<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to MFS(R) Convertible Securities Fund, MFS(R)
Blue Chip Fund, MFS(R) New Discovery Fund, MFS(R) Science and Technology Fund
and MFS(R) Research International Fund (the "Funds") has been filed with the
Securities and Exchange Commission. The Funds may not be sold nor may offers to
buy be accepted prior to the time the registration statement becomes effective.
This Prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of the Funds in any State in which such
offer, solicitation or sale would be unlawful prior to registration as
qualification under the securities laws of any such state. The other Funds
described herein are currently offered for sale pursuant to a Prospectus dated
July 1, 1996.
[THE NON-EDGARIZED VERSION CONTAINS THIS HEADING IN RED]
[LOGO]
INVESTMENT MANAGEMENT
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED OCTOBER 16, 1996.
PROSPECTUS
JANUARY 1, 1997
MFS(R) EQUITY INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) NEW DISCOVERY FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
MFS(R) RESEARCH INTERNATIONAL FUND
Class A Shares of Beneficial Interest
(Members of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
Each a series of MFS Series Trust I Class C Shares of Beneficial Interest
- -------------------------------------------------------------------------------
MFS EQUITY INCOME FUND (THE "EQUITY INCOME FUND") -- The primary investment
objective of the Equity Income Fund is reasonable income by investing mainly in
income producing securities, and the secondary investment objective of the Fund
is capital appreciation. The Fund invests, under normal market conditions, at
least 65% of its total assets in income producing equity securities, and may
invest up to 35% of its total assets in fixed income securities. In selecting
investments, the Fund considers the potential for capital appreciation.
MFS CORE GROWTH FUND (THE "CORE GROWTH FUND") -- The investment objective of the
Core Growth Fund is capital appreciation. The Fund invests, under normal market
conditions, at least 65% of its total assets in equity securities of well-known
and established companies which the Fund's investment adviser believes have
above-average growth potential. The Fund may invest up to 35% of its total
assets in equity securities of companies in the developing stages of their life
cycle that offer the potential for accelerated earnings or revenue growth
(emerging growth companies).
(CONTINUED ON THE NEXT PAGE.)
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.
- 1 -
<PAGE>
MFS AGGRESSIVE GROWTH FUND (THE "AGGRESSIVE GROWTH FUND") -- The investment
objective of the Aggressive Growth Fund is capital appreciation. The Fund
invests, under normal market conditions, substantially all of its assets in
equity securities of companies of any size which the Fund's investment adviser
believes offer superior prospects for growth, including companies in the
developing stages of their life cycle that offer the potential for accelerated
earnings or revenue growth (emerging growth companies).
MFS SPECIAL OPPORTUNITIES FUND (THE "SPECIAL OPPORTUNITIES FUND") -- The
investment objective of the Special Opportunities Fund is capital appreciation.
The Fund invests, under normal market conditions, substantially all of its
assets in equity and fixed income securities which the Fund's investment adviser
believes represent uncommon value by having the potential for significant
capital appreciation over a period of 12 months or longer. The Fund may engage
in short sales.
MFS CONVERTIBLE SECURITIES FUND (THE "CONVERTIBLE SECURITIES FUND") -- The
investment objective of the Convertible Securities Fund is high total return
through a combination of current income and capital appreciation. The Fund
invests, under normal market conditions, at least 65% of its total assets in
convertible securities, and may invest up to 35% of its total assets in
non-convertible corporate and U.S. Government fixed income securities, equity
securities and money market instruments. The Fund may engage in short sales.
MFS BLUE CHIP FUND (THE "BLUE CHIP FUND") -- The investment objective of the
Blue Chip Fund is capital appreciation. The Fund invests, under normal market
conditions, at least 65% of its total assets in equity securities of well-known,
stable and established companies, which the Fund's investment adviser believes
have above-average capital appreciation potential and may invest up to 35% of
its total assets in other securities (including emerging growth companies)
offering an opportunity for capital appreciation.
MFS NEW DISCOVERY FUND (THE "NEW DISCOVERY FUND") -- The investment objective of
the New Discovery Fund is capital appreciation. The Fund invests, under normal
market conditions, at least 65% of its total assets in equity securities of
companies of any size which the Fund's investment adviser believes offer
superior prospects for growth, and emphasizes companies in the developing stages
of their life cycle that offer the potential for accelerated earnings or revenue
growth (emerging growth companies), and may invest up to 35% of its total assets
in other securities offering an opportunity for capital appreciation. The Fund
may engage in short sales.
MFS SCIENCE AND TECHNOLOGY FUND (THE "SCIENCE AND TECHNOLOGY FUND") -- The
investment objective of the Science and Technology Fund is capital appreciation.
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of companies which the Fund's investment adviser
expects to benefit from scientific and technological advances and improvements,
including companies in the developing stages of their life cycle that offer the
potential for accelerated earnings or revenue growth (emerging growth
companies), and may invest up to 35% of its total assets in other securities
offering an opportunity for capital appreciation. The Fund may engage in short
sales.
MFS RESEARCH INTERNATIONAL FUND (THE "RESEARCH INTERNATIONAL FUND") -- The
investment objective of the Research International Fund is capital appreciation.
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of companies whose principal activities are located
outside the United States, and may invest up to 35% of its total assets in other
securities offering an opportunity for capital appreciation.
Each Fund's investment adviser and distributor are Massachusetts Financial
Services Company (the "Adviser" or "MFS") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116. Each Fund is a series of MFS Series Trust I (the "Trust").
THE SPECIAL OPPORTUNITIES FUND AND THE CONVERTIBLE SECURITIES FUND EACH MAY
INVEST UP TO 100% OF ITS NET ASSETS IN LOWER RATED BONDS, COMMONLY KNOWN AS
"JUNK BONDS," THAT ENTAIL GREATER RISKS THAN THOSE FOUND IN HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING
(SEE "ADDITIONAL RISK FACTORS - LOWER RATED BONDS").
WHILE THREE CLASSES OF SHARES OF EACH FUND ARE DESCRIBED IN THIS PROSPECTUS, THE
FUNDS DO NOT CURRENTLY OFFER CLASS B AND CLASS C SHARES. CLASS A SHARES ARE
AVAILABLE FOR PURCHASE AT NET ASSET VALUE ONLY BY EMPLOYEES OF MFS AND ITS
AFFILIATES AND CERTAIN OF THEIR FAMILY MEMBERS WHO ARE RESIDENTS OF THE
COMMONWEALTH OF MASSACHUSETTS, AND MEMBERS OF THE GOVERNING BOARDS OF THE
VARIOUS FUNDS SPONSORED BY MFS.
This Prospectus sets forth concisely the information concerning each Fund and
the Trust that a prospective investor ought to know before investing. The Trust,
on behalf of each Fund, has filed with the Securities and Exchange Commission
(the "SEC") a Statement of Additional Information ("SAI"), dated January 1,
1997, as amended or supplemented from time to time, which contains more detailed
information about the Trust and each Fund. The SAI is incorporated into this
Prospectus by reference. See page 37 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).
- 2 -
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. Expense Summary................................................ 4
2. The Funds...................................................... 8
3. Condensed Financial Information................................ 9
4. Investment Objectives and Policies............................. 10
Equity Income Fund............................................. 10
Core Growth Fund............................................... 10
Aggressive Growth Fund......................................... 10
Special Opportunities Fund..................................... 11
Convertible Securities Fund.................................... 11
Blue Chip Fund................................................. 12
New Discovery Fund............................................. 12
Science and Technology Fund.................................... 13
Research International Fund.................................... 13
5. Investment Techniques.......................................... 14
6. Additional Risk Factors........................................ 20
7. Management of the Funds........................................ 23
8. Information Concerning Shares of the Funds..................... 25
Purchases............................................... 25
Exchanges............................................... 29
Redemptions and Repurchases............................. 30
Distribution Plans...................................... 32
Distributions........................................... 33
Tax Status.............................................. 34
Net Asset Value......................................... 34
Expenses ............................................... 34
Description of Shares, Voting Rights and Liabilities.... 35
Performance Information................................. 35
9. Shareholder Services........................................... 36
Appendix A - Waivers of Sales Charges..........................A-1
Appendix B - Description of Bond Ratings.......................B-1
- 3 -
<PAGE>
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price) 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable) See Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET
ASSETS):
</TABLE>
CLASS A SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EQUITY AGGRESSIVE SPECIAL
INCOME CORE GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.75% 0.00%
Rule 12b-1 Fees(3).................. 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.50% 1.50% 0.59% 1.50%
----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 1.50% 1.50% 1.34% 1.50%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(3).................. 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.50% 1.50% 1.50% 1.50% 1.75%
----- ----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 1.50% 1.50% 1.50% 1.50% 1.75%
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EQUITY AGGRESSIVE SPECIAL
INCOME CORE GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.75% 0.00%
Rule 12b-1 Fees(4).................. 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.57% 1.57% 0.66% 1.57%
----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 2.57% 2.57% 2.41% 2.57%
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4).................. 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.57% 1.57% 1.57% 1.57% 1.82%
----- ----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 2.57% 2.57% 2.57% 2.57% 2.82%
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EQUITY AGGRESSIVE SPECIAL
INCOME CORE GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.75% 0.00%
Rule 12b-1 Fees(4).................. 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.50% 1.50% 0.59% 1.50%
----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 2.50% 2.50% 2.34% 2.50%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
Management Fees (after fee
reduction)(2).................... 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees(4).................. 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses (after fee
reduction)(5)(7)................. 1.50% 1.50% 1.50% 1.50% 1.75%
----- ----- ----- ----- -----
TOTAL OPERATING EXPENSES
(AFTER FEE REDUCTION)(6) 2.50% 2.50% 2.50% 2.50% 2.75%
</TABLE>
- ------------------------------------
(1) Purchases of $1 million or more and certain purchases by retirement
plans are not subject to an initial sales charge; however, a contingent
deferred sales charge ("CDSC") of 1% will be imposed on such purchases
in the event of certain redemption transactions within 12 months
following such purchases (see "Purchases").
(2) The Adviser is currently waiving its right to receive management fees
from each Fund except the Aggressive Growth Fund. Absent this waiver,
"Management Fees" would be 0.75% per annum for every other Fund except
for the Research International Fund, and 1.00% per annum for that Fund.
(3) Each Fund has adopted a Distribution Plan for its Class A shares in
accordance with Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.50% per annum of the average daily net assets attributable to Class A
shares (see "Distribution Plans"). Distribution and service fees under the
Class A Distribution Plan are currently being waived on a voluntary basis
and may be imposed at the discretion of MFD. 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.
(4) Each Fund has adopted separate Distribution Plans for Class B shares and
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 Class B shares under the Class B Distribution Plan and
Class C shares under the Class C Distribution Plan (see "Distribution
plans"). Distribution expenses paid under these Plans, together
- 5 -
<PAGE>
with any CDSC payable upon redemption of Class B and Class C shares, may
cause long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
(5) "Other Expenses" for the Convertible Securities Fund, the Blue Chip Fund,
the New Discovery Fund, the Science and Technology Fund and the Research
International Fund are based on estimates of payments to be made during
each such Fund's current fiscal year. As discussed below in footnote 6, the
Adviser is bearing certain expenses of each Fund except the Aggressive
Growth Fund, subject to reimbursement by the Funds. Absent this
arrangement, "Other Expenses," expressed as a percentage of average daily
net assets, would be as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EQUITY CORE SPECIAL
INCOME GROWTH OPPORTUNITIES
FUND FUND FUND
Class A 3.42% 3.03% 1.72%
Class B 3.49% 3.10% 1.79%
Class C 3.42% 3.03% 1.72%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
Class A 0.90% 0.90% 0.90% 0.90% 0.96%
Class B 0.97% 0.97% 0.97% 0.97% 1.03%
Class C 0.90% 0.90% 0.90% 0.90% 0.96%
</TABLE>
(6) The Adviser has agreed to bear expenses of each Fund, subject to
reimbursement by the Funds as described under "Information Concerning
Shares of the Funds - Expenses." Under this arrangement, "Total Operating
Expenses" will not exceed, on an annualized basis, 1.50% of each of the
Equity Income Fund's, Core Growth Fund's and Special Opportunities Fund's
average daily net assets with respect to Class A shares, 2.57% of each such
Fund's average daily net assets with respect to Class B shares, and 2.50%
of each such Fund's average daily net assets with respect to Class C
shares, during the current fiscal year and each fiscal year through August
31, 2006. "Total Operating Expenses" will not exceed, on an annualized
basis, 1.50% of each of the Convertible Securities Fund's, Blue Chip
Fund's, New Discovery Fund's and Science and Technology Fund's average
daily net assets with respect to Class A shares, 2.57% of each such Fund's
average daily net assets with respect to Class B shares, and 2.50% of each
such Fund's average daily net assets with respect to Class C shares, during
the current fiscal year and each fiscal year through August 31, 2007.
"Total Operating Expenses" will not exceed, on an annualized basis, 1.75%
of the Research International Fund's average daily net assets with respect
to Class A shares, 2.82% of the Fund's average daily net assets with
respect to Class B shares, and 2.75% of the Fund's average daily net assets
with respect to Class C shares, during the current fiscal year and each
fiscal year through August 31, 2007. These arrangements may be changed or
terminated by the Adviser at any time. Absent any fee waivers and expense
reductions, "Total Operating Expenses," expressed as a percentage of
average daily net assets, would be as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EQUITY CORE SPECIAL AGGRESSIVE
INCOME GROWTH OPPORTUNITIES GROWTH
FUND FUND FUND FUND
Class A 4.67% 4.28% 2.97% 1.84%
Class B 5.24% 4.85% 3.54% N/A
Class C 5.17% 4.78% 3.47% N/A
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
2.15% 2.15% 2.15% 2.15% 2.46% Class A
2.72% 2.72% 2.72% 2.72% 3.03% Class B
2.65% 2.65% 2.65% 2.65% 2.96% Class C
</TABLE>
- 6 -
<PAGE>
(7) Each Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in each Fund, assuming (a) a 5% annual return and, unless otherwise
noted, (b) redemption at the end of each of the time periods indicated:
CLASS A SHARES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGRESSIVE SPECIAL
PERIOD EQUITY INCOME FUND CORE GROWTH FUND GROWTH FUND OPPORTUNITIES FUND
1 year............ $62 $62 $61 $62
3 years........... 93 93 88 93
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
PERIOD SECURITIES FUND BLUE CHIP FUND DISCOVERY FUND TECHNOLOGY FUND INTERNATIONAL FUND
1 year............ $62 $62 $62 $62 $ 64
3 years........... 93 93 93 93 100
</TABLE>
CLASS B SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGRESSIVE SPECIAL
PERIOD EQUITY INCOME FUND CORE GROWTH FUND GROWTH FUND OPPORTUNITIES FUND
1 year............ $ 66 $ 66 $ 64 $ 66
3 years........... 110 110 105 110
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
PERIOD SECURITIES FUND BLUE CHIP FUND DISCOVERY FUND TECHNOLOGY FUND INTERNATIONAL FUND
1 year............ $ 66 $ 66 $ 66 $ 66 $ 69
3 years........... 110 110 110 110 117
</TABLE>
CLASS B SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGRESSIVE SPECIAL
PERIOD EQUITY INCOME FUND CORE GROWTH FUND GROWTH FUND OPPORTUNITIES FUND
1 year............ $26 $26 $24 $26
3 years........... 80 80 75 80
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
PERIOD SECURITIES FUND BLUE CHIP FUND DISCOVERY FUND TECHNOLOGY FUND INTERNATIONAL FUND
1 year............ $26 $26 $26 $26 $29
3 years........... 80 80 80 80 87
</TABLE>
- 7 -
<PAGE>
CLASS C SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGRESSIVE SPECIAL
PERIOD EQUITY INCOME FUND CORE GROWTH FUND GROWTH FUND OPPORTUNITIES FUND
1 year............ $35 $35 $32 $35
3 years........... 78 78 69 78
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
PERIOD SECURITIES FUND BLUE CHIP FUND DISCOVERY FUND TECHNOLOGY FUND INTERNATIONAL FUND
1 year............ $35 $35 $35 $32 $38
3 years........... 78 78 78 69 85
</TABLE>
CLASS C SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
AGGRESSIVE SPECIAL
PERIOD EQUITY INCOME FUND CORE GROWTH FUND GROWTH FUND OPPORTUNITIES FUND
1 year............ $25 $25 $34 $25
3 years........... 78 78 73 78
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CONVERTIBLE NEW SCIENCE AND RESEARCH
PERIOD SECURITIES FUND BLUE CHIP FUND DISCOVERY FUND TECHNOLOGY FUND INTERNATIONAL FUND
1 year............ $25 $25 $25 $25 $28
3 years........... 78 78 78 78 85
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of each Fund will bear
directly or indirectly. More complete descriptions of the following Fund
expenses are set forth in the following sections: (i) varying sales charges on
share purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii)
management fees -- "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 A FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
2. THE FUNDS
Each Fund is a 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. Each Fund is a diversified fund except for the
Special Opportunities Fund, which is non-diversified. The Trust presently
consists of thirteen series, four of which are offered for sale pursuant to
separate prospectuses, and each of which represents a portfolio with separate
investment objectives and policies. Shares of each Fund are sold continuously to
the public and each Fund then uses the proceeds to buy securities for its
portfolio. While each Fund has three classes of shares designed for sale
generally to the public, Class A shares are the only class presently available
for sale. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a CDSC upon redemption
of 1.00% during the first year in the case of certain purchases of $1 million or
more and certain purchases by retirement plans) and are subject to an annual
distribution fee and service fee up to a maximum of 0.50% per annum. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year to
0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption of 1.00% during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert to
any other class of shares of a Fund.
- 8 -
<PAGE>
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. MFS is each Fund's investment adviser and is responsible for the
management of each Fund's assets. The officers of the Trust are responsible for
its operations. The Adviser manages each Fund's portfolio from day to day in
accordance with each Fund's investment objective and policies. A majority of the
Trustees are not affiliated with the Adviser. The selection of investments and
the way they are managed depend on the conditions and trends in the economies of
the various countries of the world, their financial markets and the relationship
of their currencies to the U.S. dollar. The Trust also offers to buy back
(redeem) shares of each Fund from shareholders at any time at net asset value,
less any applicable CDSC.
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Funds' Annual Report to
shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Funds' independent auditors, given upon their authority as
experts in accounting and auditing. The Funds' independent auditors are Ernst &
Young LLP. The Convertible Securities Fund, Blue Chip Fund, New Discovery Fund,
Science and Technology Fund and Research International Fund did not commence
investment operations prior to August 31, 1996.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EQUITY CORE AGGRESSIVE SPECIAL
CLASS A INCOME GROWTH GROWTH OPPORTUNITIES
PERIOD ENDED AUGUST 31, 1997* FUND FUND FUND FUND
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income from investment operations# -
Net investment income (loss)** $ 0.13 $(0.01) $ 0.02 $ 0.06
Net realized and unrealized gain on investments
and foreign currency transactions 0.94 2.34 2.24 1.30
------ ------ ------ ------
Total from investment operations $ 1.07 $2.33 $2.26 $1.36
------ ----- ----- -----
Net asset value - end of period $11.07 $12.33 $12.26 $11.36
====== ====== ====== ======
Total return 10.70%@@ 23.30%@@ 22.60%@@ 13.60%@@
Ratios (to average net assets)/Supplemental
data**:
Expenses 1.50%@ 1.50%@ 0.44%@ 1.50%@
Net investment income (loss) 1.83%@ (0.11)%@ 0.23%@ 0.78%@
Portfolio turnover 56% 204% 104% 108%
Average commission rate $0.0331 $0.0411 $0.0555 $0.0361
Net assets at end of period (000 omitted) $ 477 $ 686 $10,145 $ 2,259
</TABLE>
- ----------------------------
@ Annualizized.
@@ Not annualized.
# Per share data is based on average shares outstanding.
* For the period from the commencement of investment operations, January 2,
1996 to August 31, 1996.
** The investment adviser voluntarily agreed to maintain the expenses of the
Funds at not more than 1.50% of each Fund's average daily net assets. In
the case of the Aggressive Growth Fund, the investment adviser and
distributor voluntarily waived their management fee and distribution fee,
respectively. To the extent actual expenses were over/under these
limitations or, if these fees had been incurred by the Aggressive Growth
Fund, the net investment loss per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment loss $ (0.06) $ (0.18) $ (0.05) $ (0.01)
Ratios (to average net assets):
Expenses 4.67%@ 4.28%@ 1.84%@ 2.97%@
Net investment loss (0.78)%@ (2.34)%@ (0.66)%@ (0.16)%@
</TABLE>
- 9 -
<PAGE>
4. INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective which it pursues through separate
investment policies, as described below. The differences in objectives and
policies among the Funds can be expected to affect the market and financial risk
to which each Fund is subject and the performance of each Fund. The investment
objective and polices of each Fund, unless otherwise specifically stated, may be
changed by the Trustees of the Trust without a vote of the shareholders. A
change in a Fund's objective may result in the Fund having an investment
objective different from the objective which shareholders considered appropriate
at the time of investment in the Fund. Any investment involves risk and there is
no assurance that the investment objective of any Fund will be achieved.
EQUITY INCOME FUND - The Equity Income Fund's primary investment objective is
reasonable income by investing mainly in income-producing securities, and the
secondary investment objective of the Fund is capital appreciation.
Under normal market conditions, the Fund invests at least 65% of its total
assets in income producing equity securities (see "Investment Techniques -
Equity Securities" below). The Fund seeks to achieve a gross yield that exceeds
that of the S&P 500. The Fund may also invest up to 35% of its total assets in
fixed income securities, including up to 20% of its net assets in fixed income
securities rated BB or lower by Standard & Poor's Ratings Services ("S&P") or
Fitch Investors Service, Inc. ("Fitch") or Ba or lower by Moody's Investors
Service, Inc. ("Moody's"), or if unrated, determined to be of equivalent quality
by the Adviser (commonly referred to as "junk bonds"). For a description of
these ratings, see Appendix B to this Prospectus. See "Additional Risk Factors -
Lower Rated Bonds" below.
Consistent with its investment objectives and policies described above, the Fund
may also invest up to 35% (and generally expects to invest between 5% and 25%)
of its net assets in foreign equity and fixed income securities which are not
traded on an U.S. exchange.
The Fund may engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI. The Fund's investments are
subject to certain risks, as described in the above-referenced sections of this
Prospectus and the SAI and as described below under the caption "Additional Risk
Factors."
CORE GROWTH FUND - The Core Growth Fund's investment objective is capital
appreciation.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of well-known and established companies which the
Adviser believes have above-average growth potential (see "Investment Techniques
Equity Securities" below). When choosing the Fund's investments, the Adviser
seeks companies that it expects will demonstrate greater long-term earnings
growth than the average company included in the S&P 500. This method of stock
selection is based on the belief that growth in a company's earnings will
eventually translate into growth in the price of its stock. The Fund may also
invest up to 35% of its total assets in equity securities of companies in the
developing stages of their life cycle that offer the potential for accelerated
earnings or revenue growth (emerging growth companies). Such companies generally
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.
Consistent with its investment objective and policies described above, the Fund
may invest up to 35% (and generally expects to invest up to 20%) of its net
assets in foreign equity securities which are not traded on an U.S. exchange.
The Fund may engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI. The Fund's investments are
subject to certain risks, as described in the above-referenced sections of this
Prospectus and the SAI and as described below under the caption "Additional Risk
Factors."
AGGRESSIVE GROWTH FUND - The Aggressive Growth Fund's investment objective is
capital appreciation.
Under normal market conditions, the Fund invests substantially all of its assets
in equity securities of companies which the Adviser believes offer superior
prospects for growth (see "Investment Techniques - Equity Securities" below). In
pursuit of its investment objective, the Fund may invest in companies of any
size, including smaller, lesser known companies in the developing stages of
their life cycle that offer the potential for accelerated earnings or revenue
growth (emerging growth companies). Such companies generally 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 Adviser will consider many factors when choosing the Fund's investments,
such as economic and financial trends or the prospective acquisition or
reorganization of a company. Some of the Fund's investments may not respond to
market rallies or downturns. While the Fund may buy securities that provide
income, it does not place any emphasis on income, except when the Adviser
believes this income will have a favorable influence on the security's market
value.
- 10 -
<PAGE>
Consistent with its investment objective and policies described above, the Fund
may invest up to 35% (and generally expects to invest between 5% and 20%) of its
net assets in foreign equity securities which are not traded on an U.S.
exchange.
The Fund may engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI. The Fund's investments are
subject to certain risks, as described in the above-referenced sections of this
Prospectus and the SAI and as described below under the caption "Additional Risk
Factors."
SPECIAL OPPORTUNITIES FUND - The Special Opportunities Fund's investment
objective is capital appreciation.
Under normal market conditions, the Fund invests substantially all of its assets
in equity and fixed income securities which the Adviser believes represent
uncommon value by having the potential for significant capital appreciation over
a period of 12 months or longer (see "Investment Techniques - Equity Securities"
below). The issuers of such securities may include companies out-of-favor in the
marketplace or in out-of-favor industries, companies currently performing well
but in industries where the outlook is questionable and over-leveraged companies
with promising longer-term prospects. Some of these companies may be
experiencing financial or operating difficulties, and certain of these companies
may be involved, at the time of acquisition or soon thereafter, in
reorganizations, capital restructurings or bankruptcy proceedings; however, most
of these companies will not be experiencing such financial or operating
difficulties as will lead, in the Adviser's opinion, to reorganizations, capital
restructurings or bankruptcy proceedings. The Adviser will determine the
relative apportionment of the Fund's assets among particular equity and fixed
income investments based on their appreciation potential. The Fund may invest a
substantial amount of its assets in U.S. Government Securities when, in the
judgment of the Adviser, securities with the potential for significant capital
appreciation are not available for purchase by the Fund (see "Investment
Techniques - U.S. Government Securities" below).
The Fund may invest in companies of any size, including smaller, lesser known
companies in the developing stages of their life cycle that offer the potential
for accelerated earnings or revenue growth (emerging growth companies). Such
companies generally 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 fixed income securities in which the Fund may invest include fixed income
securities rated BB or lower by S&P or Fitch or Ba or lower by Moody's, or if
unrated, determined to be of equivalent quality by the Adviser (commonly
referred to as "junk bonds"). For a description of these ratings, see Appendix B
to this Prospectus. Up to 100% of the Fund's net assets may be invested in such
lower-rated fixed income securities (see "Additional Risk Factors - Lower Rated
Bonds" below).
The Fund may engage in short sales of securities which the Adviser expects to
decline in price (see "Investment Techniques - Short Sales" below). The Fund may
also borrow from banks and use the proceeds of such borrowings to invest in
portfolio securities, thereby creating leverage (see "Investment Techniques -
Borrowing and Leverage" below).
Consistent with its investment objective and policies described above, the Fund
may invest up to 50% of its net assets in foreign equity and fixed-income
securities which are not traded on an U.S. exchange.
The Fund may engage in certain investment techniques as described under the
caption "Investment Techniques" below and in the SAI. The Fund's investments are
subject to certain risks, as described in the above-referenced sections of this
Prospectus and the SAI and as described below under the caption "Additional Risk
Factors."
CONVERTIBLE SECURITIES FUND - The Convertible Securities Fund's investment
objective is high total return through a combination of current income and
capital appreciation.
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in convertible securities. A
convertible security is generally a debt obligation or preferred stock that may
be converted within a specified period of time into a certain amount of common
stock of the same or a different issuer. A convertible security provides a fixed
income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises and to decrease as the market value of the underlying
stock declines. Because its value can be influenced by both interest rate and
market movements, a convertible security is not as sensitive to interest rates
as a similar fixed income security, nor is it as sensitive to changes in share
price as its underlying stock.
- 11 -
<PAGE>
The remaining 35% of the Fund's total assets may be invested in
non-convertible corporate and U.S. Government fixed income securities, equity
securities and money market instruments. The Fund's policies permit investment
in convertible and non-convertible fixed income securities without restrictions
as to maturity or duration. The convertible and non-convertible fixed income
securities in which the Fund may invest include fixed income securities rated BB
or lower by S&P or Fitch or Ba or lower by Moody's, or if unrated, determined to
be of equivalent quality by the Adviser (commonly referred to as "junk bonds").
For a description of these ratings, see Appendix B to this Prospectus. Up to
100% of the Fund's net assets may be invested in such lower rated fixed income
securities (see "Additional Risk Factors - Lower Rated Bonds" below).
The Fund may engage in short sales of securities which the Adviser
expects to decline in price (see "Investment Techniques - Short Sales" below).
Consistent with its investment objective and policies described above,
the Fund may invest up to 20% (and generally expects to invest up to 5%) of its
net assets in foreign securities which are not traded on an U.S. exchange.
The Fund may engage in certain investment techniques as described under
the caption "Investment Techniques" below and in the SAI. The Fund's investments
are subject to certain risks, as described in the above-referenced sections of
this Prospectus and the SAI and as described below under the caption "Additional
Risk Factors."
BLUE CHIP FUND - The Blue Chip Fund's investment objective is capital
appreciation.
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
well-known, stable and established companies which the Adviser believes have
above average capital appreciation potential, commonly known as "Blue Chip
Companies." Blue Chip Companies are those companies generally identified by
their substantial capitalization, established history of earnings and dividends,
easy access to credit, good industry position and superior management structure.
These companies also typically have a large number of publicly held shares and a
high trading volume, resulting in a high degree of liquidity. While the Fund
will primarily invest in equity securities of such companies, it may also invest
in other equity and fixed income securities offering an opportunity for capital
appreciation, such as companies in a relatively early stage of development that
offer the potential for accelerated earnings or revenue growth (emerging growth
companies).
Consistent with its investment objective and policies described above,
the Fund may also invest any portion or all (and generally expects to invest up
to 50%) of its net assets in foreign securities which are not traded on an U.S.
exchange.
The Fund may engage in certain investment techniques as described under
the caption "Investment Techniques" below and in the SAI. The Fund's investments
are subject to certain risks, as described in the above-referenced sections of
this Prospectus and the SAI and as described below under the caption "Additional
Risk Factors."
NEW DISCOVERY FUND - The New Discovery Fund's investment objective is capital
appreciation.
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in companies that the
Adviser believes offer superior prospects for growth. Such securities may either
be listed on securities exchanges or traded in the over-the-counter markets and
may be U.S. or foreign companies. While companies in which the Fund invests may
be of any size, such as companies in a relatively early stage of development
that offer the potential for accelerated earnings or revenue growth (emerging
growth companies), or larger or more established companies whose rates of
earnings growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, or structural changes in the economy, the
Fund will generally invest in companies with small market capitalizations
relative to companies included in the S&P 500. Such companies generally 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 fixed income securities offering an
opportunity for capital appreciation, including up to 10% of its net assets in
fixed income securities rated BB or lower by S&P or Fitch or Ba or lower by
Moody's, or if unrated, determined to be of equivalent quality by the Adviser
(commonly referred to as "junk bonds"). For a description of these ratings, see
Appendix B to this Prospectus (see "Additional Risk Factors - Lower Rated Bonds"
below).
The Fund may engage in short sales of securities which the Adviser
expects to decline in price (see "Investment Techniques - Short Sales" below).
Consistent with its investment objective and policies described above,
the Fund may also invest up to 50% (and generally expects to invest up to 20%)
of its net assets in foreign securities which are not traded on an U.S.
exchange.
- 12 -
<PAGE>
The Fund may engage in certain investment techniques as described under
the caption "Investment Techniques" below and in the SAI. The Fund's investments
are subject to certain risks, as described in the above-referenced sections of
this Prospectus and the SAI and as described below under the caption "Additional
Risk Factors."
SCIENCE AND TECHNOLOGY FUND - The Science and Technology Fund's investment
objective is capital appreciation.
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in securities of companies
which the Adviser believes will benefit from scientific and technological
advances and improvements. These companies may include companies in many
different fields, such as, for example, computer software and hardware,
semiconductor, minicomputers and peripheral equipment, scientific instruments,
telecommunications, pharmaceuticals, environmental services, chemicals and
synthetic materials, defense and commercial electronics, data storage and
retrieval, biotechnology, health care and medical supplies, among others.
The Fund may invest in companies of any size, including smaller, lesser
known companies in the developing stages of their life cycle that offer the
potential for accelerated earnings or revenue growth (emerging growth
companies). Such companies generally 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 engage in short sales of securities which the Adviser
expects to decline in price (see "Investment Techniques - Short Sales" below).
While the Fund generally will invest in equity securities, it may also
invest in fixed income securities offering an opportunity for capital
appreciation, including up to 30% of its net assets in fixed income securities
rated BB or lower by S&P and Fitch or Ba and lower by Moody's, or if unrated,
determined to be of equivalent quality by the Adviser (commonly referred to as
"junk bonds"). For a description of these ratings, see Appendix B to this
Prospectus (see "Additional Risk Factors - Lower Rated Bonds" below).
Consistent with its investment objective and policies described above,
the Fund may invest up to 50% (and generally expects to invest up to 20%) of its
net assets in foreign equity and fixed income securities which are not traded on
an U.S. exchange.
The Fund may engage in certain investment techniques as described under
the caption "Investment Techniques" below and in the SAI. The Fund's investments
are subject to certain risks, as described in the above-referenced sections of
this Prospectus and the SAI and as described below under the caption "Additional
Risk Factors."
RESEARCH INTERNATIONAL FUND - The Research International Fund's investment
objective is capital appreciation.
The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
companies whose principal activities are located outside the U.S. The equity
securities in which the Fund may invest include securities of more established
companies which represent opportunities for long-term growth (see "Investment
Techniques - Foreign Growth Securities" below). The Fund may also invest up to
25% of its net assets in securities of companies located, or primarily
conducting their business, in emerging market countries. The selection of
securities is made solely on the basis of potential for capital appreciation.
The Fund does not intend to emphasize any particular country and, under normal
market conditions, will be invested in at least five countries. In addition, the
Fund may hold foreign currency received in connection with investments in
foreign securities or in anticipation of purchasing foreign securities (see
"Additional Risk Factors - Foreign Securities" below.)
In determining where a company's principal activities are located, the
Adviser considers such factors as its country of organization, the principal
trading market for its securities and the source of its revenues and assets. The
company's principal activities are deemed to be located in a particular country
if: (a) the company is organized under the laws of, and maintains a principal
office in, that country; (b) the company has its principal securities trading
market in that country; (c) the company derives 50% or more of its total
revenues from goods sold or services performed in that country; or (d) the
company has 50% or more of its assets in that country.
The portfolio securities of the Fund are selected by a committee of
investment research analysts. This committee includes investment analysts
employed not only by the Adviser but also by MFS International (U.K.) Limited, a
wholly owned subsidiary of MFS, and investment analysts employed by Foreign &
Colonial Management Limited and Foreign & Colonial Emerging Markets Limited,
with which MFS has entered into a strategic alliance (see "Management of the
Funds" below). The Fund's assets are allocated among countries and industries by
the analysts acting together as a group. Individual analysts are then
responsible for selecting what they view as the securities best suited to meet
the Fund's investment objective within their assigned geographic and industry
responsibility.
- 13 -
<PAGE>
The Fund may engage in certain investment techniques as described under
the caption "Investment Techniques" below and in the SAI. The Fund's investments
are subject to certain risks, as described in the above-referenced sections of
this Prospectus and the SAI and as described below under the caption "Additional
Risk Factors."
5. INVESTMENT TECHNIQUES
The investment techniques described below are applicable to all or certain of
the Funds, as specified. Additional information about certain of these
investment techniques can be found under the caption "Investment Techniques" in
the SAI.
INVESTMENT TECHNIQUES APPLICABLE TO EACH FUND. The following investment
techniques are applicable to each Fund:
EQUITY SECURITIES: Each Fund may invest in all types of equity
securities, including the following: common stocks, preferred stocks and
preference stocks; securities such as bonds, warrants or rights that are
convertible into stocks; and depository receipts for those securities. These
securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.
FIXED INCOME SECURITIES: Fixed income securities in which each Fund may
invest include bonds, debentures, mortgage securities, notes, bills, commercial
paper, U.S. Government Securities and certificates of deposit, as well as debt
obligations which may have a call on common stock by means of a conversion
privilege or attached warrants.
RESTRICTED SECURITIES: Each Fund may purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is liquid and thus not subject to a 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 the Adviser 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 each Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in a Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to each Fund's 15%
limitation on investments in illiquid investments, a Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, a Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily available. Therefore,
judgment may at times play a greater role in valuing these securities than in
the case of unrestricted securities.
LENDING OF PORTFOLIO SECURITIES: Each Fund may seek to increase its
income by lending portfolio securities. Such loans will usually be made to
member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and to member banks of the Federal Reserve System, and would be
required to be secured continuously by collateral in cash, irrevocable letters
of credit or U.S. Treasury securities maintained on a current basis at an amount
at least equal to the market value of the securities loaned. If the Adviser
determines to lend portfolio securities, it is intended that the value of the
securities loaned would not exceed 30% of the value of the net assets of the
Fund making the loans.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements
in order to earn income on available cash or as a temporary defensive measure.
Under a repurchase agreement, a Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). Each
Fund has adopted certain procedures intended to minimize the risks of such
transactions.
"WHEN ISSUED" SECURITIES: Each Fund may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the securities
will be delivered to a Fund at a future date usually beyond customary settlement
time. The commitment to purchase a security for which payment will be made on a
future date may be deemed a separate security. In general, a Fund does not pay
for such securities until received, and does not start earning interest on the
securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, a Fund will normally invest in cash, cash
equivalents and high grade debt securities (if consistent with the Fund's
investment policies).
U.S. GOVERNMENT SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities Fund generally may invest, and
each Fund for temporary defensive purposes, as discussed below, may invest, in
U.S. Government securities, including: (1) U.S. Treasury obligations, which
differ only in their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturities of one year or less); U.S. Treasury notes (maturities
of one to ten years); and U.S. Treasury bonds (generally maturities of
- 14 -
<PAGE>
greater than ten 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; and some of which are backed only by the
credit of the issuer itself, E.G., obligations of the Student Loan Marketing
Association (collectively, "U.S. Government Securities"). The term "U.S.
Government Securities" also includes interests in trusts or other entities
issuing interests in obligations that are backed by the full faith and credit of
the U.S. Government or are issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities.
INVESTMENTS FOR TEMPORARY 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 a Fund may be invested in cash
(including foreign currency) or cash equivalents, including, but not limited to,
obligations of banks (including certificates of deposit, bankers' acceptances,
time deposits and repurchase agreements), commercial paper, short-term notes,
U.S. Government Securities and related repurchase agreements.
FOREIGN GROWTH SECURITIES: Each Fund may invest in securities of
foreign growth companies, including established foreign companies, whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Additional Risk Factors - Foreign Securities" below.
It is anticipated that these companies will primarily be in nations with more
developed securities markets, such as Japan, Australia, Canada, New Zealand,
Hong Kong and most Western European countries, including Great Britain.
EMERGING MARKETS SECURITIES: Consistent with each Fund's respective
objectives and policies, each Fund may invest in securities of issuers whose
principal activities are located in emerging market countries (which may include
foreign governments and their subdivisions, agencies or instrumentalities).
Emerging markets include any country determined by the Adviser to have an
emerging market economy, taking into account a number of factors, including
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country. See "Risk Factors - Emerging Market Securities" below.
INDEXED SECURITIES: Each Fund may invest in indexed securities whose
value is linked to foreign currencies, interest rates, commodities, indices or
other financial indicators. Most indexed securities are short to intermediate
term fixed income securities whose values at maturity (I.E., principal value)
and/or interest rates rise or fall according to the change in one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (I.E., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by a Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, a Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
Each Fund may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the
counterparty. For example, the purchase of an interest rate cap entitles the
buyer, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of an interest
rate floor obligates the seller to make payments to the extent that a specified
interest rate falls below an agreed-upon level. A collar arrangement combines
elements of buying a cap and selling a floor.
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Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of a 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
a Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Swaps, caps, floors and collars are highly
specialized activities which involve certain risks as described in the SAI.
OPTIONS ON SECURITIES: Each Fund may write (sell) covered put and call
options and purchase put and call options on securities. Each Fund will write
options on securities for the purpose of increasing its return and/or to protect
the value of its portfolio. In particular, where a Fund writes an option that
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. Each Fund may also write combinations of
put and call options on the same security, known as "straddles." Such
transactions can generate additional premium income but also present increased
risk.
By writing a call option on a security, a 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 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.
Each 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 a Fund wants to purchase at a later date. In the event
that the expected market fluctuations occur, a 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, a Fund may enter into options on Treasury
securities that are "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: Each Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. Each 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 a Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. A 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 a Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to a Fund's option position, the option may be exercised, and the Fund
will experience a loss which may only be partially offset by the amount of the
premium received.
Each Fund may also purchase put or call options on stock indices in
order, respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance. A
Fund's possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each Fund may 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 (an effort to increase
current income) 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, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease. Yield curve options written by a Fund will be covered as
described in the SAI. The trading of yield curve
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options is subject to all the risks associated with trading other types of
options, as discussed below under "Additional Risk Factors" and in the SAI. In
addition, such options present risks of loss even if the yield on one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: Each Fund may
purchase and sell futures contracts ("Futures Contracts") on stock indices, and
may purchase and sell Futures Contracts on foreign currencies or indices of
foreign currencies. Each Fund may also purchase and write options on such
Futures Contracts. The Equity Income Fund, the Special Opportunities Fund and
the Convertible Securities Fund may purchase and sell Futures Contracts on
foreign or domestic fixed income securities or indices of such securities,
including municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. These Funds may
also purchase and write options on such Futures Contracts. All above-referenced
options on Futures Contracts are referred to as "Options on Futures Contracts."
Such transactions will be entered into for hedging purposes or for
non-hedging purposes to the extent permitted by applicable law. Each Fund will
incur brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit the
Funds, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, a Fund's overall performance may be poorer
than if it had not entered into any such contract and the Fund may realize a
loss. A 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. In addition, a Fund
will not purchase put and call options on Futures Contracts if as a result more
than 5% of its total assets would be invested in such options.
Purchases of Options on Futures Contracts may present less risk in
hedging a Fund's portfolio than the purchase or sale of the underlying Futures
Contracts since the potential loss is limited to the amount of the premium plus
related transaction costs, although it may be necessary to exercise the option
to realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, a Fund may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered
into by a Fund will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: Each Fund may enter into forward foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date at a price set at the time of the contract ("Forward
Contracts"). Each Fund may enter into Forward Contracts for hedging purposes and
for non-hedging purposes of increasing the Fund's current income. By entering
into transactions in Forward Contracts for hedging purposes, a Fund may be
required to forego the benefits of advantageous changes in exchange rates and,
in the case of Forward Contracts entered into for non-hedging purposes, a Fund
may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative. Forward Contracts are traded
over-the-counter and not on organized commodities or securities exchanges. As a
result, Forward Contracts operate in a manner distinct from exchange-traded
instruments, and their use involves certain risks beyond those associated with
transactions in Futures Contracts or options traded on exchanges. A Fund may
choose to, or be required to, receive delivery of the foreign currencies
underlying Forward Contracts it has entered into. 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, a Fund may hold such
currencies for an indefinite period of time. A Fund may also enter into a
Forward Contract on one currency 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. Each Fund has
established procedures consistent with statements of the SEC and its staff
regarding the use of Forward Contracts by registered investment companies, which
requires use of segregated assets or "cover" in connection with the purchase and
sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: Each Fund may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of 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 a Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Fund may also choose, or be
required to receive delivery of the foreign currencies underlying Options on
Foreign Currencies into which it has entered. 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, a Fund may hold such
currencies for an indefinite period of time.
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INVESTMENT TECHNIQUES APPLICABLE TO CERTAIN FUNDS. The following investment
techniques are applicable only to certain Funds, as specified:
SHORT SALES: If the Special Opportunities Fund, the Convertible
Securities Fund, the New Discovery Fund or the Science and Technology Fund
anticipates that the price of a security will decline, it may sell the security
short and borrow the same type of security from a broker or other institution to
complete the sale. A Fund may make a profit or loss depending upon whether the
market price of the security decreases or increases between the date of the
short sale and the date on which the Fund must replace the borrowed security.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested. Each
Fund's short sales must be fully collateralized. A Fund will not sell short
securities whose underlying value exceeds 40% of its net assets.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Equity Income Fund, the
Special Opportunities Fund and the Convertible Securities Fund may enter into
mortgage "dollar roll" transactions with selected banks and broker-dealers
pursuant to which a 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. A 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.
CORPORATE ASSET-BACKED SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities 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. 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.
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 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. A 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.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Equity
Income Fund, the Special Opportunities Fund and the Convertible Securities Fund
may invest in zero coupon bonds, deferred interest bonds and payment-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 than debt obligations which make regular
payments of interest. A Fund will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Equity Income Fund, the Special Opportunities Fund and the
Convertible Securities Fund each 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, the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"), but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral collectively referred to as "Mortgage
Assets"). Each of these Funds 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
a Fund invests, the investment may be subject to a greater or lesser risk of
prepayments than other types of mortgage-related securities.
The Equity Income Fund, the Special Opportunities Fund and the
Convertible Securities 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.
STRIPPED MORTGAGE-BACKED SECURITIES: The Equity Income Fund, the
Special Opportunities Fund and the Convertible Securities Fund may invest in
stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities usually structured with two classes that receive different
proportions of interest and principal distributions from an underlying pool of
mortgage assets.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Equity Income Fund, the
Special Opportunities Fund and the Convertible Securities Fund may each invest a
portion of its assets in loans. By purchasing a loan, a Fund acquires some or
all of the interest of a bank or other lending institution in a loan to a
corporate, government or other borrower. Many such loans are secured, and most
impose restrictive covenants which must be met by the borrower. These loans are
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, leveraged buy-outs and other corporate activities. Such loans may
be in default at the time of purchase. A Fund may also purchase trade or other
claims against companies, which generally represent money owed by the company to
a supplier of goods and services. These claims may also be purchased at a time
when the company is in default. Certain of the loans acquired by a Fund may
involve revolving credit facilities or other standby financing commitments which
obligate a Fund to pay additional cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loans
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Fund may be unable to sell such investments at an opportune time
or may have to resell them at less than fair market value.
MORTGAGE PASS-THROUGH SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities 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. 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 GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as FNMA or FHLMC, which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers).
BRADY BONDS: The Equity Income Fund, the Special Opportunities Fund and
the Convertible Securities 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.
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<PAGE>
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently, and for that reason do not have a long payment history. Brady Bonds
may be collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts 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.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Investment Techniques" in the SAI.
SPECIAL OPPORTUNITIES FUND: The Special Opportunities Fund's
investments will be aggressively managed with a higher risk of loss than that of
more conservatively managed portfolios. Many of the securities offering the
capital appreciation sought by the Fund will involve a high degree of risk. The
Fund will seek to reduce risk by investing in a number of securities markets
(E.G., U.S. Government, corporate fixed income, equity and foreign markets) and
issuers, performing credit analyses of potential investments and monitoring
current developments and trends in both the economy and financial markets.
Some of the Fund's assets may be invested in securities whose issuers
have operating losses, substantial capital needs, negative net worth or are
insolvent or involved in bankruptcy or reorganization proceedings. It is
difficult to value financially distressed issuers and to estimate prospects for
their financial recovery. The issuers may be unable to meet debt service
requirements and the investments may take considerable time to appreciate in
value. Some of the securities acquired by the Fund may not be current on payment
of interest or dividends. In the event that issuers of securities owned by the
Fund become involved in bankruptcy or other insolvency proceedings, additional
risks will be present. Bankruptcy or other insolvency proceedings are highly
complex, can be very costly and may result in unpredictable outcomes. Bankruptcy
courts have extensive powers and under certain circumstances may alter
contractual obligations of the bankrupt company.
Since there may be no public market or only inactive trading markets
for some of the securities in which the Fund invests, the Fund may be required
to retain such investments for indefinite periods or to sell them at substantial
losses. Such securities may involve greater risks, often related to
creditworthiness, solvency, relative liquidity of the secondary market,
potential market losses, vulnerability to rising interest rates and economic
downturns and market price volatility based upon interest rate sensitivity, all
of which may adversely affect the Fund's net asset value. This may be
particularly true of lower rated or unrated securities in which the Fund may
invest (see "Lower Rated Bonds" below). In addition, many of the securities held
by the Fund may not have readily available market prices and may instead be
priced by third party pricing vendors or priced at fair market value by MFS,
subject to the oversight of the Trust's Board of Trustees.
NON-DIVERSIFICATION: The Special Opportunities Fund is
"non-diversified," as that term is defined in the 1940 Act, but intends to
qualify as a "regulated investment company" ("RIC") for federal income tax
purposes. This means, in general, that although more than 5% of the Fund's total
assets may be invested in the securities of one issuer (including a foreign
government), at the close of each quarter of its taxable year, the aggregate
amount of such holdings may not exceed 50% of the value of its total assets, and
no more than 25% of the value of its total assets may be invested in the
securities of a single issuer. To the extent that a non-diversified fund at
times may hold the securities of a smaller number of issuers than if it were
"diversified" (as defined in the 1940 Act), the Fund will at such times be
subject to greater risk with respect to its portfolio securities than a fund
that invests in a broader range of securities, because changes in the financial
condition or market assessment of a single issuer may cause greater fluctuations
in the Fund's total return and the net asset value of its shares.
SCIENCE AND TECHNOLOGY FUND: An investment in the Science and
Technology Fund may involve significantly greater risks and therefore may
experience greater volatility than an investment in a fund with a more broadly
diversified investment mandate. Because the Science and Technology Fund will
primarily invest in companies which the Adviser expects to benefit from
scientific and technological advancements and improvements, the Fund's
investment performance will be closely tied to the performance of companies in a
limited number of industries. Companies in a single industry are often faced
with the same obstacles, issues and regulatory burdens, and their securities may
react similarly and more in unison to these or other market conditions. These
price movements may have a disproportionate impact on the Fund's investment
performance given its narrow industry focus.
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<PAGE>
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 one-person
management. The securities of emerging growth companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. Similarly, many of the securities
offering the capital appreciation sought by the Funds will involve a higher
degree of risk than would established growth stocks.
FIXED INCOME SECURITIES: To the extent a Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Funds are not
subject to restrictions on the maturities of the fixed income securities they
hold. A Fund's investments in fixed income securities with longer terms to
maturity are subject to greater volatility than the Fund's shorter-term
obligations.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although each Fund
may enter into transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and Options on Foreign Currencies for hedging
purposes, such transactions nevertheless involve certain risks. For example, a
lack of correlation between the instrument underlying an option or Futures
Contract and the assets being hedged, or unexpected adverse price movements,
could render a Fund's hedging strategy unsuccessful and could result in losses.
The Funds also may enter into transactions in options, Futures Contracts,
Options on Futures Contracts and Forward Contracts for other than hedging
purposes, which involves greater risk. In particular, such transactions may
result in losses for a Fund which are not offset by gains on other portfolio
positions, thereby reducing gross income. In addition, foreign currency markets
may be extremely volatile from time to time. There also can be no assurance that
a liquid secondary market will exist for any contract purchased or sold, and a
Fund may be required to maintain a position until exercise or expiration, which
could result in losses. The SAI contains a description of the nature and trading
mechanics of options, Futures Contracts, Options on Futures Contracts, Forward
Contracts and Options on Foreign Currencies, and includes a discussion of the
risks related to transactions therein.
Transactions in Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on U.S. exchanges regulated by the Commodity Futures Trading
Commission and on foreign exchanges. In addition, the securities and indices
underlying options, Futures Contracts and Options on Futures Contracts traded by
the Fund will include both domestic and foreign securities.
LOWER RATED BONDS: The Equity Income Fund, the Special Opportunities
Fund, the Convertible Securities Fund, the New Discovery Fund and the Science
and Technology Fund may invest in fixed income securities, and may invest in
convertible securities, rated Baa by Moody's or BBB by S&P or Fitch and
comparable unrated securities. These securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade securities.
These Funds may also invest in securities rated Ba or lower by Moody's
or BB or lower by S&P or Fitch and comparable unrated securities (commonly known
as "junk bonds") to the extent described above. 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. However, since yields vary over time, no specific level of income
can ever be assured. These lower rated high yielding fixed income securities
generally tend to reflect economic changes and short-term corporate and industry
developments 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, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on a
Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, a Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to a Fund but will be reflected
in the net asset value of shares of the Fund.
FOREIGN SECURITIES: Each Fund may invest in dollar denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, securities settlement practices, governmental
administration or
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<PAGE>
economic or monetary policy (in the United States 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 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 expropriation, confiscatory taxation and potential
difficulties in enforcing contractual obligations and could be subject to
extended settlement periods. Each Fund may hold foreign currency received in
connection with investments in foreign securities 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 rate. Each
Fund may also hold foreign currency in anticipation of purchasing foreign
securities.
AMERICAN DEPOSITARY RECEIPTS: Each Fund may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Because ADRs
trade on U.S. 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: Each Fund may invest in emerging markets.
In addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative and,
while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a Fund is uninvested and no return is earned thereon. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause a Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to a
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 a 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 on repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic movements in price.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Fund could be
adversely affected by 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 a Fund.
PORTFOLIO TRADING: Each Fund intends to manage its portfolio by buying
and selling securities, as well as holding securities to maturity, to help
attain its investment objective and policies.
Each Fund will engage in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in attaining
its investment objective. In trading portfolio securities, a Fund seeks to take
advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. For a description of the strategies which may be
used by the Funds in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI. Because each Fund is expected to have a
portfolio turnover rate of up to 200% during its current fiscal year,
transaction costs incurred by each Fund and the realized capital gains and
losses of each Fund may be greater than that of a fund with a lower portfolio
turnover rate.
- 22 -
<PAGE>
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 of the Trust may determine, the Adviser
may consider sales of shares of other investment company clients of MFD, the
distributor of shares of the Trust and of the MFS Family of Funds (the "MFS
Funds"), as a factor in the selection of broker-dealers to execute each 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 a Fund's operating expenses (E.G., fees charged by the custodian of
the Fund's assets).
-------------------------------
The SAI includes a discussion of other investment policies and a
listing of specific investment restrictions which govern the investment policies
of each Fund. The specific investment restrictions listed in the SAI may be
changed without shareholder approval unless indicated otherwise (see the SAI). A
Fund's investment limitations, policies and rating standards are adhered to at
the time of purchase or utilization of assets; a subsequent change in
circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER -- The Adviser manages each Fund pursuant to separate
Investment Advisory Agreements, dated January 2, 1996 with respect to the Equity
Income Fund, the Core Growth Fund, the Aggressive Growth Fund and the Special
Opportunities Fund, and December ___, 1996 with respect to the remaining Funds
(the "Advisory Agreements"). The Adviser provides each Fund with overall
investment advisory and administrative services, as well as general office
facilities. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for each Fund. For its services and facilities, the
Adviser is entitled to receive a management fee, computed and paid monthly, in
an amount equal to 0.75% per annum of the average daily net assets of each Fund,
except the Research International Fund, and 1.00% per annum of the average daily
net assets of this Fund.
For the period from the commencement of investment operations, January 2, 1996,
to the fiscal year end of August 31, 1996, the Adviser has waived its right to
receive management fees from each Fund. The Adviser is currently waiving its
right to receive management fees from each Fund except the Aggressive Growth
Fund.
The identity and background of the portfolio manager(s) for each Fund is set
forth below. Each portfolio manager has acted in that capacity since the
commencement of investment operations of each Fund.
FUND PORTFOLIO MANAGER(S)
Equity Income Fund Lisa B. Nurme, a Vice President of the Adviser,
has been employed as a portfolio manager by the
Adviser since 1987.
Core Growth Fund Stephen Pesek, a Vice President of the Adviser,
has been employed as a portfolio manager by
the Adviser since 1994. Prior to 1994,
Mr. Pesek worked at Fidelity Research Corporation
as an analyst. John D. Laupheimer, Jr., a Senior
Vice President of the Adviser, has been employed
by the Adviser since 1981.
Aggressive Growth Fund Christian A. Felipe, a Senior Vice President of
the Adviser, has been employed as a portfolio
manager by the Adviser since 1986.
Special Opportunities Fund Robert J. Manning, a Senior Vice President of
the Adviser, has been employed as a portfolio
manager by the Adviser since 1984. John F.
Brennan, Jr., a Senior Vice President of the
Adviser, has been employed by the Adviser since
1985.
Convertible Securities Fund Judith N. Lamb, a Vice President of the Adviser,
has been employed as a portfolio manager by the
Adviser since 1992.
- 23 -
<PAGE>
FUND PORTFOLIO MANAGER(S)
Blue Chip Fund Mitchell D. Dynan, a Vice President of the
Adviser, has been employed as a portfolio manager
by the Adviser since 1986.
New Discovery Fund Brian E. Stack, a Vice President of the Adviser,
has been employed as a portfolio manager by the
Adviser since 1993. Prior to 1993, Mr. Stack was
employed by Robertson, Stephens & Co. as a
securities analyst.
Science and Technology Fund Irfan S. Ali, an Assistant Vice President of the
Adviser, has been employed as a portfolio
manager by the Adviser since 1993. Prior to 1993,
Mr. Ali was employed by CS First Boston as a
financial analyst.
Research International Fund A committee of investment research analysts.
MFS also serves as investment adviser to each of the other MFS Funds and to
MFS(R) Municipal Income Trust, MFS MultimarkeT Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust,
MFS Special Value Trust, MFS Union Standard Trust, MFS Institutional Trust, MFS
Variable Insurance Trust, MFS/Sun Life Series Trust, 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 U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $___
billion on behalf of approximately ___ million investor accounts as of November
30, 1996. As of such date, the MFS organization managed approximately $____
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $____ billion of assets invested in foreign securities, and
approximately $____ billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott and John D.
McNeil. Mr. Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott
is the Secretary and a Senior Executive Vice President of MFS. Mr. McNeil is the
Chairman of Sun Life. Sun Life, a mutual life insurance company, is one of the
largest international life insurance companies and has been operating in the
U.S. since 1895, establishing a headquarters office here in 1973. The executive
officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman 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
officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("FCM"). FCM 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 Wechsel-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 FCM share their views on a variety of investment-related
issues, such as the economy, securities markets, portfolio securities and their
issuers, investment recommendations, strategies and techniques, risk analysis,
trading strategies and other portfolio management matters. MFS has access to the
extensive international equity investment expertise of FCM, and FCM has access
to the extensive U.S. equity investment expertise of MFS. MFS and FCM each have
investment personnel working in each other's offices in Boston and London,
respectively.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for portfolios of other clients of MFS or clients of FCM.
Some simultaneous transactions are inevitable when several clients receive
investment advice from MFS and FCM, particularly when the same security is
suitable for more than one client. While in some cases this arrangement could
have a detrimental effect on the price or availability of the security as far as
a Fund is concerned, in other cases, however, it may produce increased
investment opportunities for the Funds.
SUB-INVESTMENT ADVISERS - The Funds' Advisory Agreements permit the Adviser from
time to time to engage one or more sub-advisers to assist in the performance of
its services. The Adviser has engaged two sub-advisers for the Research
- 24 -
<PAGE>
International Fund: FCM and Foreign and Colonial Emerging Markets Limited
("FCEM"). As described under "Investment Objective and Policies - Research
International Fund" above, investment research analysts employed by the
sub-advisers are part of the Committee which manages the Fund.
FCM and FCEM are each companies incorporated under the laws of England and Wales
and are located at Exchange House, Primrose Street, London EC2A 2NY, United
Kingdom. FCM is a wholly owned subsidiary of Hypo Foreign & Colonial Management
(Holdings) Ltd. ("Hypo F&C"). Fifty percent of the outstanding voting securities
of Hypo F&C is owned by each of (i) Poutney Hill Holdings Limited, which is
wholly owned by five closed-end publicly listed investment trusts managed by
FCM, including Foreign & Colonial Investment Trust PLC, and (ii) Hypo (U.K.)
Holdings Ltd., which is a wholly owned subsidiary of HYPO-Bank (Bayerische
Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and fifth largest,
commercial bank in Germany, founded in 1835. FCM has a history of money
management dating from 1868 and the establishment of the world's oldest
closed-end fund, Foreign & Colonial Investment Trust PLC. As of ____________,
1996, FCM managed approximately U.S. $_____ billion of assets in securities. The
Adviser has entered into a sub-advisory agreement with FCM dated December __,
1996. For its services, the Adviser pays FCM an annual management fee, computed
and paid monthly, in an amount equal to 0.40% of the Fund's average daily net
assets on an annualized basis. FCM is currently waiving its right to receive
management fees.
FCEM is a wholly owned subsidiary of FCEM (HOLDINGS) Limited ("FCEM Holdings").
FCEM Holdings is a subsidiary of FCM, which owns 75.1% of the outstanding voting
securities of FCEM Holdings. Garantia Banking Limited, a wholly owned subsidiary
of Banco de Investmentos Garantia SA located at Rua Jorge Coelho, 16-13th Floor,
CEP 01451-020, Sao Paulo, Brazil, owns 14.9% of the outstanding voting
securities of FCEM Holdings, and Audley William Twiston Davies, the Managing
Director of FCEM, owns 10% of the outstanding voting securities of FCEM
Holdings. FCEM manages emerging market investments for FCM and FCEM serves as
the investment adviser to public closed-end and open-end funds and segregated
accounts specializing in emerging markets. As of ___________, 1996, FCEM managed
approximately U.S. $_____ billion of assets invested in emerging markets. FCM
has entered into a sub-advisory agreement with FCEM dated December ___, 1996.
For its service, the FCM pays FCEM an annual management fee, computed and paid
monthly, in an amount equal to [ ]% of the Fund's average daily net assets on an
annual basis. FCEM is currently waiving its right to receive management fees
from FCM.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of each Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for each Fund.
8. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Shares of each Fund may be purchased at the public offering price through any
dealer and other financial institution ("dealers") having a selling agreement
with MFD. Dealers may also charge their customers fees relating to investments
in each Fund.
Each Fund offers three classes of shares to the general public (Class A, B and C
shares) which bear sales charges and distribution fees in different forms and
amounts, as described below (currently, only Class A shares are available for
sale):
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
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<PAGE>
follows:
SALES CHARGE* AS PERCENTAGE OF:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DEALER ALLOWANCE
OFFERING NET AMOUNT AS A PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
Less than $100,000.......................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000............. 4.00 4.17 3.20
$250,000 but less than $500,000............. 2.95 3.04 2.25
$500,000 but less than $1,000,000........... 2.20 2.25 1.70
$1,000,000 or more.......................... None** None** See Below**
</TABLE>
................
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 4% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of each Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the
following four circumstances, Class A shares of each Fund are also offered at
net asset value without an initial sales charge but subject to a CDSC, equal to
1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividend and capital gain distributions) or the total cost of such shares, in
the event of a share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject
to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if: (a) the plan had established an account with the
Shareholder Servicing Agent prior to July 1, 1996 and (b) the
sponsoring organization demonstrates to the satisfaction of MFD that
either (i) the employer has at least 25 employees or (ii) the
aggregate purchases by the retirement plan of Class A shares of the
Funds in the MFS Funds will be in an aggregate amount of at least
$250,000 within a reasonable period of time, as determined by MFD in
its sole discretion;
(iii)on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes
an account with the Shareholder Servicing Agent on or after July 1,
1996; and (c) the aggregate purchases by the retirement plan of Class
A shares of the MFS Funds will be in an aggregate amount of at least
$500,000 within a reasonable period of time, as determined by MFD in
its sole discretion; and
(iv) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1996 and (b) the plan has, at the
time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds. THE RETIREMENT PLAN
WILL QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING
ORGANIZATION INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE
PURCHASES THAT THE PLAN HAS A MARKET VALUE OF $500,000 OR MORE
INVESTED IN SHARES OF ANY CLASS OR CLASSES OF THE MFS FUNDS. THE
SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO
DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on
new investments in Class A shares made through
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<PAGE>
such dealers, as follows:
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
1.00%.............................. On the first $2,000,000, plus
0.80%.............................. Over $2,000,000 to $3,000,000, plus
0.50%.............................. Over $3,000,000 to $50,000,000, plus
0.25%.............................. Over $50,000,000
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares made on
or after April 1, 1996, purchases for each shareholder account (and certain
other accounts for which the shareholder is a record or beneficial holder) will
be aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" 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 are waived. These circumstances are
described in Appendix A to this Prospectus. In addition to these circumstances,
the CDSC imposed upon the redemption of Class A shares is waived with respect to
shares held by certain retirement plans qualified under Section 401(a) or 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe
to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to, the Shareholder Servicing Agent
that the retirement plan has, at the time of certification, or will
have pursuant to a purchase order placed with the certification, a
market value of $500,000 or more invested in shares of any class or
classes of the MFS Funds and aggregate assets of at least $10 million;
PROVIDED, HOWEVER, that the CDSC will not be waived (I.E., it will be imposed)
in the event that there is a change in law or regulations which results in a
material adverse change to the tax advantaged nature of the plan, or in the
event that the plan and/or sponsoring organization: (i) becomes insolvent or
bankrupt; (ii) is terminated or partially terminated under ERISA or is
liquidated or dissolved; or (iii) is acquired by, merged into, or consolidated
with any other entity.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC as follows:
CONTINGENT
YEAR OF REDEMPTION AFTER DEFERRED SALES
PURCHASE CHARGE
First....................................... 4%
Second...................................... 4%
Third....................................... 3%
Fourth...................................... 3%
Fifth....................................... 2%
Sixth....................................... 1%
Seventh and following....................... 0%
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" for further
discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under each Fund's Class B
Distribution Plan (see "Distribution Plans" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
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<PAGE>
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Class B Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon
redemption of Class B shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class B shares is waived with respect to shares
held by a retirement plan whose sponsoring organization subscribes to the MFS
Participant Recordkeeping System and which has established an account with the
Shareholder Servicing Agent on or after July 1, 1996; provided, however, that
the CDSC will not be waived (I.E., it will be imposed) in the event that there
is a change in law or regulations which results in a material adverse change to
the tax advantaged nature of the plan, or in the event that the plan and/or
sponsoring organization: (i) becomes insolvent or bankrupt; (ii) is terminated
or partially terminated under ERISA or is liquidated or dissolved; or (iii) is
acquired by, merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of each Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Distribution Plan
applicable to Class B shares. See "Distribution Plans" below. However, for
purposes of conversion to Class A shares, all shares in a shareholder's account
that were purchased through the reinvestment of dividends and distributions paid
in respect of Class B shares (and which have not converted to Class A shares as
provided in the following sentence) will be held in a separate sub-account. Each
time any Class B shares in the shareholder's account (other than those in the
sub-account) convert to Class A shares, a portion of the Class B shares then in
the sub-account will also convert to Class A shares. The portion will be
determined by the ratio that the shareholder's Class B shares not acquired
through reinvestment of dividends and distributions that are converting to Class
A shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares. The maximum
investment in Class C shares is up to $1,000,000 per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee paid under the Class C Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plans"
below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Code, if the retirement plan
and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k) Plan
or another similar recordkeeping program made available by the Shareholder
Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon
redemption of Class C shares is waived. These circumstances are described in
Appendix A to this Prospectus.
GENERAL: The following information applies to purchases of all classes of each
Fund's shares.
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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
Individual Retirement Accounts ("IRAs")) involving the submission of investments
by means of group remittal statements are subject to a $50 minimum on initial
and additional investments per account. The minimum initial investment for IRAs
is $250 per account and the minimum additional investment is $50 per account.
Accounts being established for participation in the Automatic Exchange Plan are
subject to a $50 minimum on initial and additional investments per account.
There are also other limited exceptions to these minimums for certain
tax-deferred retirement programs. Any minimums may be changed at any time at the
discretion of MFD. Each Fund reserves the right to cease offering its shares at
any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. Each Fund and MFD reserve the right
to reject any specific purchase order or to restrict purchases by a particular
purchaser (or group of related purchasers). Each Fund or MFD may reject or
restrict any purchases by a particular purchaser or group, for example, when
such purchase is contrary to the best interests of the Fund's other shareholders
or otherwise would disrupt the management of the Fund.
MFD may enter into an agreement with shareholders who intend to make exchanges
among certain classes of shares of certain MFS Funds (as determined by MFD)
which follow a timing pattern, and with individuals or entities acting on such
shareholders' behalf (collectively, "market timers"), setting forth the terms,
procedures and restrictions with respect to such exchanges. In the absence of
such an agreement, it is the policy of each Fund and MFD to reject or restrict
purchases by market timers if (i) more than two exchange purchases are effected
in a timed account in the same calendar quarter or (ii) a purchase would result
in shares being held in timed accounts by market timers representing more than
(x) one percent of a Fund's net assets or (y) specified dollar amounts in the
case of certain MFS Funds which may include the Funds and which may change from
time to time. Each Fund and MFD reserve the right to request market timers to
redeem their shares at net asset value, less any applicable CDSC, if either of
these restrictions is violated.
DEALER CONCESSIONS. Dealers may receive different compensation with
respect to sales of Class A, 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 and/or Class C shares of certain specified MFS Funds sold
by such dealer during a specified sales period. In addition, from time to time,
MFD, at its expense, may provide additional commissions, compensation or
promotional incentives ("concessions") to dealers which sell shares of a Fund.
Such concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate
in certain investment programs (E.G., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act
prohibits national banks from engaging in the business of underwriting, selling
or distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in a Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with a Fund for which payment has been received by the Fund (I.E., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charge 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
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<PAGE>
respect to an exchange involving shares subject to a CDSC, the CDSC will be
unaffected by the exchange and the holding period for purposes of calculating
the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectus of the other MFS Fund and
consider the differences in objectives, policies and restrictions before making
any exchange. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent in proper form (I.E., if in writing -- signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record) and each
exchange must involve either shares having an aggregate value of at least $1,000
($50 in the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If an Exchange Request is received by the Shareholder
Servicing Agent on any business day prior to the close of regular trading on the
Exchange (generally, 4:00 p.m., Eastern time), the exchange will occur on that
day if all the requirements set forth above have been complied with at that time
and subject to the Fund's right to reject purchase orders. No more than five
exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from dealers or the Shareholder Servicing Agent.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares exchanged and, therefore, an exchange could result in a
gain or loss to the shareholder making the exchange. Exchanges by telephone are
automatically available to most non-retirement plan accounts and certain
retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions by Telephone." The exchange privilege (or any aspect
of it) may be changed or discontinued and is subject to certain limitations,
including certain restrictions on purchases by market timers. Special
procedures, privileges and restrictions with respect to exchanges may apply to
market timers who enter into an agreement with MFD, as set forth in such
agreement. See "Purchases - General - Right to Reject Purchase Orders/Market
Timing."
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which a Fund is open for business by redeeming shares at their net asset
value (a redemption) or by selling such shares to a 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, each 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
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<PAGE>
amount of any income tax required to be withheld, except during any period in
which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A, Class B and Class C
shares ("Direct Purchases") will be subject to a CDSC for a period of: (i) with
respect to Class A and Class C shares, 12 months (however, the CDSC on Class A
shares is only imposed with respect to purchases of $1 million or more of Class
A shares or purchases by certain retirement plans of Class A shares); or (ii)
with respect to Class B shares, six years. Purchases of Class A shares made
during a calendar month, regardless of when during the month the investment
occurred, will age one month on the last day of the month and each subsequent
month. Class B and Class C shares 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 each Fund purchased prior
to January 1, 1993, transactions will be aggregated on a calendar year basis --
all transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. Prior to April 1, 1996, Class C shares of
the MFS Funds were not subject to a CDSC upon redemption. In no event will Class
C shares of the MFS Funds purchased prior to this date be subject to a CDSC. For
the purpose of calculating the CDSC upon redemption of shares acquired in an
exchange on or after April 1, 1996, the purchase of shares acquired in one or
more exchanges is deemed to have occurred at the time of the original purchase
of the exchanged shares (if such original purchase occurred prior to April 1,
1996, then no CDSC would be imposed upon such a redemption).
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of each Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud,
each Fund requires, in certain instances as indicated above, that the
shareholder's signature be guaranteed. In these cases the shareholder's
signature must be guaranteed by an eligible bank, broker, dealer, credit union,
national securities exchange, registered securities association, clearing agency
or savings association. Signature guarantees shall be accepted in accordance
with policies established by the Shareholder Servicing Agent.
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REINSTATEMENT PRIVILEGE. Shareholders of a Fund who have redeemed their
shares have a one-time right to reinvest the redemption proceeds in the same
class of shares of any of the MFS Funds (if shares of such Fund are available
for sale) at net asset value (with a credit for any CDSC paid) within 90 days of
the redemption pursuant to the Reinstatement Privilege. If the shares credited
for any CDSC paid are then redeemed within six years of the initial purchase in
the case of Class B shares or within 12 months of the initial purchase for Class
C shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of each Fund
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder. Each Fund has reserved
the right to pay other redemptions, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's portfolio.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost
of maintaining small accounts, each Fund reserves the right to redeem shares in
any account for their then-current value if at any time the total investment in
such account drops below $500 because of redemptions, except in the case of
accounts being established for monthly automatic investments and certain payroll
savings programs, Automatic Exchange Plan accounts and tax-deferred retirement
plans, for which there is a lower minimum investment requirement. See "Purchases
- - General - Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
DISTRIBUTION PLANS
The Trustees have adopted separate Distribution Plans for Class A, Class B and
Class C shares 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 each Fund and
its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
common features, as described below.
SERVICE FEES. Each Distribution Plan provides that a Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (I.E., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of a 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 a Fund may pay
MFD a distribution fee in addition to the service fee described above 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 Funds - Distributor" in the SAI. The amount of the
distribution fee paid by a 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 expenses
incurred by MFD under its distribution agreement with the Fund, the Fund is not
liable to MFD for any losses MFD may incur in performing services under its
distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under 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.
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<PAGE>
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 a Fund's average daily net assets
attributable to Class A shares. As noted above, MFD may use the distribution fee
to cover distribution-related expenses incurred by it under its distribution
agreement with the Fund, including commissions to dealers and payments to
wholesalers employed by MFD (E.G., MFD pays commissions to dealers with respect
to purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). Distribution fee payments under the Class A
Distribution Plan may be used by MFD to pay securities dealers a distribution
fee in an amount equal to 0.25% per annum of each Fund's average daily net
assets attributable to Class A shares (other than Class A shares that have
converted from Class B shares) owned by investors from whom that securities
dealer is the holder or dealer of record. See "Purchases - Class A Shares"
above. In addition, to the extent that the aggregate service and distribution
fees paid under the Class A Distribution Plan do not exceed 0.50% per annum of
the average daily net assets of a Fund attributable to Class A shares, the Fund
is permitted to pay such distribution-related expenses or other
distribution-related expenses.
CLASS B DISTRIBUTION PLAN. Class B shares 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 a 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, a 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 an initial sales charge but subject to a CDSC upon redemption of
1.00% during the first year See "Purchases - Class C shares" above. MFD will pay
a commission to dealers of 1.00% of the purchase price of Class C shares
purchased through dealers at the time of purchase. In compensation for this
1.00% commission paid by MFD to dealers, MFD will retain the 1.00% per annum
Class C distribution and service fees paid by the Fund with respect to such
shares for the first year after purchase, and dealers will become eligible to
receive from MFD the ongoing 1.00% per annum distribution and service fees paid
by the Fund to MFD with respect to such shares commencing in the thirteenth
month following purchase.
This ongoing 1.00% fee is comprised of the 0.25% per annum service fee
paid to MFD under the Class C Distribution Plan (which MFD in turn pays to
dealers), as discussed above, and a distribution fee paid to MFD (which MFD also
in turn pays to dealers) under the Class C Distribution Plan equal, on an annual
basis, to 0.75% of a Fund's average daily net assets attributable to Class C
shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: Each Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.00%,
1.00% and 1.00%, per annum, respectively. Distribution and service fees under
the Class A Distribution Plan are currently being waived on a voluntary basis
and may be imposed at the discretion of MFD.
DISTRIBUTIONS
Each Fund intends to pay substantially all of its net investment income to its
shareholders as dividends at least annually. In determining the net investment
income available for distributions, each Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. If a Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. Each Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either 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 a Fund with respect to Class A shares will generally be
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greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
Each Fund is treated as an entity separate from the other Funds and the other
series of the Trust for federal income tax purposes. In order to minimize the
taxes each Fund would otherwise be required to pay, each Fund intends to qualify
each year as a "regulated investment company" under Subchapter M of the Code,
and to make distributions to its shareholders in accordance with the timing
requirements imposed by the Code. It is expected that the Funds will not be
required to pay entity level federal income or excise taxes, although
foreign-source income received by a Fund may be subject to foreign withholding
taxes.
Shareholders of a Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or additional shares. A portion of
the dividends received from each Fund (but none of the Funds' capital gains
distributions) may qualify for the dividends-received deduction for
corporations. Shortly after the end of each calendar year, each shareholder of a
Fund will be sent a statement that sets forth the federal income tax status of
all of the Fund's dividends and distributions for that calendar year, including
any portion taxable as ordinary income, any 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 a Fund's net asset value per share. Shareholders
who buy shares just before a Fund makes a distribution may thus pay the full
price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Each Fund intends to withhold U.S. federal income tax at a rate of 30% on
dividends and any other payments that are subject to such withholding and that
are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
Each Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on 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 Funds' Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in a Fund.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in a 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 in "good order" by the dealer prior to its
calculation and received by the dealer prior to the close of that business day.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Funds (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 Funds; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Funds; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Funds' custodian, for all services to the Funds,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Funds;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses are borne by the Funds 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 are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
Subject to termination or revision at the discretion of MFS, MFS has agreed to
pay until August 31, 2006 the foregoing expenses of the Equity Income Fund, the
Core Growth Fund, the Aggressive Growth Fund and the Special Opportunities Fund
such that each Fund's
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aggregate operating expenses do not exceed, on an annualized basis, 1.50% of the
average daily net assets with respect to Class A shares, 2.57% of the average
daily net assets with respect to Class B shares, and 2.50% of the average daily
net assets with respect to Class C shares. Such payments by MFS are subject to
reimbursement by each Fund which will be accomplished by the payment by the Fund
of an expense reimbursement fee to MFS computed and paid monthly as a percentage
of its average daily net assets for its then-current fiscal year, with a
limitation that immediately after such payment the aggregate operating expenses
of a Fund would not exceed the above-referenced percentage limitations. The
expense reimbursement agreement terminates for each Fund on the earlier of the
date on which payments made thereunder by the Fund equal the prior payment of
such reimbursable expenses by MFS or August 31, 2006.
Subject to termination or revision at the discretion of MFS, MFS has agreed to
pay until August 31, 2007 the foregoing expenses of the Convertible Securities
Fund, the Blue Chip Fund, the New Discovery Fund, the Science and Technology
Fund and the Research International Fund such that each Fund's aggregate
operating expenses do not exceed, on an annualized basis, 1.50% (1.75% for the
Research International Fund) of the average daily net assets with respect to
Class A shares, 2.57% (2.82% for the Research International Fund) of the average
daily net assets with respect to Class B shares, and 2.50% (2.75% for the
Research International Fund) of the average daily net assets with respect to
Class C shares. Such payments by MFS are subject to reimbursement by each Fund
which will be accomplished by the payment by the Fund of an expense
reimbursement fee to MFS computed and paid monthly as a percentage of its
average daily net assets for its then-current fiscal year, with a limitation
that immediately after such payment the aggregate operating expenses of a Fund
would not exceed the above-referenced percentage limitations. The expense
reimbursement agreement terminates for each Fund on the earlier of the date on
which payments made thereunder by the Fund equal the prior payment of such
reimbursable expenses by MFS or August 31, 2007.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
Each Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without par
value). Each Fund also has a class of shares which it offers exclusively to
certain retirement plans established for the benefit of employees of the Adviser
and its affiliates, entitled Class P shares. As of the date of this Prospectus,
the Trust has thirteen series of shares. The Trust has reserved the right to
create and issue additional classes and series of shares, in which case each
class of shares of a series would participate equally in the earnings, dividends
and assets attributable to that class of that particular series. Shareholders
are entitled to one vote for each share held and shares of each series would be
entitled to vote separately to approve investment advisory agreements or changes
in investment restrictions, but shares of all series would vote together in the
election of Trustees and selection of accountants. Additionally, each class of
shares of a series will vote separately on any material increases in the fees
under its Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Trust's Declaration of Trust provides that a
Trustee may be removed from office in certain instances (see "Description of
Shares, Voting Rights and Liabilities" in the SAI).
Each share of a class of each Fund represents an equal proportionate interest in
that Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth in "Purchases -- Conversion of Class B shares"). Shares are fully paid and
non-assessable. Should a Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, each Fund may provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as the Lipper
Analytical Services, Inc., and Wiesenberger Investment Companies Service. Yield
quotations are based on the annualized net investment income per share allocated
to each class of a Fund over a 30-day period stated as a percent of the maximum
public offering price of that class on the last day of that period. Yield
calculations for Class B and Class C shares assume no CDSC is paid. The current
distribution rate for each class is generally based upon the total amount of
dividends per share paid by a Fund to shareholders of that class during the past
12 months and is computed by dividing the amount of such dividends by the
maximum public offering price of that class at the end of such period. Current
distribution rate calculations for Class B and Class C shares assumes 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
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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 a Fund
made at the maximum public offering price of the shares of that class with all
distributions reinvested and which will give effect to the imposition of any
applicable CDSC assessed upon redemptions of the Fund's Class B and Class C
shares. Such total rate of return quotations may be accompanied by quotations
which do not reflect the reduction in value of the initial investment due to the
sales charge or the deduction of the 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 a Fund over a stated period of time, while total rate of
return reflects all components of investment return over a stated period of
time. A Fund's quotations may from time to time be used in advertisements,
shareholder reports or other communications to shareholders. For a discussion of
the manner in which a Fund will calculate its yield, current distribution rate
and total rate of return, see the SAI. For further information about the Funds'
performance for the fiscal year ended August 31, 1996, please see the Funds'
annual report. . The Convertible Securities Fund, Blue Chip Fund, New Discovery
Fund, Science and Technology Fund and Research International Fund did not
commence investment operations prior to August 31, 1996. A copy of the Funds'
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, each Fund may, in its discretion,
from time to time, make a list of all or a portion of its holdings available to
investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of a Fund, should contact the Shareholder Servicing
Agent (see back cover for address and phone number). A shareholder whose shares
are held in the name of, or controlled by, a dealer might not receive many of
the privileges and services from a Fund (such as Right of Accumulation, Letter
of Intent and certain recordkeeping services) that a Fund ordinarily provides.
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is specified;
-- Dividends (including short-term capital gains) in cash; capital gain
distributions reinvested in additional shares; or
-- 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 each Fund. If a shareholder has elected to receive
dividends and/or capital gain distributions in cash, and the postal or other
delivery service is unable to deliver checks to the shareholder's address of
record, or the shareholder does not respond to mailings from the Shareholder
Servicing Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, each
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with a Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of a Fund alone or in combination with shares of Class B or Class C shares of a
Fund or any of the classes of other MFS Funds or MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or 36-month period for
purchases of $1 million or more), the shareholder may obtain such shares at the
same reduced sales charge as though the total quantity were invested in one lump
sum, subject to escrow agreements and the appointment of an attorney for
redemptions from the escrow amount if the intended purchases are not completed,
by completing the Letter of Intent section of the Account Application.
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<PAGE>
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of a Fund
may be sold at net asset value (and 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 a 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 (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one 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 and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account twice monthly, monthly or quarterly.
Required forms are available from the Shareholder Servicing Agent or investment
dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic monthly or quarterly exchanges of funds from the shareholder's account
in an MFS Fund for investment in the same class of shares of other MFS Funds
selected by the shareholder (if available for sale). Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to four
different funds. A shareholder should consider the objectives and policies of a
fund and review its prospectus before electing to exchange money into such fund
through the Automatic Exchange Plan. No transaction fee is imposed in connection
with exchange transactions under the Automatic Exchange Plan. However, exchanges
of shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares transferred and, therefore, could result in a capital gain
or loss to the shareholder making the exchange. See the SAI for further
information concerning the Automatic Exchange Plan. Investors should consult
their tax advisers for information regarding the potential capital gain and loss
consequences of transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining an investment program concurrently with a withdrawal program
would be disadvantageous because of the sales charges included in share
purchases in the case of Class A shares, and because of the assessment of the
CDSC for share redemption (if applicable) in the case of Class A shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
Shares," shares of each Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, Simplified Employee Pension plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax advisers before establishing any of the
tax-deferred retirement plans described above.
-------------------------
The Funds' SAI contains more detailed information about each Fund, including,
but not limited to, information related to: (i) each Fund's investment policies
and restrictions; (ii) the Trustees, officers and Adviser; (iii) portfolio
trading; (iv) the shares, including rights and liabilities of shareholders; (v)
tax status of dividends and distributions; (vi) the Distribution Plans; and
(vii) various services and privileges provided by each Fund for the benefit of
its shareholders, including additional information with respect to the exchange
privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III).
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 and Class C shares, as
applicable, are waived:
1. DIVIDEND REINVESTMENT
Shares acquired through dividend or capital gain reinvestment; and
Shares acquired by automatic reinvestment of distributions of
dividends and capital gains of any fund in the 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 MFS, Sun Life or any of their subsidiary companies;
Trustees and retired trustees of any investment company for which 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.
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases - General
- Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("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
A - 1
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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:
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.
A - 2
<PAGE>
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.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the CDSC imposed on redemptions of Class B and
Class C shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
Systematic Withdrawal Plan redemptions with respect to up to 10% per
year of the account value at the time of establishment.
2. DEATH OF OWNER
Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a
living trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled
individual's name or in a living trust for the benefit of the
disabled individual (in which case a disability certification
form is required to be submitted to the Shareholder Servicing
Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made
under the following circumstances:
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 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 - 3
<PAGE>
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(I.E., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
B - 1
<PAGE>
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 or a plus or minus signed to show relative standing within the major
categories.
NR: indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA'. Because bonds rated
in the `AAA' and `AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated `F-1+'.
A: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin
B - 3
<PAGE>
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 designed 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>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: 800-225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[LOGO]
INVESTMENT MANAGEMENT
MFS(R) EQUITY INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) NEW DISCOVERY FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
MFS(R) RESEARCH INTERNATIONAL FUND
500 Boylston Street, Boston, MA 02116
<PAGE>
[LOGO]
INVESTMENT MANAGEMENT
================================================================================
MFS(R) EQUITY INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R)AGGRESSIVE GROWTH FUND STATEMENT OF ADDITIONAL INFORMATION
MFS(R)SPECIAL OPPORTUNITIES FUND JANUARY 1, 1997
MFS(R)CONVERTIBLE SECURITIES FUND
MFS(R)BLUE CHIP FUND
MFS(R)NEW DISCOVERY FUND
MFS(R)SCIENCE AND TECHNOLOGY FUND
MFS(R)RESEARCH INTERNATIONAL FUND
(Members of the MFS Family of Funds(R))
Each a series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
PAGE
1. Definitions........................................................ 1
2. Investment Objectives, Policies and Restrictions................... 1
3. Management of the Funds............................................18
Trustees..................................................18
Officers..................................................18
Investment Adviser........................................19
Sub-Investment Advisers...................................20
Custodian.................................................20
Shareholder Servicing Agent...............................21
Distributor...............................................21
4. Portfolio Transactions and Brokerage Commissions...................21
5. Shareholder Services...............................................23
Investment and Withdrawal Programs........................23
Exchange Privilege........................................25
Tax-Deferred Retirement Plans.............................26
6. Tax Status.........................................................26
7. Distribution Plans.................................................27
8. Determination of Net Asset Value and Performance...................28
9. Description of Shares, Voting Rights and Liabilities...............31
10. Independent Auditors and Financial Statements......................32
Appendix A - Trustee Compensation Table............................A-1
This Statement of Additional Information ("SAI"), as amended or supplemented
from time to time, sets forth information which may be of interest to investors
but which is not necessarily included in the Funds' Prospectus dated January 1,
1997. This SAI should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number).
THIS SAI IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
I. DEFINITIONS
Equity Income Fund MFS(R) Equity Income Fund, a diversified series
of the Trust.
Core Growth Fund MFS(R) Core Growth Fund, a
diversified series of the Trust.
Aggressive Growth MFS(R) Aggressive Growth Fund, a
Fund diversified series of the Trust.
Special MFS(R) Special Opportunities Fund, a
Opportunities Fund non-diversified series of the Trust.
Convertible MFS(R) Convertible Securities Fund, a
Securities Fund diversified series of the Trust.
Blue Chip Fund MFS(R) Blue Chip Fund, a diversified
series of the Trust.
New Discovery Fund MFS(R) New Discovery Fund, a diversified
series of the Trust.
Science and MFS(R) Science and Technology Fund, a
Technology Fund diversified series of the Trust.
Research MFS(R) Research International Fund, a
International Fund diversified series of the Trust.
"Fund(s)" Equity Income Fund, Core Growth
Fund, Aggressive Growth Fund,
Special Opportunities Fund,
Convertible Securities Fund, Blue
Chip Fund, New Discovery Fund,
Science and Technology Fund and
Research International Fund.
"Trust" MFS Series Trust I, a Massachusetts
business Trust, organized on July
22, 1986. The Trust was known as
"MFS Lifetime Managed Sectors Fund"
prior to August 1, 1993, and as
"Lifetime Managed Sectors Trust"
prior to August 3, 1992.
"MFS" or Massachusetts Financial Services
the "Adviser" Company, a Delaware corporation.
"Sub-Advisers" Foreign & Colonial Management Limited, a company
incorporated under the laws of England and Wales ("FCM")
and Foreign & Colonial Emerging Markets Limited, a company
incorporated under the laws of England and Wales ("FCEM").
"MFD" MFS Fund Distributors, Inc., a
Delaware corporation.
"Prospectus" The Prospectus of the Funds, dated January 1, 1997, as
amended or supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES. The investment objective and policies of
each Fund are described in the Prospectus and below. The following discussion of
each Fund's investment techniques and restrictions supplements, and should be
read in conjunction with, the information set forth in the "Investment
Objectives and Policies," "Investment Techniques" and "Additional Risk Factors"
sections of the Prospectus.
INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: Each Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms of the New York Stock Exchange (the "Exchange") (and subsidiaries thereof)
and member banks of the Federal Reserve System, and would be required to be
secured continuously by collateral in cash, an irrevocable letter of credit or
U.S. Treasury securities maintained on a current basis at an amount at least
equal to the market value of the securities loaned. A Fund would have the right
to call a loan and obtain the securities loaned at any time on customary
industry settlement notice (which will not usually exceed five business days).
For the duration 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 from the investment of the collateral (if the
collateral is in the form of cash). A Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund 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 can be earned
currently from securities loans of this type justifies the attendant risk. 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 a Fund's net
assets.
REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements with
sellers who are member firms (or a subsidiary thereof) of 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 a Fund purchases and holds
through its agent are U.S. Government securities, the values of
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<PAGE>
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 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, a Fund
will have the right to liquidate the securities. If at the time the Fund is
contractually entitled to exercise its right to liquidate the securities, the
seller is subject to a proceeding under the bankruptcy laws or its assets are
otherwise subject to a stay order, the Fund's exercise of its right to liquidate
the securities may be delayed and result in certain losses and costs to the
Fund. Each Fund has adopted and follows procedures which are intended to
minimize the risks of repurchase agreements. For example, a Fund only enters
into repurchase agreements after the Adviser 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.
"WHEN-ISSUED" SECURITIES: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When a Fund commits to purchase these
securities 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 (the "SEC") concerning such purchases. Since that policy
currently recommends that an amount of each Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment, a
Fund will always have cash, short-term money market instruments or high quality
debt securities (if consistent with the Fund's investment policies) sufficient
to cover any commitments or to limit any potential risk. Although no Fund
intends to make such purchases for speculative purposes and intends to adhere to
the provisions of the SEC policy, purchases of securities on such bases may
involve more risk than other types of purchases. For example, a Fund may have to
sell assets which have been set aside in order to meet redemptions. Also, if a
Fund determines it 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.
FOREIGN SECURITIES: Each Fund may invest in dollar-denominated and non
dollar-denominated foreign securities. As discussed in the Prospectus, investing
in foreign securities generally represents 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, a Fund may receive interest or dividend
payments, or the proceeds of the sale or redemption of such securities, in the
foreign currencies in which such securities are denominated. 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, a Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS: Each Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. Each Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the U.S. can
reduce costs and delays as well as potential currency exchange and other
difficulties. Each Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. Each Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the U.S. 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 "DOLLAR ROLL" TRANSACTIONS: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities 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, a Fund foregoes principal and interest paid on the mortgage-backed
- 2 -
<PAGE>
securities. Each 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. Each Fund may also be compensated by receipt of a
commitment fee. 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.
CORPORATE ASSET-BACKED SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities 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. 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 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. Each 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
Equity Income Fund, the Special Opportunities Fund and the Convertible
Securities 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 (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes 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 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 of interest payments or
principal payments.
Each of the Equity Income Fund, the Special Opportunities Fund and the
Convertible Securities 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.
STRIPPED MORTGAGE-BACKED SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities Fund may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
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
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<PAGE>
"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, a Fund may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities are
traded among institutional investors and investment banking firms.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities Fund may purchase loans and
other direct indebtedness. In purchasing a loan, a Fund acquires some or all of
the interest of a bank or other lending institution in a loan to a corporate,
governmental or other borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer a Fund more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
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 a
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. A Fund may also purchase trade or other claims against
companies, which generally represent money owned 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 loans and the other direct indebtedness acquired by a Fund may
involve revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring a Fund to increase its investment
in a company at a time when the Fund might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that a Fund is committed to
advance additional funds, it will at all times hold and maintain in a segregated
account cash or other high grade debt obligations in an amount sufficient to
meet such commitments.
A Fund's ability to receive payment 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 loans and other direct indebtedness
which a Fund will purchase, the Adviser will rely upon its own (and not the
original lending institution's) credit analysis of the borrower. As a Fund may
be required to rely upon another lending institution to collect and pass onto
the Fund amounts payable with respect to the loan and to enforce the Fund's
rights under the loan and other direct indebtedness, an insolvency, bankruptcy
or reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower and
the lending institution as an "issuer" of the loan for purposes of certain
investment restrictions pertaining to the diversification of the Fund's
portfolio investments. The highly leveraged nature of many such loans and other
direct indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans and other direct indebtedness may involve additional risk to a Fund.
MORTGAGE PASS-THROUGH SECURITIES: The Equity Income Fund, the Special
Opportunities Fund and the Convertible Securities 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 prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to the
Fund may be different than the quoted yield on the securities. Mortgage premiums
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
mortgage pass-through securities generally will decline; however, when interest
rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed-income
securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the Government National Mortgage Association ("GNMA")); or guaranteed by
agencies or instrumentalities of the U.S. Government (such as the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation
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("FHLMC"), which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental 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.
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 GNMA) are described as "modified pass-through"
securities. These securities entitle the holder to receive all interests and
principal payments owed on the mortgages in the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration ("FHA")-insured or Veterans
Administration ("VA")-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 FNMA and 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
sellers/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 is also a government-sponsored corporation owned by private stockholders.
FHLMC issues Participation Certificates ("PCs") which represent interests in
conventional mortgages (I.E., not federally insured or guaranteed) for FHLMC's
national portfolio. FHLMC guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the underlying mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. Each such Fund may also buy mortgage-related securities without
insurance or guarantees.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Equity Income
Fund, the Special Opportunities Fund and the Convertible Securities Fund may
invest in 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 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 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 than
debt obligations which make regular payments of interest. Each Fund will accrue
income on such investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
each Fund's distribution obligations
SHORT SALES: The Special Opportunities Fund, the Convertible Securities Fund,
the New Discovery Fund and the Science and Technology Fund each may seek to
hedge investments or realize additional gains through short sales. Short sales
are transactions in which a Fund sells a security it does not own, in
anticipation of a
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decline in the market value of that security. To complete such a transaction,
the Fund must borrow the security to make delivery to the buyer. The Fund then
is obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
which accrue during the period of the loan. To borrow the security, the Fund
also may be required to pay a premium, which would increase the cost of the
security sold. The net proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out. The Fund also will incur transaction costs in effecting
short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends or interest the Fund may be required to pay in connection with a short
sale.
The Special Opportunities Fund, the Convertible Securities Fund, the Discovery
Fund and the Science and Technology Fund may each make short sales "against the
box," I.E., when a security identical to or convertible or exchangeable into one
owned by the Fund is borrowed and sold short. Each Fund may also enter into so
called "naked" short sales, I.E., when a security identical to or exchangeable
into the security borrowed and sold short is not owned by the Fund.
No securities will be sold short by a Fund if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 40%
of the value of the Fund's net assets.
Whenever the Fund engages in short sales, its custodian segregates cash or U.S.
Government securities in an amount that, when combined with the amount of
collateral deposited with the broker in connection with the short sale, equals
the current market value of the security sold short. The segregated assets are
marked to market daily.
INDEXED SECURITIES: Each 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 (I.E., principal value) 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 principal value or interest rates 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.
SWAPS AND RELATED TRANSACTIONS: Each Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A Fund is not limited
to any particular form or variety of swap agreement if MFS determines it is
consistent with the Fund's investment objective and policies.
Each Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If a Fund enters into a
swap agreement on a net basis (I.E., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily 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 a Fund enters into a swap agreement
on other than a net basis, it will maintain cash or liquid assets with a value
equal to the full amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of a Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by a Fund, the Fund must be prepared to make such
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payments when due. In addition, if the counterparty's creditworthiness declined,
the value of the swap agreement would be likely to decline, potentially
resulting in losses.
If the counterparty defaults, a Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. Each Fund
anticipates that it will be able to eliminate or reduce its exposure under these
arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
OPTIONS ON SECURITIES: Each Fund may write (sell) covered put and call options,
and purchase put and call options, on securities. Call and put options written
by a Fund may be covered in the manner set forth below.
A call option written by a Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if a Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by a
Fund is "covered" if the Fund maintains cash, short-term money market
instruments 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 a Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
a 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 a 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 a Fund, provided that another option on such security is
not written. If a 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.
A 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 a Fund is more than the
premium paid for the original purchase. Conversely, a 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 a 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, a Fund may purchase a security and then write a call option against that
security. The exercise price of the call option the Fund determines to write
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, a 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 a Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, a 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; a
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-
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money, at-the-money and in-the-money put options may be used by a Fund in the
same market environments that call options are used in equivalent buy-and-write
transactions.
Each Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, a 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, a Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, a Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then-current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by a 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.
Each Fund may also 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 a 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, a 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.
Each Fund may also 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 a Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
RESET OPTIONS: In certain instances, each 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 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 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: Each 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."
Each 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 a Fund covers
a call option on a stock index through ownership of securities, such securities
may not match the composition of the index and, in that event, the Fund will not
be fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. Each Fund may also cover call options on
stock indices by holding a call on the same index and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of 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
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segregated account with its custodian. Each 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.
Each 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 a Fund has written
a call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the securities it owns. If the value of
the index rises, however, the Fund will realize a loss in its call option
position, which will reduce the benefit of any unrealized appreciation in the
Fund's stock investments. By writing a put option, a Fund assumes the risk of a
decline in the index. To the extent that the price changes of securities owned
by a Fund correlate with changes in the value of the index, writing covered put
options on indices will increase a Fund's losses in the event of a market
decline, although such losses will be offset in part by the premium received for
writing the option.
Each Fund may also purchase put options on stock indices to hedge its
investments against a decline in value. By purchasing a put option on a stock
index, a Fund will seek to offset a decline in the value of securities it owns
through appreciation of the put option. If the value of the Fund's investments
does not decline as anticipated, or if the value of the option does not
increase, the Fund's loss will be limited to the premium paid for the option
plus related transaction costs. The success of this strategy will largely depend
on the accuracy of the correlation between the changes in value of the index and
the changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by a Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, a Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when a Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
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.
"YIELD CURVE" OPTIONS: Each Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, a Fund may purchase or write such options for hedging
purposes. For example, a 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. A 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 a 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, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling.
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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 each Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which 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 a Fund for writing the option, plus the
amount, if any, of the option's intrinsic value (I.E., the amount that the
option is in-the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike price of the
option if the option is written out-of-the-money. Each Fund will treat all or a
part of the formula price as illiquid for purposes of the SEC illiquidity
ceiling. Each Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these options as illiquid for purposes of such SEC illiquidity ceiling.
FUTURES CONTRACTS: Each Fund may purchase and sell futures contracts ("Futures
Contracts") on stock indices, and may purchase and sell Futures Contracts on
foreign currencies or indices of foreign currencies. The Equity Income Fund, the
Special Opportunities Fund and the Convertible Securities Fund may purchase and
sell Futures Contracts on foreign or domestic fixed income securities or indices
of such securities including municipal bond indices and any other indices of
foreign or domestic fixed income securities that may become available for
trading. 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
are 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 Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable - a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, a 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 a 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 a Fund's current or intended
investments in fixed income securities. For example, if a Fund owned long-term
bonds and interest rates were expected to increase, that 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 that Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of that 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, a
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 that Fund's cash reserves could then
be used to buy long-term bonds on the
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cash market. A Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures market is more liquid than the
cash market, the use of interest rate futures contracts as a hedging technique
allows a Fund to hedge its interest rate risk without having to sell its
portfolio securities.
As noted in the Prospectus, a 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. A 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, a 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 a 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.
FORWARD CONTRACTS: Each Fund may enter into contracts for the purchase or sale
of a specific currency at a future date at a price set at the time the contract
is entered into (a "Forward Contract"), for hedging purposes as well as for
non-hedging purposes. Each Fund may also enter into Forward Contracts for
"cross-hedging" purposes as noted in the Prospectus. The Fund will enter into
Forward Contracts for the purpose of protecting its current or intended
investments from fluctuations in currency exchange rates.
A Forward Contract to sell a currency may be entered into where a 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.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or the increase in the cost of securities 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 forego all or a portion of the benefits which otherwise could have been
obtained from favorable movements in exchange rates. Each Fund does not
presently intend to hold Forward Contracts entered into until maturity, at which
time it would be required to deliver or accept delivery of the underlying
currency, but will seek in most instances to close out positions in such
Contracts by entering into offsetting transactions, which will serve to fix the
Fund's profit or loss based upon the value of the Contracts at the time the
offsetting transaction is executed.
Each Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such Contracts. In those instances in which 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 FUTURES CONTRACTS: Each Fund also may purchase and write options to
buy or sell those Futures Contracts in which it may invest ("Options on Futures
Contracts") as described above under "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 Fund (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 a Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the
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exchange clearinghouse. In addition, Options on Futures Contracts may be traded
on foreign exchanges. A 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. A Fund may cover the writing of put Options on
Futures Contracts (a) through sales of the underlying Futures Contract, (b)
through segregation of cash, short-term money market instruments 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
a Fund, the Fund will be required to sell the underlying Futures Contract which,
if the Fund has covered its obligation through the purchase of such Contract,
will serve to liquidate its futures position. Similarly, where a put Option on a
Futures Contract written by a Fund is exercised, the Fund will be required to
purchase the underlying Futures Contract which, if the Fund has covered its
obligation through the sale of such Contract, will close out its futures
position.
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, a
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a Futures
Contract constitutes a partial hedge against increasing prices of the 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, a 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 a Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, a Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
Each Fund may purchase Options on Futures Contracts for hedging purposes 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, a 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 in part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by a Fund will increase prior to acquisition, due to a
market advance or changes in interest or exchange rates, a Fund could purchase
call Options on Futures Contracts, rather than purchasing the underlying Futures
Contracts.
OPTIONS ON FOREIGN CURRENCIES: Each 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,
a 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 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, each 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 forego a portion or all of the benefits of
advantageous changes in such rates. Each 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 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.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which,
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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 a 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 a
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, a Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
ADDITIONAL RISK FACTORS:
OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH A FUND'S PORTFOLIO. A
Fund's ability 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 depends 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 a 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 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, a 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 instruments. 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 a Fund
enters into transactions in options, or futures on narrowly-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 Contracts 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 indices,
options on currencies and Options on Futures Contracts, a 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 a Fund in connection with such transactions.
In writing a covered call option on a security, index or futures contract, a
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 a 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 a Fund's portfolio. When a 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.
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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, a Fund may be required
to forego 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, a Fund's overall return may be lower than
if it had not engaged in the hedging transactions.
The Funds may enter transactions in options (except for Options on Foreign
Currencies), Futures Contracts, Options on Futures Contracts and Forward
Contracts for non-hedging purposes as well as hedging purposes. 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 Funds 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 a 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. Entering into
transactions in Futures Contracts, Options on Futures Contracts and Forward
Contracts for other than hedging purposes could expose the Fund to significant
risk of loss if foreign currency exchange rates do not move in the direction or
to the extent anticipated.
With respect to the writing of straddles on securities, a 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 a 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 Funds 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 a 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 to 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 a 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 a 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 exchange 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 portfolios
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk a Fund assumes when it
purchases an Option on a Futures
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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 a 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 a Fund makes investment and trading decisions in 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 market 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 a 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 a
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. 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 a 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 a 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. A
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 indices, 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 a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
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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 a Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
Each Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of such Fund's total assets. In addition, a Fund will not purchase put and call
options on Futures Contracts if as a result more than 5% of its total assets
would be invested in such options.
When a 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 Contract is
minimized.
RISKS OF INVESTING IN LOWER RATED BONDS
The Equity Income Fund, the Special Opportunities Fund, the Convertible
Securities Fund, the New Discovery Fund, and the Science and Technology Fund may
invest in fixed income securities, and may invest in convertible securities,
rated Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard &
Poor's Ratings Services ("S&P") or Fitch Investors Service, Inc. ("Fitch"), and
comparable unrated securities. These securities, while normally exhibiting
adequate protection parameters, have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than in the case of higher
grade fixed income securities.
These Funds may also invest in fixed income securities rated Ba or lower by
Moody's or BB or lower by S&P or Fitch, and comparable unrated securities
(commonly known as "junk bonds") to the extent described in the Prospectus. No
minimum rating standard is required by a 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 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. 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 a 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. To the extent a Fund
invests in these lower rated securities, the achievement of its investment
objectives may be a more dependent on the Adviser's own credit analysis than in
the case of a fund investing in higher quality fixed income securities. These
lower rated securities may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
--------------------------
Each Fund's limitations, policies and ratings restrictions are adhered to at the
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
--------------------------
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The policies stated above are not fundamental and may be changed without
shareholder approval, as may each Fund's investment objective.
INVESTMENT RESTRICTIONS. Each Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of a 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 series or class, as applicable or (ii) 67%
or more of the outstanding shares of the Trust or a series or class, as
applicable, present at a meeting at which 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):
Each Fund may not:
(1) borrow amounts in excess of 331/3 of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as a Fund
may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein
and securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein), interests in oil, gas
or mineral leases, commodities or commodity contracts (excluding
Options, Options on Futures Contracts, Options on Stock Indices,
Options on Foreign Currency and any other type of option, Futures
Contracts, any other type of futures contract, and Forward Contracts)
in the ordinary course of its business. Each Fund reserves the freedom
of action to hold and to sell real estate, mineral leases, commodities
or commodity contracts (including Options, Options on Futures
Contracts, Options on Stock Indices, Options on Foreign Currency and
any other type of option, Futures Contracts, any other type of futures
contract, and Forward Contracts) acquired as a result of the ownership
of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to
any type of option (including Options on Futures Contracts, Options,
Options on Stock Indices and Options on Foreign Currencies), short
sale, Forward Contracts, Futures Contracts, any other type of futures
contract, and collateral arrangements with respect to initial and
variation margin, are not deemed to be the issuance of a senior
security;
(5) make loans to other persons. For these purposes, the purchase of
short-term commercial paper, the purchase of a portion or all of an
issue of debt securities, the lending of portfolio securities, or the
investment of a Fund's assets in repurchase agreements, shall not be
considered the making of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in
securities of issuers whose principal business activities are in the
same industry (except obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase
agreements collateralized by such obligations).
Except with respect to Investment Restriction (1), these investment restrictions
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
In addition, each Fund has the following nonfundamental policies which may be
changed without shareholder approval. Each Fund will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily
available market (E.G., trading in the security is suspended, or, in
the case of unlisted securities, where no market exists), if more than
15% of a 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 a Fund's limitation
on investment in illiquid securities. 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 a 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 a Fund's net assets, may be warrants
which are not listed on the New York or American Stock Exchange.
Warrants acquired by a Fund in units or attached to securities may be
deemed to be without value;
(3) invest for the purpose of exercising control or management;
(4) purchase securities issued by any other investment company in excess
of the amount permitted by the 1940 Act;
(5) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of
each Fund, or is an officer or a director of the investment adviser of
each Fund, if one or more of such persons also owns beneficially more
than 1/2 of 1% of the securities of such issuer, and such persons
owning more than 1/2 of 1% of such securities together own
beneficially more than 5% of such securities;
(6) purchase any securities or evidences of interest therein on margin,
except that a Fund may obtain such short-term credit as may be
necessary for the clearance of any transaction and except that a Fund
may make margin deposits in connection with any type of option
(including Options on Futures Contracts, Options, Options on Stock
Indices and Options on Foreign Currencies), any short
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sale, any type of futures contract (including Futures Contracts), and
Forward Contracts;
(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 (including Options on Futures Contracts,
Options, Options on Stock Indices and Options on Foreign Currencies),
any short sale, any type of futures contract (including Futures
Contracts), Forward Contracts and payments of initial and variation
margin in connection therewith, are not considered a pledge of assets;
or
(9) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership,
holding or sale of (i) warrants where the grantor of the warrants is
the issuer of the underlying securities or (ii) put or call options or
combinations thereof with respect to securities, indexes of
securities, Options on Foreign Currencies or any type of futures
contract (including Futures Contracts) or (b) the purchase, ownership,
holding or sale of contracts for the future delivery of securities or
currencies.
3. MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees provides broad supervision over the affairs of
each Fund. The Adviser is responsible for the investment management of each
Fund's assets, and the officers of the Trust are responsible for its operations.
The Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
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 funds), 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
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
JAMES O. YOST,* Assistant Treasurer
Massachusetts Financial Services Company, 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
------------------------
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* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
While each Fund pays the compensation of the non-interested Trustees and Mr.
Bailey, the Trustees are currently waiving their rights to receive such fees.
Each Fund 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 5 years of service, he would be entitled to
annual payments during his lifetime of up to 50% of such Trustee's average
annual compensation (based on the three years prior to his retirement) depending
on his length of service. A Trustee may also retire prior to age 75 and receive
reduced payments if he has completed at least 5 years of service. Under the
plan, a Trustee (or his beneficiaries) will also receive benefits for a period
of time in the event the Trustee is disabled or dies. These benefits will also
be based on the Trustee's average annual compensation and length of service.
There is no retirement plan provided by the Trust for Messrs. Brodkin, Scott and
Shames. Each Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid by each Fund during its last fiscal year to the Trustees.
As of August 31, 1996, the Trustees and officers as a group owned less than 1%
of each Fund's shares, not including the 671,188 shares of the Aggressive Growth
Fund, 28,720 shares of the Core Growth Fund, 9,892 shares of the Equity Income
Fund and 136,098 shares of the Special Opportunities Fund (which represent
approximately 81.1%, 51.6% 22.9% and 68.5% of the outstanding shares of each
such Fund, respectively) owned of record by certain employee benefit plans of
MFS of which Messrs. Brodkin, Scott and Shames are Trustees.
As of August 31, 1996, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA
02116-3740 was the record owner of approximately 81.09% of the outstanding Class
A shares of the Aggressive Growth Fund.
As of August 31, 1996, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA
02116-3740, Ruth M. Scott, 176 Fisherville Lane, Westport, MA 02790-1506 and
Massachusetts Financial Services Company, c/o Robert Blake, 500 Boylston Street,
Boston, MA 02116-3740 were the record owners of approximately 51.60%, 5.39% and
36.44%, respectively, of the outstanding Class A shares of the Core Growth Fund.
As of August 31, 1996, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA
02116-3740 was the record owner of approximately 92.5% of the outstanding Class
A shares of the Equity Income Fund.
As of August 31, 1996, MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services Company, 500 Boylston Street, Boston, MA
02116-3740, and Robert J. Manning and Donna Manning, JTWROS, 13 Rockyledge Road,
Swampscott, MA 01907-2821, were the record owners of approximately 68.45% and
17.95%, respectively, of the outstanding Class A shares of the Special
Opportunities Fund.
The Convertible Securities Fund, the Blue Chip Fund, the New Discovery Fund, the
Science and Technology Fund and the Research International Fund did not commence
investment operations prior to August 31, 1996.
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 of 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 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 they have not engaged
in willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a wholly
owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT -- The Adviser manages each Fund pursuant to
separate Investment Advisory Agreements, dated January 2, 1996, with respect to
the Equity Income Fund, the Core Growth Fund, the Aggressive Growth Fund and the
Special Opportunities Fund, and December ___, 1996, with respect to the
remaining funds (the "Advisory Agreements"). The Adviser provides each Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for each Fund. For these services and
facilities, the Adviser receives an annual management fee,
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computed and paid monthly, as disclosed in the Prospectus under the heading
"Management of the Funds."
For the period from the commencement of investment of operations on January 2,
1996 to the fiscal year end of August 31, 1996, the Adviser waived its right to
receive management fees from each Fund. The Adviser is currently waiving its
right to receive its management fee from each Fund except the Aggressive Growth
Fund.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
each Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by each Fund in any fiscal year to the extent such
expenses exceed the most restrictive of such state expense limitations. The
Adviser will make appropriate adjustments to such reimbursements in response to
any amendment or rescission of the various state requirements.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing each Fund's investments, effecting its
portfolio transactions, and, in general, administering its affairs.
Each Advisory Agreement will remain in effect until August 1, 1997, with respect
to the Equity Income Fund, the Core Growth Fund, the Aggressive Growth Fund and
the Special Opportunities Fund, and until August 1, 1998 with respect to the
remaining Funds, 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 Objective,
Policies and Restrictions") and, in either case, by a majority of the Trustees
who are not parties to the Advisory Agreement or interested persons of any such
party.
Each Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by vote of a majority of the Fund's shares (as
defined in "Investment Objectives, Policies and Restrictions"), or by either
party on not more than 60 days' nor less than 30 days' written notice. Each
Advisory Agreement provides that if MFS ceases to serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS" and that
MFS may render services to others and may permit other fund clients to use the
initials "MFS" in their names. Each Advisory Agreement also provides that
neither the Adviser nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in the execution and management of the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Advisory Agreement.
SUB-INVESTMENT ADVISERS
FCM - FCM serves as the Research International Fund's sub-adviser pursuant to a
Sub-Advisory Agreement dated _________, 1996 between the Adviser and FCM (the
"FCM Sub-Advisory Agreement"). The FCM Sub-Advisory Agreement provides that the
Adviser may delegate to FCM the authority to make investment decisions for the
Fund. For these services, the Adviser pays FCM an annual fee computed and paid
monthly in an amount equal to 0.40% of the average daily net assets of such
Fund.
FCEM - FCEM serves as the Research International Fund's sub-adviser pursuant to
a separate Sub-Advisory Agreement dated ________, 1996 between FCM and FCEM (the
"FCEM Sub-Advisory Agreement," the "FCM Agreement" and together with the FCM
Sub-Advisory Agreement, the "FCM Agreements"). The FCEM Sub-Advisory Agreement
provides that FCM may delegate to FCEM the authority to make investment
decisions for the Fund. It is presently intended that FCEM will provide
portfolio management services for the portion of the assets of the Fund invested
in emerging markets securities. For these services, FCM pays FCEM an annual fee
computed and paid monthly in an amount equal to [ ]% of the average daily net
assets of the Fund managed by FCEM.
SUB-ADVISORY AGREEMENTS - Each Sub-Advisory Agreement will remain in effect
until August 1, 1998, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Board of Trustees
or by the vote of a majority of the relevant Fund's outstanding shares, and, in
either case, by a majority of the Trustees who are not parties to the
Sub-Advisory Agreement or interested persons of any such party. Each
Sub-Advisory Agreement terminates automatically if it is assigned and may be
terminated without penalty by the Trustees, by vote of a majority of the Fund's
outstanding shares, by the Adviser on not less than 30 days' nor more than 60
days' written notice or, by the Sub-Adviser on not less than 60 days' nor more
than 90 days' written notice.
Each Sub-Advisory Agreement specifically provides that no Sub-Adviser, nor its
personnel shall be liable for any error or judgment or mistake of law or for any
loss arising out of any investment or for any act or omission in the execution
and management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Sub-Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and
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accounts, and calculating the daily net asset value of each class of shares of
each Fund. The Custodian does not determine the investment policies of each Fund
or decide which securities a Fund will buy or sell. Each Fund may, however,
invest in securities of the Custodian and may deal with the Custodian as
principal in securities transactions. The Custodian also acts as the dividend
disbursing agent of each Fund. The Custodian has contracted with the Adviser for
the Adviser to perform certain accounting functions related to options
transactions for which the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is each Fund's shareholder servicing agent, pursuant to an
Amended and Restated Shareholder Servicing Agreement dated January 2, 1996 (the
"Agency Agreement") with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of each Fund. For
these services, the Shareholder Servicing Agent will receive a fee calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively. In addition, the
Shareholder Servicing Agent will be reimbursed by each Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. The Custodian
has contracted with the Shareholder Servicing Agent to perform certain dividend
and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of each Fund pursuant to a Distribution Agreement with the
Trust dated as of January 1, 1995 (the "Distribution Agreement").
CLASS A SHARES: MFD acts as agent in selling Class A shares of each Fund to
dealers. The public offering price of Class A shares of each Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of
each Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of each Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (E.G., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).
Class A shares of each Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or a Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to a Fund
and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of each Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES AND CLASS C SHARES: MFD acts as agent in selling Class B and
Class C shares of each 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 a Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
The Distribution Agreement will remain in effect until August 1, 1997 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment Objective, Policies and Restrictions
- -- Investment Restrictions") and in either case, by a majority of the Trustees
who are not parties to the Distribution Agreement or interested persons of any
such party. The Distribution Agreement terminates automatically if it is
assigned and may be terminated without penalty by either party on not more than
60 days' nor less than 30 days' notice.
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4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Funds 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
each Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
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 National Association of Securities Dealers, Inc. ("NASD") and such other
policies as the Trustees may determine, the Adviser may consider sales of shares
of a Fund and of the other investment company clients of MFD as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
Under an Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause a Fund to pay a broker-dealer which
provides brokerage and research services to the Adviser, 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 a Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of a
Fund and the Adviser's 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 a Fund. The Trustees
(together with the Trustees of the other MFS Funds) have directed the Adviser to
allocate a total of $23,100 of commission business from the MFS Funds to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the annual
renewal of the Lipper Directors' Analytical Data Service (which provides
information useful to the Trustees in reviewing the relationship between a Fund
and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent a Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both a Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser 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 period ended August 31, 1996, the Equity Income Fund ("EIF"), the Core
Growth Fund ("CGF"), the Aggressive Growth Fund ("AGF") and the Special
Opportunities Fund ("SOF") paid
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total brokerage commissions on total transactions as follows:
TOTAL TOTAL
COMMISSIONS TRANSACTIONS
EIF $ 783 $ 713,627
CGF $ 1,544 $ 1,398,932
AGF $19,205 $13,710,580
SOF $ 3,451 $ 2,016,503
Not all of the Fund's transactions are equity security transactions. During the
period ended August 31, 1996, the Aggressive Growth Fund acquired securities
issued by Charles Schwab Inc. and Merrill Lynch, Pierce, Fenner & Smith, Inc.,
regular broker-dealers of the Fund, which securities had a value of $6,125 and
$6,250, respectively, as of August 31, 1996.
The Convertible Securities Fund, the Blue Chip Fund, the New Discovery Fund, the
Science and Technology Fund and the Research International Fund did not commence
investment operations prior to August 31, 1996.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for a Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as a Fund is
concerned. In other cases, however, a Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- Each Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or a Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser
described below) anticipates purchasing $100,000 or more of Class A shares of a
Fund alone or in combination with shares of any class of MFS Funds or MFS Fixed
Fund (a bank collective investment fund) within a 13-month period (or 36-month
period, in the case of purchases of $1 million or more), the shareholder may
obtain Class A shares of the Fund at the same reduced sales charge as though the
total quantity were invested in one lump sum by completing the Letter of Intent
section of the Account Application or filing a separate Letter of Intent
application (available from the Shareholder Servicing Agent) within 90 days of
the commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of a Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of all classes of shares
of that shareholder in the MFS Funds or MFS Fixed Fund reaches a discount level.
See "Purchases" in the Prospectus for the sales charges on quantity discounts.
For example, if a shareholder owns shares with a
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<PAGE>
current offering price value of $75,000 and purchases an additional $25,000 of
Class A shares of a Fund, the sales charge for the $25,000 purchase would be at
the rate of 4.00% (the rate applicable to single transactions of $100,000). A
shareholder must provide the Shareholder Servicing Agent (or his investment
dealer must provide MFD) with information to verify that the quantity sales
charge discount is applicable at the time the investment is made.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by a Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of that 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 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 and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Reinvested Shares"; (ii) to the extent necessary, any
"Free Amount"; and (iii) to the extent necessary, the "Direct Purchase" subject
to the lowest CDSC (as such terms are defined in "Contingent Deferred Sales
Charge" in the Prospectus). The CDSC will be waived in the case of redemptions
of Class B and Class C shares pursuant to a SWP, but will not be waived in the
case of SWP redemptions of Class A shares which are subject to a CDSC. To the
extent that redemptions for such periodic withdrawals exceed dividend income
reinvested in the account, such redemptions will reduce and may eventually
exhaust the number of shares in the shareholder's account. All dividend and
capital gain distributions for an account with a SWP will be received in full
and fractional shares of a Fund at the net asset value in effect at the close of
business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The shareholder may deposit into the account
additional shares of a Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by a Fund
with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that a Fund
ceases to assume the cost of these services. Each Fund may terminate any SWP for
an account if the value of the account falls below $5,000 as a result of share
redemptions (other than as a result of a SWP) or an exchange of shares of the
Fund for shares of another MFS Fund.
Any SWP may be terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at
any time by mailing a check payable to a Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated
as a single purchaser and, under the Right of Accumulation (but not the Letter
of Intent) obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if available for sale). 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
transfer 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
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<PAGE>
funds may not be available for exchanges until the following month; therefore,
care should be used to avoid inadvertently terminating the Automatic Exchange
Plan through exhaustion of the account balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the Funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (I.E., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of each Fund and shareholders of
the other MFS Funds (except MFS Money Market Fund, MFS Government Money Market
Fund and holders of Class A shares of MFS Cash Reserve Fund in the case where
shares of such funds are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of MFS Cash Reserve Fund, the shareholder has the right to
exchange the acquired shares for shares of another MFS Fund at net asset value
pursuant to the exchange privilege described below. Such a reinvestment must be
made within 90 days of the redemption and is limited to the amount of the
redemption proceeds. If the shares credited for any CDSC paid are then redeemed
within six years of the initial purchase in the case of Class B shares or 12
months of the initial purchase in the case of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain period
of time in the same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on the
original redemption for federal income tax purposes. Please see your tax adviser
for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with a Fund for which payment has
been received by the Fund (I.E., an established account) may be exchanged for
shares of the same class of any of the other MFS Funds (if available for sale)
at net asset value. Exchanges will be made only after instructions in writing or
by telephone (an "Exchange Request") are received for an established account by
the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (I.E., if in writing -signed by the
record owner(s) exactly as the shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. Each exchange involves the redemption of the shares
of the Fund to be exchanged and the purchase at net asset value (I.E., without a
sales charge) of shares of the same class of the other MFS Fund. Any gain or
loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the requirements set
forth above have been complied with at that time. However, payment of the
redemption proceeds by a Fund, and thus the purchase of shares of the other MFS
Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market
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Fund, MFS Government Money Market Fund and Class A Shares of MFS Cash Reserve
Fund for shares acquired through direct purchase and dividends reinvested prior
to June 1, 1992) have the right to exchange their shares for shares of each
Fund, subject to the conditions, if any, set forth in their respective
prospectuses. In addition, unitholders of the MFS Fixed Fund have the right to
exchange their units (except units acquired through direct purchases) for shares
of a Fund, subject to the conditions, if any, imposed upon such unitholders by
the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations (see "Purchases" in the
Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of each Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their
Non-employed spouses who desire to make limited contributions to a
Tax-deferred retirement program and, if eligible, to receive a federal
Income tax deduction for amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
School systems and certain non-profit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
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 Section 401(a) or 403(b) recordkeeping program made
available by the Shareholder Servicing Agent.
6. TAX STATUS
Each Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), by meeting all applicable requirements of
Subchapter M, including requirements as to the nature of the Fund's gross
income, the amount of Fund distributions, and the composition and holding period
of the Fund's portfolio assets. Because each Fund intends to distribute all of
its net investment income and net realized capital gains to shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that any Fund will be required to pay any federal income or excise taxes,
although a Fund's foreign-source income may be subject to foreign withholding
taxes. If a Fund should fail to qualify as a "regulated investment company" in
any year, the Fund would incur a regular corporate federal income tax upon its
taxable income and Fund distributions would generally be taxable as ordinary
dividend income to the shareholders.
Shareholders of each Fund will have to pay federal income taxes and any state or
local taxes on the dividends and capital gain distributions they receive from
the Fund. Dividends from ordinary income and 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 these dividends (but none of the 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 shareholders is
subject to certain limitations, and deducted amounts may be subject to the
alternative minimum tax and may result in certain basis adjustments.
Distributions from 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 a Fund's shareholders as long-term capital
gains for federal income tax purposes without regard to the length of time
shareholders have owned their shares. Fund dividends that are 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 a Fund by the amount of the dividend or distribution.
Shareholders purchasing shares shortly before the record date of any taxable
dividend or other distribution may thus pay the full price for the shares and
then effectively receive a portion of the purchase price back as a taxable
distribution.
In general, any gain or loss realized upon a taxable disposition of shares of a
Fund by a shareholder that holds such shares as a capital asset will be treated
as long-term capital gain or loss if the
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shares have been held for more than twelve months and otherwise as short-term
capital gain or loss. However, any loss realized upon a disposition of shares in
a Fund held for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gain made with respect to
those shares. Any loss realized upon a redemption of shares may also be
disallowed under rules relating to wash sales. Gain may be increased (or loss
reduced) upon a redemption of Class A shares of a Fund within ninety days after
their purchase followed by any purchase (including purchases by exchange or by
reinvestment) without payment of an additional sales charge of Class A shares of
that Fund or of another MFS Fund (or any other shares of an MFS Fund generally
sold subject to a sales charge).
Each Fund's current dividend and accounting policies may affect the amount,
timing, and character of distributions to shareholders and may under certain
circumstances make an economic return of capital taxable to shareholders. A
Fund's investments in zero coupon bonds, deferred interest bonds, stripped
securities, PIK bonds, and certain securities purchased at a market discount
will cause it to realize income prior to the receipt of cash payments with
respect to those securities. In order to distribute this income and avoid a tax
on the Fund, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
Each Fund's transactions in options, Futures Contracts and Forward Contracts
will be subject to special tax rules that may affect the amount, timing and
character of Fund income and distributions to shareholders. For example, certain
positions held by a Fund on the last business day of each taxable year will be
marked to market (I.E., treated as if closed out) on such day, and any gain or
loss associated with the positions will be treated as 60% long-term and 40%
short term capital gain or loss. Certain positions held by a Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio will 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 which could alter the effects of these
rules. Each Fund will limit its activities in options, Futures Contracts,
Forward Contracts, short sales and swaps and related transactions to the extent
necessary to meet the requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of a Fund.
For example, foreign exchange gains or losses realized by a Fund will generally
be treated as ordinary income or losses. Use of foreign currencies for
non-hedging purposes and investment by a Fund in certain "passive foreign
investment companies" may be limited in order to avoid imposition of a tax on
the Fund.
Investment income received by a Fund from foreign securities may be subject to
foreign income taxes. The United States has entered into tax treaties with many
foreign countries that may entitle a Fund to a reduced rate of tax or an
exemption from tax on such income; each Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine a
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known. Except in the case
of the Research International Fund, the Funds do not expect to be able to pass
through to their shareholders foreign tax credits with respect to foreign income
taxes paid by the Funds. If the Research International Fund holds more than 50%
of its assets in foreign stock and securities at the close of its taxable year,
it may elect to "pass through" to its shareholders foreign income taxes paid. If
the Research International Fund so elects, its shareholders will be required to
treat their pro rata portion of the foreign income taxes paid by that Fund as
part of the amounts distributed to them by the Fund and thus includable in their
gross income for federal income tax purposes. Shareholders who itemize
deductions would then be allowed to claim a deduction or credit (but not both)
on their federal income tax returns for such amounts, subject to certain
limitations. Shareholders who do not itemize deductions would (subject to such
limitations) be able 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 Research International Fund does not qualify or
elect to "pass through" to its shareholders foreign income taxes paid by it, its
shareholders will not be able to claim any deduction or credit for any part of
the foreign taxes paid by that Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. Each Fund intends
to withhold U.S. federal income tax at the rate of 30% on 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. Distributions received from a Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. Each Fund is also
required in certain circumstances to apply backup withholding at a rate of 31%
on taxable dividends and the proceeds of redemptions and exchanges 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.
Fund distributions 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
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state and local taxes. Each 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 advisors 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 a Fund.
A Fund will not be required to pay Massachusetts income or excise taxes as long
as it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION 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 each Fund and
the respective class of shareholders. The Distribution Plans are designed to
promote sales, thereby increasing the net assets of each Fund. Such an increase
may reduce the expense ratio to the extent a Fund's fixed costs are spread over
a larger net asset base. Also, an increase in net assets may lessen the adverse
effect that could result were a Fund required to liquidate portfolio securities
to meet redemptions. There is, however, no assurance that the net assets of a
Fund will increase or that the other benefits referred to above will be
realized.
The Distribution Plans are described in the Prospectus under the caption
"Distribution Plans," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A Distribution Plan, no service fees
will be paid: (i) to any dealer who is the holder or dealer or 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 a
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. MFD, however, may waive this minimum amount
requirement 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 a 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.
During the period from the commencement of operations, January 2, 1996, to the
fiscal year ended August 31, 1996, distribution and service fees under the Class
A, Class B and Class C Distribution Plans were not imposed.
GENERAL: Each of the Distribution Plans will remain in effect until August 1,
1997, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties 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 a 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.
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8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of each Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Equity securities in a Fund's portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the NASDAQ system
for unlisted national market issues, or at the last quoted bid price for listed
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Bonds and other fixed income
securities (other than short-term obligations) of U.S. issuers in a Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Forward Contracts will be valued
using a pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board of
Trustees. All other securities, futures contracts and options in a Fund's
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges (whether domestic or foreign)
will be valued at the last reported sale price or at the settlement price prior
to the determination (or if there has been no current sale, at the closing bid
price) on the primary exchange on which such securities, futures contracts or
options are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available, be
valued at current bid prices, unless such securities are reported on the NASDAQ
system, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations in
a Fund's portfolio are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer supplied valuations.
Portfolio investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of a Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: Each Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. Each Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares purchased after April 1, 1996) and therefore may result in a higher rate
of return, (ii) a total rate of return assuming an initial account value of
$1,000, which will result in a higher rate of return since the value of the
initial account will not be reduced by the sales charge (4.75% maximum with
respect to Class A shares) and/or (iii) a total rate of return which represents
aggregate performance over a period or year-by-year performance, and which may
or may not reflect the effect of the maximum or other sales charge or CDSC.
The aggregate total rates of return for Class A shares for the following Funds
for the period from January 2, 1996 (the commencement of investment operations)
to August 31, 1996 are as follows:
INCLUDING WITHOUT
EFFECT OF EFFECT OF
SALES SALES
CHARGE CHARGE
Aggressive Growth Fund 16.76% 22.60%
Core Growth Fund 17.43% 22.30%
Equity Income Fund 5.43% 10.70%
Special Opportunities Fund 8.19% 13.60%
Class B and C shares were not available for sale during this period.
The Convertible Securities Fund, the Blue Chip Fund, the New Discovery Fund, the
Science and Technology Fund and the Research International Fund did not commence
investment operations prior to August 31, 1996.
Total rates of return figures would have been lower if fee reductions were not
in place. These figures are not calculated on an annualized basis. The aggregate
total return represents a limited time frame and may not be indicative of future
performance.
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<PAGE>
YIELD: Any yield quotation for a class of shares of a Fund is based on the
annualized net investment income per share of that class for the 30-day period.
The yield for each class of the Fund is calculated by dividing the net
investment income allocated to that class earned during the period by the
maximum offering price per share of that class of the Fund on the last day of
the period. The resulting figure is then annualized. Net investment income per
share of a class is determined by dividing (i) the dividends and interest
allocated to that class during the period, minus accrued expense of that class
for the period by (ii) the average number of shares of the class entitled to
receive dividends during the period multiplied by the maximum offering price per
share 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 yields for Class A shares of each Fund for the 30-day period ended August
31, 1996 were as follows:
ACTUAL 30-DAY
30-DAY YIELD YIELD
(INCLUDING (WITHOUT
ANY WAIVERS) ANY WAIVERS)
Aggressive Growth Fund -2.87% -0.15%
Core Growth Fund -15.60% -0.23%
Equity Income Fund -16.15% 1.13%
Special Opportunities Fund 13.18% 12.92%
Class B and Class C shares were not available for sale during this period.
The Convertible Securities Fund, the Blue Chip Fund, the New Discovery Fund, the
Science and Technology Fund and the Research International Fund did not commence
investment operations prior to August 31, 1996.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to a 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 12 months by the maximum public offering price of that class at the end of
such period. Under certain circumstances, such as when there has been a change
in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 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 from option writing, short-term
capital gains and return of invested capital, and is calculated over a different
period of time. A Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 4.75%. The Fund's current distribution
rate calculation for Class B and Class C shares assumes no CDSC is paid.
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, THE 100 BEST MUTUAL FUNDS YOU CAN BUY, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. Each Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, each Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
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From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (E.G., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planningsm program, an intergenerational financial
planning assistance program; issues with respect to insurance (E.G., disability
and life insurance and Medicare supplemental insurance); issues regarding
financial and health care management for elderly family members; and other
similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are 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 in cash.
- -- 1976 -- MFS(R)Municipal Bond Fund is among the
first municipal bond funds established.
- -- 1979 -- Spectrum becomes the first combination
fixed/ variable annuity with no initial
sales charge.
- -- 1981 -- MFS(R)World Governments Fund is
established as America's first globally
diversified fixed-income mutual fund.
- - 1984 -- MFS(R)Municipal High Income Fund is the
first open-end mutual fund to seek high
tax-free income from lower-rated
municipal securities.
- -- 1986 -- MFS(R)Managed Sectors Fund becomes the
first mutual fund to target and shift
investments among industry sectors for
shareholders.
- -- 1986 -- MFS(R)Municipal Income Trust is the first
closed-end, high-yield municipal bond
fund traded on the New York Stock
Exchange.
- -- 1987 -- MFS(R)Multimarket Income Trust is the
first closed-end, multimarket high income
fund listed on the New York Stock
Exchange.
- -- 1989 -- MFS(R)Regatta becomes America's first
non-qualified market value adjusted
fixed/variable annuity.
- -- 1990 -- MFS(R)World Total Return Fund is the first
global balanced fund.
- -- 1993 -- MFS(R)World Growth Fund is the first
global emerging markets fund to offer the
expertise of two sub-advisers.
- -- 1993 -- MFS(R)becomes money manager of MFS(R)Union
Standard Trust, the first Trust to invest
solely in companies deemed to be
union-friendly by an advisory board of
senior labor officials, senior managers
of companies with significant labor
contracts, academics and other national
labor leaders or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of each Fund and four other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of each Fund (Class A, Class B, Class C and Class P
shares). Each share of a class of a Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
a Fund, shareholders of each class of the Fund are entitled to share pro rata in
the Fund's net assets allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue a number of
series and additional classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust
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<PAGE>
without the affirmative vote of a majority of the Trust's outstanding shares (as
defined in "Investment Restrictions"). The Trust or any series of the Trust may
be terminated (i) upon the merger or consolidation of the Trust or any series of
the Trust with another organization or upon the sale of all or substantially all
of its assets (or all or substantially all of the assets belonging to any series
of the Trust), if approved by the vote of the holders of two-thirds of the
Trust's or the affected series' outstanding shares voting as a single class, or
of the affected series of the Trust, except that if the Trustees recommend such
merger, consolidation or sale, the approval by vote of the holders of a majority
of the Trust's or the affected series' outstanding shares will be sufficient, or
(ii) upon liquidation and distribution of the assets of a Fund, if approved by
the vote of the holders of two-thirds of its outstanding shares of the Trust, or
(iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Ernst & Young LLP are each Fund's independent auditors, providing audit
services, tax services, and assistance and consultation with respect to the
preparation of filings with the SEC.
The Portfolios of Investments and the Statements of Assets and Liabilities at
August 31, 1996, the Statements of Operations for the period from January 2,
1996 (commencement of investment operations) to August 31, 1996, the Statements
of Changes in Net Assets for the period from January 2, 1996 (commencement of
investment operations) to August 31, 1996, the Notes to Financial Statements and
the Report of the Independent Auditors, each of which is included in the Annual
Report to Shareholders of the Funds, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
The Convertible Securities Fund, the Blue Chip Fund, the New Discovery Fund, the
Science and Technology Fund and the Research International Fund did not commence
investment operations prior to August 31, 1996.
- 32 -
<PAGE>
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TRUSTEE FEES RETIREMENT BENEFIT ACCRUED ESTIMATED CREDITED TOTAL TRUSTEE FEES
FROM EACH AS PART OF FUND EXPENSE(1) YEARS OF SERVICE(2) FROM FUND COMPLEX(3)
TRUSTEE FUND(1)
Richard B. Bailey...................$0............... $0 6 $263,815
A. Keith Brodkin.....................0............... 0 N/A 0
Marshall N. Cohan....................0............... 0 6 148,624
Dr. Lawrence Cohn....................0............... 0 16 135,874
Sir David Gibbons....................0............... 0 6 135,874
Abby M. O'Neill......................0............... 0 7 129,499
Walter E. Robb, III..................0............... 0 6 148,624
Arnold D. Scott......................0............... 0 N/A 0
Jeffrey L. Shames....................0............... 0 N/A 0
J. Dale Sherratt.....................0............... 0 18 148,624
Ward Smith...........................0............... 0 10 148,624
</TABLE>
1) For the fiscal year ending August 31, 1996.
2) Based upon normal retirement age (75).
3) For calendar year 1995. All Trustees receiving compensation served as
Trustees of 36 funds within the MFS fund complex (having aggregate net
assets at December 31, 1995, of approximately $12.5 billion) except Mr.
Bailey, who served as Trustee of 73 funds within the MFS fund complex
(having aggregate net assets at December 31, 1995, of approximately
$31.7 billion).
A - 1
<PAGE>
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617) 954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617) 954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800) 225-2606
MAILING ADDRESS:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young, LLP
200 Clarendon Street
Boston, MA 02116
MFS(R) EQUITY INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) NEW DISCOVERY FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
MFS(R) RESEARCH INTERNATIONAL FUND
500 BOYLSTON STREET
BOSTON, MA 02116
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