------
Call Options Purchased
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Italian Lire/Deutsche Marks
September/1143.9 ITL 314,573 $ 5,895
Japanese Government Bonds
September/110.818 JPY 150,000 1,350
September/114.918 228,000 0
October/115.27 230,000 460
November/114.165 120,000 1,320
December/109.69 129,000 14,448
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $101,461) $ 23,473
- -----------------------------------------------------------------------------
Put Option Purchased
- -----------------------------------------------------------------------------
British Pounds
September/1.5305 (Premium Paid, $5,184) GBP 785,487 $ 1,403
- -----------------------------------------------------------------------------
Short-Term Obligation - 2.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Ford Motor Credit Corp., due 9/01/95, at
Amortized Cost $ 3,280 $ 3,279,472
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $153,270,585) $161,314,940
- -----------------------------------------------------------------------------
Call Option Written
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Japanese Yen $ (2,505)
March/78 (Premium Received, $21,847) JPY 92,111
- -----------------------------------------------------------------------------
Put Options Written - (0.1)%
- -----------------------------------------------------------------------------
British Pounds $ (1,351)
September/1.53 GBP 785
Deutsche Marks (12,739)
September/1.465 DEM 2,319
September/1.49 (1,647)
1,238
Italian Lire/Deutsche Marks
September/1227.5 ITL 337,563 0
Japanese Government Bonds (19,800)
November/111.75 JPY 120,000
December/108.97 (15,609)
129,000
Japanese Yen (65,630)
March/93 109,824
- -----------------------------------------------------------------------------
Total Put Options Written
(Premiums Received, $86,292) $ (116,776)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.3% $ 393,393
- -----------------------------------------------------------------------------
Net Assets - 100.0% $161,589,052
- -----------------------------------------------------------------------------
*Non-income producing security.
+Restricted security.
##SEC Rule 144A restriction.
(S)(S)When-issued security. At August 31, 1995, the Fund had sufficient cash
and/or securities at least equal to the value of the when-issued
security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NLG = Dutch Guilders
ESP = Spanish Pesetas NZD = New Zealand Dollars
FRF = French Francs SEK = Swedish Kronor
GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
August 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $153,270,585) $161,314,940
Cash 7,627
Net receivable for forward foreign currency exchange
contracts sold 2,386,524
Net receivable for forward foreign currency contracts 161,273
Receivable for Fund shares sold 385,594
Receivable for investments sold 61,868
Interest and dividends receivable 1,747,050
Deferred organization expenses 27,445
------------
Total assets $166,092,321
------------
Liabilities:
Payable for Fund shares reacquired $ 189,855
Payable for investments purchased 2,169,330
Written options outstanding, at value (premiums received,
$108,139) 119,281
Payable for daily variation margin on open futures
contracts 25,313
Net payable for forward currency exchange contracts
purchased 1,819,433
Payable to affiliates -
Management fee 2,650
Shareholder servicing agent fee 822
Distribution fee 68,195
Accrued expenses and other liabilities 108,390
------------
Total liabilities $ 4,503,269
------------
Net assets $161,589,052
============
Net assets consist of:
Paid-in capital $147,578,245
Unrealized appreciation on investments and translation of
asset and liabilities in foreign currencies 8,875,257
Accumulated undistributed net realized gain on investments
and foreign currency transactions 5,959,132
Accumulated distributions in excess of net investment
income (823,582)
------------
Total $161,589,052
============
Shares of beneficial interest outstanding 9,733,708
============
Class A shares:
Net asset value and redemption price per share
(net assets of $58,662,968 / 3,526,991 shares of
beneficial interest outstanding) $16.63
======
Offering price per share (100/95.25) $17.46
======
Class B shares:
Net asset value and offering price per share
(net assets of $83,600,786 / 5,040,791 shares of
beneficial interest outstanding) $16.58
======
Class C shares:
Net asset value, offering price, and redemption price per
share (net assets of $19,325,298 / 1,165,926 shares of
beneficial interest outstanding) $16.58
======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended August 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 4,911,152
Dividends 1,463,988
Foreign taxes withheld (162,691)
-----------
Total investment income $ 6,212,449
-----------
Expenses -
Management fee $ 748,715
Trustees' compensation 32,823
Shareholder servicing agent fee (Class A) 71,288
Shareholder servicing agent fee (Class B) 139,960
Shareholder servicing agent fee (Class C) 20,463
Distribution and service fee (Class A) 237,651
Distribution and service fee (Class B) 636,183
Distribution and service fee (Class C) 136,422
Custodian fee 107,978
Printing 82,281
Postage 53,334
Auditing fees 52,350
Legal fees 11,927
Amortization of organization expenses 6,849
Miscellaneous 171,142
-----------
Total expenses $ 2,509,366
Reduction of expenses by distributor (Class A) (94,868)
-----------
Net expenses $ 2,414,498
-----------
Net investment income $ 3,797,951
-----------
Realized and unrealized gain on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 3,657,531
Written option transactions 250,514
Foreign currency transactions 779,553
Futures contracts (492,110)
-----------
Net realized gain on investments and foreign currency
transactions $ 4,195,488
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 7,154,479
Written options (11,142)
Translation of assets and liabilities in foreign currencies 715,978
Futures contracts 118,652
-----------
Net unrealized gain on investments $ 7,977,967
-----------
Net realized and unrealized gain on investments and
foreign currency $12,173,455
-----------
Increase in net assets from operations $15,971,406
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended August 31, 1995 1994*
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,797,951 $ 89,142
Net realized gain on investments and foreign
currency transactions 4,195,488 22,898
Net unrealized gain on investments and
foreign currency translation 7,977,967 897,290
------------ ------------
Increase in net assets from operations $ 15,971,406 $ 1,009,330
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,026,466) $ --
From net investment income (Class B) (1,012,521) --
From net investment income (Class C) (239,932) --
From net realized gain on investments and
foreign currency transactions (Class A) (258,501) --
From net realized gain on investments and
foreign currency transactions (Class B) (350,041) --
From net realized gain on investments and
foreign currency transactions (Class C) (82,468) --
------------ ------------
Total distributions declared to
shareholders $ (2,969,929) $ --
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $118,013,307 $ 54,876,622
Net asset value of shares issued to
shareholders in reinvestment
of distributions 2,475,151 --
Cost of shares reacquired (27,084,609) (702,226)
------------ ------------
Increase in net assets from Fund share
transactions $ 93,403,849 $ 54,174,396
------------ ------------
Total increase in net assets $106,405,326 $ 55,183,726
Net assets:
At beginning of period 55,183,726 --
------------ ------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $(823,582) and
$111,814, respectively) $161,589,052 $ 55,183,726
============ ============
*The Fund commenced investment operations on July 22, 1994.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1995 1994<F1> 1995 1994<F1> 1995 1994<F1>
- ----------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $15.33 $15.00 $15.31 $15.00 $15.31 $15.00
------ ------ ------ ------ ------ ------
Income from investment operations <F4> -
Net investment income $ 0.55<F6> $ 0.04<F6> $ 0.43 $ 0.02<F6> $ 0.46 $ 0.03<F6>
Net realized and unrealized gain on investments
and foreign currency transactions 1.17 0.29 1.17 0.29 1.16 0.28
------ ------ ------- ------ ------- ------
Total from investment operations $ 1.72 $ 0.33 $ 1.60 $ 0.31 $ 1.62 $ 0.31
------ ------ ------ ------ ------ ------
Less distributions declared to share holders -
From net investment income $(0.37) $ -- $(0.28) $ -- $(0.30) $ --
From net realized gain on investments and foreign
currency transactions (0.05) -- (0.05) -- (0.05) --
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.42) $ -- $(0.33) $ -- $(0.35) $ --
------ ------ ------ ------ ------ ------
Net asset value-end of period $16.63 $15.33 $16.58 $15.31 $16.58 $15.31
====== ====== ====== ====== ====== ======
Total return<F5> 11.48% 2.20%<F3> 10.65% 2.07%<F3> 10.72% 2.07%<F3>
Ratios (to average net assets)/Supplemental data:
Expenses 1.47%<F6> 1.50%<F2><F6> 2.24% 2.57%<F2><F6> 2.18% 2.50%<F2><F6>
Net investment income 3.49%<F6> 2.43%<F6>) 2.75% 1.39%<F2><F6> 2.91% 1.68%<F2><F6>
Portfolio turnover 118% 1% 118% 1% 118% 1%
Net assets at end of period (000 omitted) $58,663 $25,254 $83,601 $26,495 $19,325 $3,435
<FN>
<F1> For the period from the commencement of investment operations, July 22, 1994 to August 31, 1994.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data is based on the average shares outstanding.
<F5> Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
<F6> The investment adviser and/or the distributor did not impose a portion of their management fee and/or distribution fee,
respectively, for the periods indicated. If these fees had been incurred by the Fund, the net investment income per share and
the ratios would have been:
</FN>
Net investment income $ 0.52 $ 0.02 -- $ 0.01 -- $ 0.02
Ratios (to average net assets):
Expenses 1.67% 2.62%<F2> -- 3.21%<F2> -- 3.18%<F2>
Net investment income 3.29% 1.31%<F2> -- 0.75%<F2> -- 1.00%<F2>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Asset Allocation Fund (the Fund) is a non-diversified series of MFS
Series Trust I (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar-denominated short-term
obligations are valued at amortized cost as calculated in the base currency
and translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options
are valued by brokers through the use of a pricing model which takes into
account closing bond valuations, implied volatility and short-term repurchase
rates. Equity securities listed on securities exchanges or reported through
the NASDAQ system are valued at last sale prices. Unlisted equity securities
or listed equity securities for which last sale prices are not available are
valued at last quoted bid prices. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the securities transferred to ensure
that the value, including accrued interest, of the securities under each
repurchase agreement is greater than amounts owed to the Fund under each such
repurchase agreement.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, including income and expenses, are converted
into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Gains and losses attributable to
foreign currency exchange rates on sales of securities are recorded for
financial statement purposes as net realized gains and losses on investments.
Gains and losses attributable to foreign exchange rate movements on income and
expenses are recorded for financial statement purposes as foreign currency
transaction gains and losses. That portion of both realized and unrealized
gains and losses on investments that results from fluctuations in foreign
currency exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
investment operations of the Fund.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have
no control over whether the underlying securities may be sold (call) or
purchased (put) and, as a result, bears the market risk of an unfavorable
change in the price of the securities underlying the written option. In
general, written call options may serve as a partial hedge against decreases
in value in the underlying securities to the extent of the premium received.
Written options may also be used as a part of an income producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
the Fund each day, depending on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Investments in interest rate futures
for purposes other than hedging may be made to modify the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the Fund's relative
position in one or more currencies without buying and selling portfolio
assets. Investments in equity-index contracts, or contracts on related
options, for purposes other than hedging may be made when the Fund has cash on
hand and wishes to participate in anticipated market appreciation while cash
is being invested. Should interest or exchange rates or securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for both financial
statement and tax reporting purposes as required by federal income tax
regulations. Dividend income is recorded on the ex-dividend date for dividends
received in cash. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security
owned are added to the cost of the security; other legal fees are expensed.
Capital infusions, which are generally non-recurring, incurred to protect or
enhance the value of high-yield debt securities, are reported as an addition
to the cost basis of the security. Costs that are incurred to negotiate the
terms or conditions of capital infusions or that are expected to result in a
plan of reorganization are considered workout expenses and are reported as
realized losses. Ongoing costs incurred to protect or enhance an investment,
or costs incurred to pursue other claims or legal actions, are reported as
operating expenses.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Fund's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV. Foreign taxes have been provided
for on interest and dividend income earned on foreign investments in
accordance with the applicable country's tax rates and to the extent
unrecoverable are recorded as a reduction of investment income. Distributions
to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a return of capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended August 31, 1995, $2,454,428 was reclassified from
accumulated undistributed net investment income to accumulated net realized
gain on investments due to differences between book and tax accounting for
foreign currency transactions. This change had no effect on the net assets or
net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.60%
of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $3,248
for the year ended August 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$111,898 for the year ended August 31, 1995, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted
separate distribution plans for Class A, Class B and Class C shares pursuant
to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $934 for the year ended August 31, 1995. Fees, net of waiver,
incurred under the distribution plan during the year ended August 31, 1995
were 0.30% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $91 and
$2,377 for Class B and Class C shares, respectively, for the year ended August
31, 1995. Fees incurred under the distribution plans during the year ended
August 31, 1995 were 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within twelve months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 1995 were
$1,592 and $108,698 for Class A and Class B shares, respectively.
Currently, MFD is bearing the Fund's Class A distribution/service fee equal to
0.20% of the Fund's average daily net assets attributable to Class A shares on
an annualized basis.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 20,041,094 $ 12,470,196
============ ============
Investments (non-U.S. government securities) $220,974,944 $119,144,627
============ ============
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $153,575,536
============
Gross unrealized appreciation $ 10,906,594
Gross unrealized depreciation (3,167,190)
------------
Net unrealized appreciation $ 7,739,404
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares
1995 1994*
-------------------------- -------------------------
Year Ended August 31, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,594,208 $ 39,819,615 1,676,623 $25,208,761
Shares issued to
shareholders in
reinvestment of
distributions 72,285 1,112,578 -- --
Shares reacquired (787,357) (12,300,613) (28,768) (434,304)
--------- ------------- --------- -----------
Net increase 1,879,136 $ 28,631,580 1,647,855 $24,774,457
========= ============= ========= ===========
Class B Shares
1995 1994*
-------------------------- -------------------------
Year Ended August 31, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,914,029 $ 59,970,108 1,745,709 $26,248,238
Shares issued to
shareholders in
reinvestment of
distributions 72,092 1,107,833 -- --
Shares reacquired (675,931) (10,554,603) (15,108) (228,061)
--------- ------------- ---------- -----------
Net increase 3,310,190 $ 50,523,338 1,730,601 $26,020,177
========= ============= ========= ===========
*For the period July 22, 1994 to August 31, 1994.
Class C Shares
1995 1994*
-------------------------- -------------------------
Year Ended August 31, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,198,363 $18,223,584 226,975 $3,419,623
Shares issued to
shareholders in
reinvestment of
distributions 16,620 254,740 -- --
Shares reacquired (273,394) (4,229,393) (2,638) (39,861)
--------- ------------- ---------- -----------
Net increase 941,589 $14,248,931 224,337 $3,379,762
========= ============= ========= ===========
*For the period July 22, 1994 to August 31, 1994.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August
31, 1995 was $2,051.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts and futures contracts. The notional or contractual amounts
of these instruments represent the investment the Fund has in particular
classes of financial instruments and does not necessarily represent the
amounts potentially subject to risk. The measurement of the risks associated
with these instruments is meaningful only when all related and offsetting
transactions are considered. A summary of obligations under these financial
instruments at August 31, 1995, is as follows:
<TABLE>
Written Option Transactions
<CAPTION>
1995 Calls 1995 Puts
------------------------ -----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options written -
Australian Dollars 796 $ 6,074 2,759 $ 32,936
British Pounds 842 14,524 785 14,524
Canadian Dollars -- -- 2,663 11,168
Deutsche Marks 9,861 38,768 28,826 203,558
Deutsche Marks/British Pounds 1,550 10,069 3,778 13,292
Italian Lire/Deutsche Marks 2,662,580 18,331 1,153,304 4,094
Japanese Yen 939,255 275,397 2,052,422 215,890
Spanish Pesetas/Deutsche Marks -- -- 75,925 4,976
Swedish Kronor/Deutsche Marks 3,006 2,270 3,210 2,010
Swiss Francs/Deutsche Marks 1,258 5,298 -- --
Options terminated in closing transactions -
Australian Dollars (796) (6,074) (2,759) (32,936)
British Pounds (842) (14,524) -- --
Canadian Dollars -- -- (2,663) (11,168)
Deutsche Marks (2,964) (14,712) (21,998) (176,652)
Deutsche Marks/British Pounds (1,550) (10,069) (3,778) (13,292)
Japanese Yen (847,144) (253,550) (1,693,598) (168,252)
Spanish Pesetas/Deutsche Marks -- -- (75,925) (4,976)
Swedish Kronor/Deutsche Marks (3,006) (2,270) -- --
Options exercised -
Deutsche Marks (1,760) (5,626) -- --
Italian Lire/Deutsche Marks -- -- (815,741) (1,383)
Swiss Francs/Deutsche Marks (1,258) (5,298) -- --
Options expired -
Deutsche Marks (5,137) (18,430) (3,271) (5,487)
Italian Lire/Deutsche Marks (2,662,580) (18,331) -- --
Swedish Kronor/Deutsche Marks -- -- (3,210) (2,010)
--------- -------- ------- --------
OUTSTANDING, END OF PERIOD 92,111 $ 21,847 700,729 $ 86,292
========= ======== ======= ========
OPTIONS OUTSTANDING AT END OF PERIOD CONSIST OF -
British Pounds -- $ -- 785 $ 14,524
Deutsche Marks -- -- 3,557 21,419
Italian Lire/Deutsche Marks -- -- 337,563 2,711
Japanese Yen 92,111 21,847 358,824 47,638
--------- -------- ------- --------
OUTSTANDING, END OF PERIOD 92,111 $ 21,847 700,729 $ 86,292
========= ======== ======= ========
</TABLE>
At August 31, 1995, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 9/01/95 - 9/27/95 AUD 7,419,452 $ 5,345,748 $ 5,566,481 $ (220,733)
9/01/95 - 9/01/95 CAD 3,711,281 2,748,130 2,762,724 (14,594)
9/05/95 - 12/07/95 DEM 31,590,420 22,458,561 21,571,766 886,795
9/08/95 - 10/06/95 DKK 9,768,680 1,784,604 1,714,716 69,888
12/07/95 - 12/07/95 ESP 389,763,438 3,084,358 3,077,917 6,441
9/18/95 - 9/28/95 FRF 84,362,310 17,257,725 16,722,803 534,922
10/10/95 - 10/10/95 GBP 2,069,713 3,298,792 3,204,005 94,787
9/11/95 - 10/02/95 ITL 2,836,968,549 1,718,336 1,740,943 (22,607)
9/25/95 - 12/07/95 JPY 626,974,598 7,232,468 6,463,647 768,821
9/26/95 - 9/26/95 NLG 6,051,695 3,909,411 3,684,785 224,626
9/08/95 - 11/15/95 NZD 6,204,494 4,062,092 4,021,526 40,566
10/12/95 - 10/12/95 SEK 41,832,450 5,728,511 5,710,899 17,612
----------- ----------- -----------
$78,628,736 $76,242,212 $ 2,386,524
=========== =========== ===========
Purchases 11/27/95 - 11/27/95 AUD 129,456 $ 95,021 $ 96,829 $ 1,808
9/01/95 - 9/06/95 CAD 2,445,237 1,819,321 1,821,201 1,880
9/05/95 - 12/07/95 DEM 36,547,404 26,417,704 24,941,818 (1,475,886)
9/08/95 - 10/06/95 DKK 5,573,832 1,006,183 978,367 (27,816)
9/29/95 - 9/29/95 FRF 41,117,428 8,389,956 8,150,603 (239,353)
10/10/95 - 10/10/95 GBP 193,937 298,663 300,223 1,560
10/10/95 - 10/10/95 IEP 1,381,673 2,269,260 2,189,675 (79,585)
9/11/95 - 12/07/95 ITL 2,268,686,690 1,376,644 1,388,371 11,727
9/01/95 - 9/01/95 NLG 283,076 171,188 172,134 946
9/08/95 - 9/15/95 NZD 3,939,295 2,573,721 2,559,007 (14,714)
---------- ----------- ---------
$44,417,661 $42,598,228 $(1,819,433)
=========== =========== ===========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $161,273 at August 31, 1995.
At August 31, 1995, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
Futures Contracts
Unrealized
Expiration Contracts Position Appreciation
- --------------------------------------------------------------------------------
September 1995 45 U.S. Treasury Notes (10 yr.) Short $ 42,103
September 1995 90 U.S. Treasury Notes (5 yr.) Short 76,549
--------
$118,652
========
At August 31, 1995, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At August 31,
1995, the Fund owned the following restricted securities (constituting 2.1% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Fund does not have the right to
demand that such securities be registered. The value of these securities is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Trustees. Certain of
these securities may be offered and sold to "qualified institutional buyers"
under Rule 144A of the 1933 Act.
Shares/
Description Date of Acquisition Par Amount Cost Value
- --------------------------------------------------------------------------------
Arcadian Partners
L.P., 10.75s, 2005 10/31/94 295,000 $ 289,837 $ 305,325
Dominick's Finer
Foods, 10.875s, 2005 6/21/95 250,000 248,750 251,250
Hornbach Baumarkt AG 8/31/94 - 5/17/95 2,060 1,164,598 1,206,812
Korea Mobile
Telecom, GDR 3/24/95 - 3/31/95 18,200 474,953 574,392
Petronas Gas Berhad 7/31/95 35,400 115,639 113,549
Polymer Group, Inc.,
12.75s, 2002 9/07/94 500,000 507,500 510,000
Santa Isabel S.A.,
ADR 7/26/95 - 8/15/95 18,000 311,560 389,250
----------
$3,350,578
==========
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust I and Shareholders of MFS World Asset
Allocation Fund:
We have audited the accompanying statement of assets and liabilities of MFS
World Asset Allocation Fund, including the schedule of portfolio investments,
as of August 31, 1995, the related statement of operations for the year then
ended and the statement of changes in net assets and the financial highlights
for the year then ended and for the period from July 22, 1994 (commencement
of investment operations) to August 31, 1994. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 1995, by correspondence with the custodian
and brokers, or other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Asset Allocation Fund at August 31, 1995, the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period from July 22, 1994 to
August 31, 1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 4, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS INVESTMENT OPPORTUNITIES
MUTUAL FUNDS
The MFS Family of Funds(R), shown on the facing page, falls into the eight
general categories below. All offer full-time professional management, a
diversified portfolio, and a wide array of shareholder services.
STOCK FUNDS seek growth of capital rather than income through investments in
stocks.
STOCK AND BOND FUNDS seek current income and growth of capital through
investments in both stocks and bonds.
BOND FUNDS seek current income through investments in debt securities.
WORLD FUNDS seek stock, balanced, and bond fund objectives through
investments in U.S. and foreign stocks and bonds.
LIMITED-MATURITY FUNDS seek current income and preservation of capital
through investments in debt securities with remaining maturities of five years
or less.
NATIONAL TAX-FREE BOND FUNDS seek current income exempt from federal income
tax through investments in debt securities issued by states and
municipalities.(1)
STATE TAX-FREE BOND FUNDS seek current income exempt from federal and state
income taxes through investments in debt securities issued by a single state
and its municipalities.(1)
MONEY MARKET FUNDS seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact your
financial adviser, who can help you relate these investment opportunities to
your financial goals. If you prefer, you may call MFS Investor Information for
literature(3) on MFS products and services: 1-800-637-2929, from 9 a.m. to 5
p.m. Eastern time any business day (leave a message any time).
(1) A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
(2) Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the Fund will be able to maintain
a stable net asset value.
(3) Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
<PAGE>
THE MFS FAMILY OF FUNDS(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or, leave a message any
time). This material should be read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK LIMITED MATURITY BOND
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Trust MFS(R) Government Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
Massachusetts Investors Growth Stock Fund MFS(R) Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Capital Growth Fund MFS(R) Municipal Limited Maturity Fund
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Emerging Growth Fund
- ---------------------------------------------------- WORLD
MFS(R) Gold & Natural Resources Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Asset Allocation Fund
MFS(R) Growth Opportunities Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Governments Fund
MFS(R) OTC Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Growth Fund
MFS(R) Research Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) World Total Return Fund
MFS(R) Value Fund ----------------------------------------------------
- ----------------------------------------------------
NATIONAL TAX-FREE BOND
STOCK AND BOND ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal Bond Fund
MFS(R) Total Return Fund ----------------------------------------------------
- ---------------------------------------------------- MFS(R) Municipal High Income Fund
MFS(R) Utilities Fund (closed to new investors)
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Municipal Income Fund
BOND ----------------------------------------------------
- ----------------------------------------------------
MFS(R) Bond Fund STATE TAX-FREE BOND
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Mortgage Fund Alabama, Arkansas, California, Florida,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) High Income Fund Mississippi, New York, North Carolina,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Intermediate Income Fund Pennsylvania, South Carolina, Tennessee,
- ---------------------------------------------------- ----------------------------------------------------
MFS(R) Strategic Income Fund Texas, Virginia, Washington, West Virginia
(formerly MFS(R) Income & Opportunity Fund) ----------------------------------------------------
- ----------------------------------------------------
MONEY MARKET
----------------------------------------------------
MFS(R) Cash Reserve Fund
----------------------------------------------------
MFS(R) Government Money Market Fund
----------------------------------------------------
MFS(R) Money Market Fund
----------------------------------------------------
</TABLE>
<PAGE>
MFS(R) WORLD -----------------
ASSET ALLOCATION
FUND BULK RATE
U.S. POSTAGE
500 Boylston Street P A I D
Boston, MA 02116 PERMIT #55638
BOSTON, MA
-----------------
[MFS LOGO]
THE FIRST NAME IN MUTUAL FUNDS
MAA-3 10/95 18M 88/288/388
<PAGE> 188
<TABLE>
<S> <C>
(d) Form of Investment Advisory Agreement for MFS Equity Income Fund,
dated January 2, 1996. (7)
(e) Form of Investment Advisory Agreement for MFS Research Growth
and Income Fund, dated January 2, 1996. (7)
(f) Form of Investment Advisory Agreement for MFS Core Growth Fund,
dated January 2, 1996. (7)
(g) Form of Investment Advisory Agreement for MFS Aggressive Growth
Fund, dated January 2, 1996. (7)
(h) Form of Investment Advisory Agreement for MFS Special
Opportunities Fund, dated January 2, 1996. (7)
6 (a) Distribution Agreement, dated January 1, 1995. (5)
(b) Dealer Agreement between MFS Fund Distributors, Inc., ("MFD") and a
dealer, dated December 28, 1994 and the Mutual Fund Agreement
between MFD and a bank or NASD affiliate, dated December 28, 1994.
(1)
7 Retirement Plan for Non-Interested Person Trustees, dated January 1,
1991. (7)
8 (a) Custodian Agreement, dated January 28, 1988. (7)
(b) Amendment No. 1 to the Custodian Agreement, dated February 29, 1988
and October 1, 1989, respectively. (7)
(c) Amendment No. 2 to the Custodian Agreement, dated October 9, 1991.
(7)
(d) Custodian Agreement between Investors Bank & Trust and MFS World
Asset Allocation Fund dated June 2, 1994. (7)
9 (a) Shareholder Servicing Agent Agreement, dated September 10, 1986. (6)
(b) Amendment to the Shareholder Servicing Agent Agreement, dated June
2, 1994. (7)
(c) Exchange Privilege Agreement, dated September 1, 1995. (8)
(d) Loan Agreement by and among MFS Borrowers and The First National
Bank of Boston dated as of September 29, 1989, as amended through
and including the second Amendment dated April 21, 1994. (3)
(e) Dividend Disbursing Agent Agreement dated September 10, 1986. (7)
</TABLE>
<PAGE> 189
<TABLE>
<S> <C>
10 Rule 24e-2 Consent and Opinion of Counsel; filed
herewith.
11 (a) Consent of Deloitte & Touche LLP; filed herewith.
(b) Consent of Ernst & Young LLP; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (4)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans as Trust Agreement as currently in effect.
(4)
15 (a) Distribution Plan for Class A Shares of MFS
[REGISTERED TRADEMARK] Managed Sectors Fund, dated
December 14, 1994. (5)
(b) Amended and Restated Distribution Plan for Class B
Shares of MFS [REGISTERED TRADEMARK] Managed Sectors
Fund, dated December 14, 1994. (5)
(c) Distribution Plan for Class A Shares of MFS
[REGISTERED TRADEMARK] Cash Reserve Fund, dated
December 14, 1994. (5)
(d) Distribution Plan for Class B Shares of MFS
[REGISTERED TRADEMARK] Cash Reserve Fund, dated
December 14, 1994. (5)
(e) Distribution Plan for Class A Shares of MFS
[REGISTERED TRADEMARK] World Asset Allocation Fund,
dated December 14, 1994. (5)
(f) Distribution Plan for Class B Shares of MFS
[REGISTERED TRADEMARK] World Asset Allocation Fund,
dated December 14, 1994. (5)
(g) Distribution Plan for Class C Shares of MFS
[REGISTERED TRADEMARK] World Asset Allocation Fund
dated December 14, 1994. (5)
(h) Form of Distribution Plan for Class A Shares of MFS
[REGISTERED TRADEMARK] Equity Income Fund, MFS
[REGISTERED TRADEMARK] Research Growth and Income
Fund, MFS [REGISTERED TRADEMARK] Core Growth Fund,
MFS [REGISTERED TRADEMARK] Aggressive Growth Fund
and MFS [REGISTERED TRADEMARK] Special Opportunities
Fund each dated January 2, 1996. (7)
(i) Form of Distribution Plan for Class B Shares of MFS
[REGISTERED TRADEMARK] Equity Income Fund, MFS
[REGISTERED TRADEMARK] Research Growth and Income
Fund, MFS [REGISTERED TRADEMARK] Core Growth
</TABLE>
<PAGE> 190
<TABLE>
<S> <C>
Fund, MFS [REGISTERED TRADEMARK] Aggressive Growth
Fund and MFS [REGISTERED TRADEMARK] Special
Opportunities Fund each dated January 2, 1996. (7)
(j) Form of Distribution Plan for Class C Shares of MFS
[REGISTERED TRADEMARK] Equity Income Fund, MFS
[REGISTERED TRADEMARK] Research Growth and Income
Fund, MFS [REGISTERED TRADEMARK] Core Growth Fund,
MFS [REGISTERED TRADEMARK] Aggressive Growth Fund
and MFS [REGISTERED TRADEMARK] Special Opportunities
Fund each dated January 2, 1996. (7)
16 Schedule for Computation of Performance Quotations
- Yield Calculation Average Annual and Aggregate
Total Return and Current Distribution Rate. (1)
17 Financial Data Schedules for each class of each
series; filed herewith.
18 Not Applicable.
Power of Attorney, dated August 11, 1994. (7)
- ---------------------
<FN>
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via
EDGAR on February 22, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via
EDGAR on July 28, 1995.
(3) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on
February 28, 1995.
(4) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(5) Incorporated by reference to the Registrant's Post-Effective Amendment No.
20 filed with the SEC via EDGAR on March 30, 1995.
(6) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 17 filed with the SEC via EDGAR on
October 13, 1995.
(7) Incorporated by reference to the Registrant's Post-Effective Amendment
No. 21 filed with the SEC via EDGAR on October 17, 1995.
(8) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
FOR MFS MANAGED SECTORS FUND
----------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
[S] [C]
Class A Shares of Beneficial Interest 20,648
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest 16,397
(without par value) (as of November 30, 1995)
<PAGE> 191
<TABLE>
<CAPTION>
FOR MFS CASH RESERVE FUND
-------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 1,960
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest 14,812
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS WORLD ASSET ALLOCATION FUND
-----------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 5,293
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest 6,385
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest 786
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS EQUITY INCOME FUND
--------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS RESEARCH GROWTH AND INCOME FUND
---------------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<PAGE> 192
<TABLE>
<S> <C>
Class C Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS CORE GROWTH FUND
------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS AGGRESSIVE GROWTH FUND
------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<TABLE>
<CAPTION>
FOR MFS SPECIAL OPPORTUNITIES FUND
----------------------------------
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class B Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
Class C Shares of Beneficial Interest - 0 -
(without par value) (as of November 30, 1995)
</TABLE>
<PAGE> 193
ITEM 27. INDEMNIFICATION
---------------
Reference is hereby made to (a) Article V of the Trust's Declaration
of Trust, incorporated by reference to the Registrant's Post-Effective
Amendment No. 20 filed with the SEC via EDGAR on March 30, 1995 and (b) Section
8 of the Shareholder Servicing Agent Agreeement, incorporated by reference to
MFS Series Trust II, Post-Effective Amendment No. 17 filed with the SEC via
EDGAR on October 13, 1995.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser and principal underwriter are insured under an
errors and omissions liability insurance policy. The Registrant and its
officers are also insured under the fidelity bond required by Rule 17g-1 under
the Investment Company Act of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
MFS serves as investment adviser to the following open-end Funds
comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market
Fund, MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has
two series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI
(which has three series: MFS World Total Return Fund, MFS Utilities Fund and
MFS World Equity Fund), MFS Series Trust VII (which has two series: MFS World
Governments Fund and MFS Value Fund), MFS Series Trust VIII (which has two
series: MFS Strategic Income Fund and MFS World Growth Fund), MFS Series Trust
IX (which has three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS
Municipal Limited Maturity Fund), MFS Series Trust X (which has four series:
MFS Government Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity
Fund, MFS/Foreign & Colonial International Growth Fund and MFS/Foreign &
Colonial International Growth and Income Fund), and MFS Municipal Series Trust
(which has 19 series: MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal
Bond Fund, MFS California Municipal Bond Fund, MFS Florida Municipal Bond Fund,
MFS Georgia Municipal Bond Fund, MFS Louisiana Municipal Bond Fund, MFS
Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond Fund, MFS
Mississippi Municipal Bond Fund, MFS New York Municipal Bond Fund, MFS North
Carolina Municipal Bond Fund, MFS Pennsylvania Municipal Bond Fund, MFS South
Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS Texas
Municipal Bond Fund, MFS Virginia Municipal Bond Fund, MFS Washington Municipal
Bond Fund, MFS West Virginia Municipal Bond Fund and MFS Municipal Income Fund)
(the "MFS Funds"). The principal business address of each of the
aforementioned Funds is 500 Boylston Street, Boston, Massachusetts 02116.
MFS also serves as investment adviser of the following no-load,
open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven series),
MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS Union
Standard Trust ("UST") (which has two series). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
<PAGE> 194
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust,
MFS Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series Trust
("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"), Money Market
Variable Account, High Yield Variable Account, Capital Appreciation Variable
Account, Government Securities Variable Account, World Governments Variable
Account, Total Return Variable Account and Managed Sectors Variable Account.
The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company organized
under the laws of the Republic of Ireland and a subsidiary of MFS, whose
principal business address is 41-45 St. Stephen's Green, Dublin 2, Ireland,
serves as investment adviser to and distributor for MFS International Fund
(which has four portfolios: MFS International Funds-U.S. Equity Fund, MFS
International Funds-U.S. Emerging Growth Fund, MFS International Funds-Global
Governments Fund and MFS International Funds-Charter Income Fund) (the "MIL
Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for MFS
Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund and MFS Meridian U.S. Equity Fund (collectively the "MFS Meridian
Funds"). Each of the MFS Meridian Funds is organized as an exempt company
under the laws of the Cayman Islands. The principal business address of each
of the MFS Meridian Funds is P.O. Box 309, Grand Cayman, Cayman Islands,
British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited company
registered with the Registrar of Companies for England and Wales whose current
address is 4 John Carpenter Street, London, England ED4Y 0NH, is involved
primarily in marketing and investment research activities with respect to
private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary of
MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned subsidiary
of MFS, serves as distributor for certain life insurance and annuity contracts
issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary of MFS,
serves as shareholder servicing agent to the MFS Funds, the MFS Closed-End
Funds, MFSIT, MVI and UST.
MFS Asset Management, Inc. ("AMI"), a wholly owned subsidiary of MFS,
provides investment advice to substantial private clients.
<PAGE> 195
MFS Retirement Services, Inc. ("RSI"), a wholly owned subsidiary of
MFS, markets MFS products to retirement plans and provides administrative and
record keeping services for retirement plans.
MFS
---
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold
D. Scott, John R. Gardner and John D. McNeil. Mr. Brodkin is the Chairman,
Mr. Shames is the President, Mr. Scott is a Senior Executive Vice President and
Secretary, Bruce C. Avery, William S. Harris, William W. Scott, Jr., and
Patricia A. Zlotin are Executive Vice Presidents, James E. Russell is a Senior
Vice President and the Treasurer, Stephen E. Cavan is a Senior Vice President,
General Counsel and an Assistant Secretary, Joseph W. Dello Russo is a Senior
Vice President and Chief Financial Officer, Robert T. Burns is a Vice President
and an Assistant Secretary of MFS, and Mary Kay Doherty is a Vice President and
Assistant Treasurer.
MASSACHUSETTS INVESTORS TRUST
-----------------------------
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
-----------------------------------------
MFS GROWTH OPPORTUNITIES FUND
-----------------------------
MFS GOVERNMENT SECURITIES FUND
------------------------------
MFS SERIES TRUST I
------------------
MFS SERIES TRUST V
------------------
MFS SERIES TRUST VI
-------------------
MFS SERIES TRUST X
------------------
MFS GOVERNMENT LIMITED MATURITY FUND
------------------------------------
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice President and
Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
-------------------
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg,
Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
-----------------------------------
MFS INTERMEDIATE INCOME TRUST
-----------------------------
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Executive Vice President of MFS and Leslie J. Nanberg, Senior Vice President
of MFS, are Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
--------------------
A. Keith Brodkin is the Chairman and President, James T. Swanson,
Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS, are
Assistant Vice Presidents,
<PAGE> 196
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James
O. Yost is the Assistant Treasurer, and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SERIES TRUST IV
-------------------
MFS SERIES TRUST IX
-------------------
A. Keith Brodkin is the Chairman and President, Robert A. Dennis and
Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice Presidents,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VII
--------------------
A. Keith Brodkin is the Chairman and President, Leslie J. Nanberg and
Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice Presidents, Stephen
E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is
the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SERIES TRUST VIII
---------------------
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
--------------------------
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L. Schechter
and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel E.
McManus, Assistant Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS VARIABLE INSURANCE TRUST
----------------------------
MFS UNION STANDARD TRUST
------------------------
MFS INSTITUTIONAL TRUST
-----------------------
A. Keith Brodkin is the Chairman and President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
--------------------------
A. Keith Brodkin is the Chairman and President, Cynthia M. Brown and
Robert J. Manning are Vice Presidents, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, is the Assistant Treasurer and
James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 197
MFS MULTIMARKET INCOME TRUST
----------------------------
MFS CHARTER INCOME TRUST
------------------------
A. Keith Brodkin is the Chairman and President, Patricia A. Zlotin,
Leslie J. Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President
of MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS SPECIAL VALUE TRUST
-----------------------
A. Keith Brodkin is the Chairman and President, Jeffrey L. Shames,
Patricia A. Zlotin and Robert J. Manning are Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, and James O. Yost, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
-----
W. Thomas London is the Treasurer.
MIL
---
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott and
Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of MFS, is
the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS, is a
Senior Vice President, Stephen E. Cavan is a Director, Senior Vice President
and the Clerk, James R. Bordewick, Jr. is a Director, Vice President and an
Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello Russo
is the Treasurer and James E. Russell is the Assistant Treasurer.
MIL-UK
------
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott,
Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E. Cavan
is a Director and the Secretary, Ziad Malek is the President, Joseph W. Dello
Russo is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
---------
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle and Richard W. S. Baker are Directors, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary,
and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
------------------
A. Keith Brodkin is the Chairman, President and a Director, Richard
B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott and Jeffrey
L. Shames are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is
the Treasurer, James R. Bordewick, Jr., is the Assistant Secretary, James O.
Yost is the Assistant Treasurer, and Ziad Malek is a Senior Vice President.
<PAGE> 198
MFD
---
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive Vice
President of MFS, is the President, Stephen E. Cavan is the Secretary, Robert
T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the Treasurer,
and James E. Russell is the Assistant Treasurer.
CIAI
----
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C. Avery is
the Vice President, Joseph W. Dello Russo is the Treasurer, James E. Russell is
the Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns
is the Assistant Secretary.
MFSC
----
A. Keith Brodkin is the Chairman and a Director, Arnold D. Scott and
Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice President
of MFS, is Vice Chairman and a Director, Janet A. Clifford is the Executive
Vice President, Joseph W. Dello Russo is the Treasurer, James E. Russell is the
Assistant Treasurer, Stephen E. Cavan is the Secretary, and Robert T. Burns is
the Assistant Secretary.
AMI
---
A. Keith Brodkin is the Chairman and a Director, Jeffrey L. Shames,
and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the President
and a Director, Leslie J. Nanberg is a Senior Vice President, a Managing
Director and a Director, George F. Bennett, Carol A. Corley, John A. Gee,
Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, James E. Russell is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
---
William W. Scott, Jr., Joseph A. Recomendes and Bruce C. Avery are
Directors, Arnold D. Scott is the Chairman and a Director, Douglas C. Grip, a
Senior Vice President of MFS, is the President, Joseph W. Dello Russo is the
Treasurer, James E. Russell is the Assistant Treasurer, Stephen E. Cavan is
the Secretary, Robert T. Burns is the Assistant Secretary and Sharon A.
Brovelli is a Senior Vice President.
<TABLE>
<CAPTION>
In addition, the following persons, Directors or officers of MFS, have the affiliations indicated:
<S> <C>
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts
Director, Sun Life Insurance and Annuity Company of
New York, 67 Broad Street, New York, New York
</TABLE>
<PAGE> 199
<TABLE>
<S> <C>
John R. Gardner President and a Director, Sun Life Assurance
Company of Canada, Sun Life Centre, 150 King
Street West, Toronto, Ontario, Canada (Mr.
Gardner is also an officer and/or Director of various
subsidiaries and affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada,
Sun Life Centre, 150 King Street West, Toronto,
Ontario, Canada (Mr. McNeil is also an officer
and/or Director of various subsidiaries and affiliates
of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston, Massachusetts
(until August, 1994)
</TABLE>
Item 29. DISTRIBUTORS
------------
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
<TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
<CAPTION>
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
NAME ADDRESS
---- -------
<S> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
Investors Bank & Trust Company 89 South Street
(custodian) Boston, MA 02111
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
<PAGE> 200
ITEM 31. MANAGEMENT SERVICES
-------------------
Not applicable.
ITEM 32. UNDERTAKINGS
------------
(a) Not applicable.
(b) Not applicable.
(c) The registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
Shareholders upon request and without a charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the Securities being Registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE> 201
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City
of Boston and The Commonwealth of Massachusetts on the 29th day of December,
1995.
MFS SERIES TRUST I
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title: Assistant Secretary
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed
below by the following persons in the capacities indicated on December 29,
1995.
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ A. KEITH BRODKIN* Chairman, President (Principal
- -------------------------- Executive Officer) and Trustee
A. Keith Brodkin
/s/ W. THOMAS LONDON* Treasurer (Principal Financial Officer
- -------------------------- and Principal Accounting Officer)
W. Thomas London
/s/ RICHARD B. BAILEY* Trustee
- --------------------------
Richard B. Bailey
/s/ MARSHALL N. COHAN* Trustee
- --------------------------
Marshall N. Cohan
/s/ LAWRENCE H. COHN, M.D.* Trustee
- --------------------------
Lawrence H. Cohn, M.D.
/s/ SIR J. DAVID GIBBONS* Trustee
- --------------------------
Sir J. David Gibbons
</TABLE>
<PAGE> 202
<TABLE>
<S> <C>
/s/ ABBY M. O'NEILL* Trustee
- --------------------------
Abby M. O'Neill
/s/ WALTER E. ROBB, III* Trustee
- --------------------------
Walter E. Robb, III
/s/ ARNOLD D. SCOTT* Trustee
- --------------------------
Arnold D. Scott
/s/ JEFFREY L. SHAMES* Trustee
- --------------------------
Jeffrey L. Shames
/s/ J. DALE SHERRATT* Trustee
- --------------------------
J. Dale Sherratt
/s/ WARD SMITH* Trustee
- --------------------------
Ward Smith
<FN>
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr. on
behalf of those indicated pursuant to a
Power of Attorney dated August 11, 1994,
incorporated by reference to Registrant's
Post-Effective Amendment No. 21 filed
with the SEC via EDGAR on
October 17, 1995.
</TABLE>
<PAGE> 203
MFS SERIES TRUST I
------------------
<TABLE>
INDEX TO EXHIBITS
-----------------
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C>
10 Rule 24e-2 Consent and Opinion of Counsel.
11 (a) Consent of Deloitte & Touche LLP.
(b) Consent of Ernst & Young LLP.
17 Financial Data Schedules for each class of
each series.
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.10
December 29, 1995
MFS Series Trust I
500 Boylston Street
Boston, MA 02116
Re: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A (File No. 33-7638) (the
"Registration Statement") for MFS Series Trust I (the
"Trust") on Behalf of MFS Managed Sectors Fund, MFS
Cash Reserve Fund and MFS World Asset Allocation Fund
Gentlemen:
I am Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as
investment adviser to the Trust. I am admitted to practice law
in The Commonwealth of Massachusetts. The Trust was created
under a written Declaration of Trust dated July 22, 1986, and
executed and delivered in Boston, Massachusetts, as amended and
restated January 6, 1995 (the "Declaration of Trust"). The
beneficial interest thereunder is represented by transferable
shares without par value. The Trustees have the powers set
forth in the Declaration of Trust, subject to the terms,
provisions and conditions therein provided.
I am of the opinion that the legal requirements have been
complied with in the creation of the Trust, and that said
Declaration of Trust is legal and valid.
Under Article III, Section 3.4 and Article VI, Section 6.4
of the Declaration of Trust, the Trustees are empowered, in
their discretion, from time to time to issue shares of the Trust
for such amount and type of consideration, at such time or times
and on such terms as the Trustees may deem best. Under Article
VI, Section 6.1, it is provided that the number of Shares of
Beneficial Interest (without par value) ("Shares") authorized to
be issued under the Declaration of Trust is unlimited.
By vote adopted on February 2, 1995, the Trustees of the
Trust determined to sell to the public the authorized but
unissued shares of beneficial interest of the Trust for cash at
a price which will net the Trust (before taxes) not less than
the net asset value thereof, as defined in the Trust's By-Laws,
determined next after the sale is made or at some later time
after such sale.
<PAGE> 2
MFS Series Trust I
December 29, 1995
Page Two
The Trust is about to register under the Securities Act of
1933, as amended, 41,376,162 shares of beneficial interest by
Post-Effective Amendment No. 22 to the Trust's Registration
Statement. W. Thomas London, Treasurer of the Trust, has
certified that the Trust received cash consideration for the
issuance of each of the Shares of the Trust sold during the
Trust's fiscal year ended August 31, 1995, including the
847,808,438 Shares which were sold in reliance upon Rule 24f-2
of the General Rules and Regulations under the Investment
Company Act of 1940, as amended, at a price which netted the
Trust (before taxes) not less than the net asset value per
share, as defined in the Trust's Declaration of Trust,
determined next after the sale was made.
I am of the opinion that all necessary Trust action
precedent to the issue of the Shares of the Trust, comprising
the shares covered by Post-Effective Amendment No. 22 to the
Registration Statement has been duly taken, and that all such
shares may legally and validly be issued for cash, and when sold
will be fully paid and nonassessable by the Trust upon receipt
by the Trust or its agent of consideration thereof in accordance
with the terms described in the Registration Statement, subject
to compliance with the Securities Act of 1933, the Investment
Company Act of 1940 and applicable state laws regulating the
sale of securities.
I consent to your filing this opinion with the Securities
and Exchange Commission as an exhibit to Post-Effective
Amendment No. 22 to the Registration Statement.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
<PAGE> 1
EXHIBIT NO. 11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this
Post-Effective Amendment No. 22 to Registration Statement
No. 33-7638 of MFS Series Trust I of our reports each dated
October 6, 1995 appearing in the annual reports to
shareholders for the year ended August 31, 1995, of MFS
Managed Sectors Fund and MFS Cash Reserve Fund, each a
series of MFS Series Trust I and to the references to us
under the headings "Condensed Financial Information" in the
Prospectus and "Independent Accountants and Financial
Statements" in the Statement of Additional Information, both
of which are part of such Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 27, 1995
<PAGE> 1
EXHIBIT NO. 11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the
captions "Condensed Financial Information" in the Prospectus
and "Independent Auditors and Financial Statements" in the
Statement of Additional Information and to the incorporation
by reference in this Post-Effective Amendment No. 22 to
Registration Statement No. 33-7638 on Form N-1A of our
report dated October 4, 1995, on the financial statements
and financial highlights of MFS World Asset Allocation Fund,
a series of MFS Series Trust I, included in the 1995 Annual
Report to Shareholders.
ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Boston, Massachusetts
December 27, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MANAGED SECTORS FUND CLASS A AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> MFS MANAGED SECTORS FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 312,924,301
<INVESTMENTS-AT-VALUE> 379,130,566
<RECEIVABLES> 4,742,334
<ASSETS-OTHER> 4,251
<OTHER-ITEMS-ASSETS> 5,153
<TOTAL-ASSETS> 383,882,304
<PAYABLE-FOR-SECURITIES> 5,189,353
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 553,468
<TOTAL-LIABILITIES> 5,742,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267,105,314
<SHARES-COMMON-STOCK> 11,473,932
<SHARES-COMMON-PRIOR> 9,062,715
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 69,538
<ACCUMULATED-NET-GAINS> 44,897,442
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66,206,265
<NET-ASSETS> 378,139,483
<DIVIDEND-INCOME> 3,518,412
<INTEREST-INCOME> 236,983
<OTHER-INCOME> 0
<EXPENSES-NET> 6,366,178
<NET-INVESTMENT-INCOME> (2,610,783)
<REALIZED-GAINS-CURRENT> 52,247,905
<APPREC-INCREASE-CURRENT> 29,148,730
<NET-CHANGE-FROM-OPS> 78,785,852
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 8,991,673
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,546,423
<NUMBER-OF-SHARES-REDEEMED> 1,829,247
<SHARES-REINVESTED> 694,041
<NET-CHANGE-IN-ASSETS> 42,586,894
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 19,135,268
<OVERDISTRIB-NII-PRIOR> 25,403
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,505,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,366,178
<AVERAGE-NET-ASSETS> 333,995,633
<PER-SHARE-NAV-BEGIN> 13.41
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 3.22
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.03
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.55
<EXPENSE-RATIO> 1.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS WORLD ASSET ALLOCATION FUND CLASS C FOR THE PERIOD
ENDED AUGUST 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 033
<NAME> MFS WORLD ASSET ALLOCATION FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 153,270,585
<INVESTMENTS-AT-VALUE> 161,314,940
<RECEIVABLES> 4,742,309
<ASSETS-OTHER> 27,445
<OTHER-ITEMS-ASSETS> 7,627
<TOTAL-ASSETS> 166,092,321
<PAYABLE-FOR-SECURITIES> 2,169,330
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,333,939
<TOTAL-LIABILITIES> 4,503,269
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,578,245
<SHARES-COMMON-STOCK> 1,165,926
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (823,582)
<ACCUMULATED-NET-GAINS> 5,959,132
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,875,257
<NET-ASSETS> 161,589,052
<DIVIDEND-INCOME> 1,301,297
<INTEREST-INCOME> 4,911,152
<OTHER-INCOME> 0
<EXPENSES-NET> 2,414,498
<NET-INVESTMENT-INCOME> 3,797,951
<REALIZED-GAINS-CURRENT> 4,195,488
<APPREC-INCREASE-CURRENT> 7,977,967
<NET-CHANGE-FROM-OPS> 15,971,406
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (239,932)
<DISTRIBUTIONS-OF-GAINS> (82,468)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,198,363
<NUMBER-OF-SHARES-REDEEMED> (273,394)
<SHARES-REINVESTED> 16,620
<NET-CHANGE-IN-ASSETS> 106,405,326
<ACCUMULATED-NII-PRIOR> 111,814
<ACCUMULATED-GAINS-PRIOR> 226
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 748,715
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,509,366
<AVERAGE-NET-ASSETS> 124,494,417
<PER-SHARE-NAV-BEGIN> 15.31
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 1.16
<PER-SHARE-DIVIDEND> (0.30)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.58
<EXPENSE-RATIO> 2.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS MANAGED SECTORS FUND CLASS B AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> MFS MANAGED SECTORS FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 312,924,301
<INVESTMENTS-AT-VALUE> 379,130,566
<RECEIVABLES> 4,742,334
<ASSETS-OTHER> 4,251
<OTHER-ITEMS-ASSETS> 5,153
<TOTAL-ASSETS> 383,882,304
<PAYABLE-FOR-SECURITIES> 5,189,353
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 553,468
<TOTAL-LIABILITIES> 5,742,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267,105,314
<SHARES-COMMON-STOCK> 12,921,596
<SHARES-COMMON-PRIOR> 16,033,265
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 69,538
<ACCUMULATED-NET-GAINS> 44,897,442
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66,206,265
<NET-ASSETS> 378,139,483
<DIVIDEND-INCOME> 3,518,412
<INTEREST-INCOME> 236,983
<OTHER-INCOME> 0
<EXPENSES-NET> 6,366,178
<NET-INVESTMENT-INCOME> (2,610,783)
<REALIZED-GAINS-CURRENT> 52,247,905
<APPREC-INCREASE-CURRENT> 29,148,730
<NET-CHANGE-FROM-OPS> 78,785,852
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 14,927,407
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,728,388
<NUMBER-OF-SHARES-REDEEMED> 10,002,205
<SHARES-REINVESTED> 1,162,148
<NET-CHANGE-IN-ASSETS> 42,586,894
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 19,135,268
<OVERDISTRIB-NII-PRIOR> 25,403
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,505,884
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,366,178
<AVERAGE-NET-ASSETS> 333,995,633
<PER-SHARE-NAV-BEGIN> 13.35
<PER-SHARE-NII> (0.14)
<PER-SHARE-GAIN-APPREC> 3.20
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.95
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.46
<EXPENSE-RATIO> 2.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS CASH RESERVE FUND CLASS A AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> MFS CASH RESERVE FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 181,310,672
<INVESTMENTS-AT-VALUE> 181,310,762
<RECEIVABLES> 1,250,741
<ASSETS-OTHER> 3,028
<OTHER-ITEMS-ASSETS> 81,058
<TOTAL-ASSETS> 182,645,589
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,274,002
<TOTAL-LIABILITIES> 5,274,002
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,371,587
<SHARES-COMMON-STOCK> 10,852,198
<SHARES-COMMON-PRIOR> 2,156,434
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 177,371,587
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,606,334
<OTHER-INCOME> 0
<EXPENSES-NET> 3,937,530
<NET-INVESTMENT-INCOME> 7,668,804
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7,668,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 234,719
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,839,588
<NUMBER-OF-SHARES-REDEEMED> 13,354,949
<SHARES-REINVESTED> 211,125
<NET-CHANGE-IN-ASSETS> (38,419,713)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,134,567
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,143,810
<AVERAGE-NET-ASSETS> 206,279,576
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.05
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS CASH RESERVE FUND CLASS B AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> MFS CASH RESERVE FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 181,310,762
<INVESTMENTS-AT-VALUE> 181,310,762
<RECEIVABLES> 1,250,741
<ASSETS-OTHER> 3,028
<OTHER-ITEMS-ASSETS> 81,058
<TOTAL-ASSETS> 182,645,589
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,274,002
<TOTAL-LIABILITIES> 5,274,002
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,371,587
<SHARES-COMMON-STOCK> 166,519,389
<SHARES-COMMON-PRIOR> 213,634,866
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 177,371,587
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,606,334
<OTHER-INCOME> 0
<EXPENSES-NET> 3,937,530
<NET-INVESTMENT-INCOME> 7,668,804
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 7,668,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,434,085
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 814,926,201
<NUMBER-OF-SHARES-REDEEMED> 868,183,399
<SHARES-REINVESTED> 6,141,721
<NET-CHANGE-IN-ASSETS> (38,419,713)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,134,567
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,143,810
<AVERAGE-NET-ASSETS> 206,279,576
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.04
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARU FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS WORLD ASSET ALLOCATION FUND CLASS A FOR THE YEAR
ENDED AUGUST 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> MFS WORLD ASSET ALLOCATION FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 153,270,585
<INVESTMENTS-AT-VALUE> 161,314,940
<RECEIVABLES> 4,742,309
<ASSETS-OTHER> 27,445
<OTHER-ITEMS-ASSETS> 7,627
<TOTAL-ASSETS> 166,092,321
<PAYABLE-FOR-SECURITIES> 2,169,330
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,333,939
<TOTAL-LIABILITIES> 4,503,269
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,578,245
<SHARES-COMMON-STOCK> 3,526,991
<SHARES-COMMON-PRIOR> 1,647,855
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (823,582)
<ACCUMULATED-NET-GAINS> 5,959,132
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,875,257
<NET-ASSETS> 161,589,052
<DIVIDEND-INCOME> 1,301,297
<INTEREST-INCOME> 4,911,152
<OTHER-INCOME> 0
<EXPENSES-NET> 2,414,498
<NET-INVESTMENT-INCOME> 3,797,951
<REALIZED-GAINS-CURRENT> 4,195,488
<APPREC-INCREASE-CURRENT> 7,977,967
<NET-CHANGE-FROM-OPS> 15,971,406
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,026,466)
<DISTRIBUTIONS-OF-GAINS> (258,501)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,594,208
<NUMBER-OF-SHARES-REDEEMED> (787,357)
<SHARES-REINVESTED> 72,285
<NET-CHANGE-IN-ASSETS> 106,405,326
<ACCUMULATED-NII-PRIOR> 111,814
<ACCUMULATED-GAINS-PRIOR> 226
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 748,715
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,509,366
<AVERAGE-NET-ASSETS> 124,494,417
<PER-SHARE-NAV-BEGIN> 15.33
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.63
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MFS WORLD ASSET ALLOCATION FUND CLASS B FOR THE PERIOD
ENDED AUGUST 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> MFS WORLD ASSET ALLOCATION FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 153,270,585
<INVESTMENTS-AT-VALUE> 161,314,940
<RECEIVABLES> 4,742,309
<ASSETS-OTHER> 27,445
<OTHER-ITEMS-ASSETS> 7,627
<TOTAL-ASSETS> 166,092,321
<PAYABLE-FOR-SECURITIES> 2,169,330
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,333,939
<TOTAL-LIABILITIES> 4,503,269
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,578,245
<SHARES-COMMON-STOCK> 5,040,791
<SHARES-COMMON-PRIOR> 1,730,601
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (823,582)
<ACCUMULATED-NET-GAINS> 5,959,132
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,875,257
<NET-ASSETS> 161,589,052
<DIVIDEND-INCOME> 1,301,297
<INTEREST-INCOME> 4,911,152
<OTHER-INCOME> 0
<EXPENSES-NET> 2,414,498
<NET-INVESTMENT-INCOME> 3,797,951
<REALIZED-GAINS-CURRENT> 4,195,488
<APPREC-INCREASE-CURRENT> 7,977,967
<NET-CHANGE-FROM-OPS> 15,971,406
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,012,521)
<DISTRIBUTIONS-OF-GAINS> (350,041)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,914,029
<NUMBER-OF-SHARES-REDEEMED> (675,931)
<SHARES-REINVESTED> 72,092
<NET-CHANGE-IN-ASSETS> 106,405,326
<ACCUMULATED-NII-PRIOR> 111,814
<ACCUMULATED-GAINS-PRIOR> 226
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 748,715
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,509,366
<AVERAGE-NET-ASSETS> 124,494,417
<PER-SHARE-NAV-BEGIN> 15.31
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.58
<EXPENSE-RATIO> 2.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
