<PAGE> 1
As filed with the Securities and Exchange Commission on December 27, 1996
1933 Act File No. 33-7638
1940 Act File No. 811-4777
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 27
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 29
MFS SERIES TRUST I
(Exact Name of Registrant as Specified in Charter)
500 Boylston, Street, Boston, Massachusetts 02116
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 617-954-5000
Stephen E. Cavan, Massachusetts Financial Services Company,
500 Boylston Street, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on December 29, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / on [date] pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / on [date] pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2, the Registrant has registered an indefinite number of
its shares of Beneficial Interest (without par value), under the Securities Act
of 1933. The Registrant filed a Rule 24f-2 Notice on behalf of all series, with
respect to the fiscal year ending August 31, 1996 on October 28, 1996.
<PAGE> 2
MFS SERIES TRUST I
MFS(R) MANAGED SECTORS FUND
MFS(R) CASH RESERVE FUND
MFS(R) WORLD ASSET ALLOCATION FUND
MFS(R) RESEARCH GROWTH AND INCOME FUND
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
CROSS REFERENCE SHEET
(Pursuant to Rule 404 showing location in Prospectus and/or Statement
of Additional Information of the responses to the Items in Parts A and B of Form
N-1A)
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
1 (a), (b) Front Cover Page *
2 (a) Expense Summary *
(b), (c) * *
3 (a), (b) Condensed Financial Information *
(c), (d) Information Concerning the Funds - *
Performance Information
4 (a) The Funds; Investment Objectives and *
Policies; Investment Techniques;
Additional Risk Factors
(b), (c) Investment Objectives and Policies; *
Investment Techniques; Additional
Risk Factors
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
5 (a) The Funds; Management of the Funds - *
Investment Adviser
(b) Front Cover Page; Management of the *
Funds - Investment Adviser and -
Sub-Investment Advisers; Back
Cover Page
(c) Management of the Funds - Investment *
Adviser
(d) * *
(e) Back Cover Page *
(f) Expense Summary; Condensed Financial *
Information; Information Concerning
Shares of the Funds - Expenses
(g) Information Concerning Shares of the *
Fund - Purchases
5A (a), (b), (c) ** **
6 (a) Information Concerning Shares of the *
Funds - Description of Shares, Voting
Rights and Liabilities; Information
Concerning Shares of the Funds -
Redemptions and Repurchases;
Information Concerning Shares of
the Funds - Purchases; Information
Concerning Shares of the Funds -
Exchanges
(b), (c), (d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of the *
Funds - Distributions; Shareholder
Services - Distribution Options
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(g) Information Concerning Shares of the *
Funds - Tax Status; Information
Concerning Shares of the Funds
Distributions
(h) * *
7 (a) Front Cover Page; Management of the *
Funds - Distributor; Back Cover Page
(b) Information Concerning Shares of the *
Funds - Purchases; Information
Concerning Shares of the Funds -
Net Asset Value
(c) Information Concerning Shares of the *
Funds - Purchases; Information
Concerning Shares of the Funds -
Exchanges; Shareholder Services
(d) Front Cover Page; Information *
Concerning Shares of the Funds -
Purchases; Shareholder Services
(e) Information Concerning Shares of the *
Funds - Distribution Plans;
Information Concerning Shares of
the Funds - Purchases; Expense
Summary
(f) Information Concerning Shares of the *
Funds - Distribution Plans
8 (a) Information Concerning Shares of the *
Funds - Redemptions and Repurchases;
Information Concerning Shares of the
Funds - Purchases; Shareholder Services
(b), (c), (d) Information Concerning Shares of the *
Funds - Redemptions and Repurchases
9 * *
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
10 (a), (b) * Front Cover Page
11 * Front Cover Page
12 * Definitions
13 (a), (b), (c) * Investment Objectives and
Policies
(d) * *
14 (a), (b) * Management of the Funds -
Trustees and Officers
(c) * Management of the Funds -
Trustees and Officers;
Appendix A
15 (a) * *
(b), (c) * Management of the Funds -
Trustees and Officers
16 (a), (b) Management of the Funds Management of the Funds
(c) * *
(d) * Management of the Funds
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares of Distribution Plans
the Funds - Distribution Plans
(g) * *
(h) * Management of the Funds -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Funds -
Shareholder Servicing Agent
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
17 (a), (b), (c) * Portfolio Transactions and
(d), (e) Brokerage Commissions
18 (a) Information Concerning Shares of Description of Shares Voting
the Funds - Description of Rights and Liabilities
Shares, Voting Rights and
Liabilities
(b) * *
19 (a) Information Concerning Shares of Shareholder Services
the Funds - Purchases; Shareholder
Services
(b) Information Concerning Shares of Management of the Funds -
the Funds - Net Asset Value; Distributor; Determination of
Information Concerning Shares of Net Asset Value and
the Funds - Purchases Performance - Net Asset Value
(c) * *
20 * Tax Status
21 (a), (b) * Management of the Funds -
Distributor; Distribution Plans
(c) * *
22 (a) * *
(b) * Determination of Net Asset
Value and Performance
23 * Independent Auditors and
Financial Statements
</TABLE>
- --------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 7
MFS MANAGED SECTORS FUND
SUPPLEMENT TO THE JANUARY 1, 1997 PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS P
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.75%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.33%
----
Total Operating Expenses............................................................... 1.08%
</TABLE>
- ---------------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended August
31, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in the Fund, assuming (a) a 5% annual return and (b)
redemption at the end of each of the time periods indicated (unless otherwise
noted):
<TABLE>
<CAPTION>
PERIOD CLASS P
------ -------
<S> <C>
1 year........................................ $11
3 years....................................... 34
</TABLE>
-1-
<PAGE> 8
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUND
Three classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares and Class P shares. Class P shares are available
for purchase only by the MFS Retirement Plans and are described in this
Supplement. Class A shares and Class B shares are described in the Fund's
Prospectus and are available for purchase by the general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares will convert to Class A shares approximately eight years after purchase.
Class P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class P shares do not
convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A and
Class B shares because expenses attributable to Class A and Class B shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1997.
-2-
<PAGE> 9
PROSPECTUS
JANUARY 1, 1997
MFS[REGISTERED TRADEMARK] MANAGED
SECTORS FUND
(A member of the MFS Family of CLASS A SHARES OF BENEFICIAL INTEREST
Fund[Registered Trademark] CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
Page
----
1. Expense Summary............................................... 2
2. The Fund...................................................... 3
3. Condensed Financial Information............................... 4
4. Investment Objective and Policies............................. 5
5. Management of the Fund........................................ 14
6. Information Concerning Shares of the Fund..................... 15
Purchases.................................................. 15
Exchanges.................................................. 19
Redemptions and Repurchases................................ 20
Distribution Plan.......................................... 22
Distributions.............................................. 24
Tax Status................................................. 24
Net Asset Value............................................ 25
Description of Shares, Voting Rights and Liabilities....... 25
Performance Information.................................... 25
7. Shareholder Services.......................................... 26
APPENDIX A.................................................... A-1
APPENDIX B.................................................... B-1
APPENDIX C.................................................... C-1
APPENDIX D.................................................... D-1
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS MANAGED SECTORS FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of MFS Managed Sectors Fund (the "Fund") is to provide
capital appreciation by varying the weighting of its portfolio among 13 equity
sectors. The Fund is a non-diversified series of MFS Series Trust I (the
"Trust"), an open-end management investment company. The Fund is intended for
investors who understand and are willing to accept the risks entailed in seeking
long-term growth of capital (see "Investment Objective and Policies"). The
minimum initial investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
the Fund that a prospective investor ought to know before investing. The Trust,
on behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information dated January 1, 1997, as amended or
supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 28 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into the
Prospectus and SAI, and other information regarding the Fund. This Prospectus is
available on the Adviser's Internet World Wide Web site at http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 10
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- --------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund Shares
(as a percentage of offering price)............................... 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable)............. See Below(1) 4.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees..................................................... 0.75% 0.75%
Rule 12b-1 Fees..................................................... 0.35%(2) 1.00%(3)
Other Expenses(4)................................................... 0.33% 0.40%
---- ----
Total Operating Expenses ........................................... 1.43% 2.15%
- ---------------
<FN>
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge (a "CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Information Concerning Shares of the Fund -- Purchases").
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to the Class A
shares. Distribution expenses paid under the Plan, together with the initial
sales charge, may cause long-term shareholders to pay more than the maximum
sales charge that would have been permissible if imposed entirely as an
initial sales charge. See "Information Concerning Shares of the
Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to 1.00% per annum of the average net assets
attributable to Class B shares (see "Distribution Plans"). Distribution
expenses paid under the Distribution Plan with respect to Class B shares,
together with any CDSC, may cause long-term shareholders to pay more than
the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge. See "Information Concerning Shares of
the Fund -- Distribution Plan" below.
(4) 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."
</TABLE>
EXAMPLE OF EXPENSES
-------------------
<TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
PERIOD CLASS A CLASS B
------ ------- ---------------
<S> <C> <C> <C>
(1)
1 year........................................................ $ 71 $ 62 $ 22
3 years....................................................... 100 97 67
5 years....................................................... 131 135 115
10 years....................................................... 219 230(2) 230(2)
- ---------------
<FN>
(1) Assumes no redemption.
(2) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plan".
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2
<PAGE> 11
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust presently consists of
thirteen series, four of which are offered through separate prospectuses and
nine of which are offered through a single combined prospectus, each of which
represents a portfolio with separate investment objectives and policies. Shares
of the Fund are continuously sold to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Two classes of shares of the Fund
currently are offered to the general public. Class A shares are offered at net
asset value plus an initial sales charge up to a maximum of 5.75% of the
offering price (or a CDSC upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans) and subject to an annual distribution fee and service fee up to a maximum
of 0.35% per annum. Class B shares are offered at net asset value without an
initial sales charge but 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
automatically to Class A shares approximately eight years after purchase. In
addition, the Fund offers an additional class of shares, Class I shares,
exclusively to certain institutional investors. Class I shares are made
available by means of a separate Prospectus Supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees are not affiliated with the
Adviser. The selection of investments and the way they are managed depend on the
conditions and trends in the economy and the financial marketplaces. The Fund
also offers to buy back (redeem) its shares from its shareholders at any time at
net asset value, less any applicable CDSC.
3
<PAGE> 12
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors given upon their authority, as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
CLASS A AND CLASS B SHARES
<CAPTION>
NINE NINE
YEAR ENDED MONTHS PERIOD YEAR ENDED MONTHS
AUGUST 31, ENDED ENDED AUGUST 31, ENDED
-------------------- AUGUST 31, NOVEMBER 30 -------------------- AUGUST 31,
1996 1995 1994 1993* 1996 1995 1994
-------- -------- ---------- ------------ -------- -------- ----------
CLASS A CLASS B
------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each period):
Net asset value -- beginning of
period.......................... $ 15.55 $ 13.41 $ 15.50 $ 15.68 $ 15.46 $ 13.35 $ 15.49
-------- -------- -------- -------- -------- -------- --------
Income from investment operations# --
Net investment loss........... $ (0.08) $ (0.05) $ (0.03) $ (0.02) $ (0.18) $ (0.14) $ (0.10)
-------- -------- -------- -------- -------- -------- --------
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions................ 0.58 3.22 0.77 (0.16) 0.58 3.20 0.75
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations...................... $ 0.50 $ 3.17 $ 0.74 $ (0.18) $ 0.40 $ 3.06 $ 0.65
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to
shareholders from net realized
gain on investments and foreign
currency transactions........... $ (2.89) $ (1.03) $ (2.83) $ -- $ (2.72) $ (0.95) $ (2.79)
Net asset value -- end of period $ 13.16 $ 15.55 $ 13.41 $ 15.50 $ 13.14 $ 15.46 $ 13.35
======== ======== ======== ======== ======== ======== ========
Total return++.................... 3.92% 26.12% 5.12%++ (5.99)%+ 3.17% 25.19% 4.47%++
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net
assets)/Supplemental data:
Expenses##.................... 1.43% 1.46% 1.52%+ 1.59%+ 2.15% 2.18% 2.26%+
-------- -------- -------- -------- -------- -------- --------
Net investment loss........... (0.56)% (0.34)% (0.26)%+ (0.75)%+ (1.27)% (1.06)% (1.01)%+
------- -------- -------- -------- -------- -------- --------
Portfolio turnover................ 117% 115% 76% 106% 117% 115% 76%
-------- -------- -------- -------- -------- -------- --------
Average commission rate###........ $ 0.0411 $ -- $ -- $ -- $ 0.0411 $ -- $ --
-------- -------- -------- -------- -------- -------- --------
Net assets at end of period (000
omitted)........................ $207,504 $178,367 $121,498 $136,179 $129,858 $199,773 $214,055
-------- -------- -------- -------- -------- -------- --------
- ---------------
<FN>
* For the period from the commencement of offering of Class A shares, September 20, 1993 to November 30, 1993.
+ Annualized.
++ Not annualized.
++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
# Per share data for the periods subsequent to November 30, 1993 are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for
fees paid indirectly.
### Average commission rate is calculated for fiscal years beginning on or after September 1, 1995.
</TABLE>
4
<PAGE> 13
FINANCIAL HIGHLIGHTS
CLASS B SHARES -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987**
-------- -------- -------- -------- -------- -------- --------
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period..... $ 15.42 $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94 $ 6.50
-------- -------- -------- -------- -------- -------- --------
Income from investment operations --
Net investment income (loss)........... $ (0.25) $ (0.24) $ (0.12) $ (0.03) $ 0.03 $ 0.09 $ 0.03
-------- -------- -------- -------- -------- -------- --------
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions......................... 0.94 2.66 3.89 (2.06) 3.51 0.89 0.42
-------- -------- -------- -------- -------- -------- --------
Total from investment operations........... $ 0.69 $ 2.42 $ 3.77 $ (2.09) $ 3.54 $ 0.98 $ 0.45
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to shareholders
from net realized gain on investments and
foreign currency transactions............ $ (0.62) $ -- $ -- $ -- $ (0.08) $ (0.06) $ (0.01)
Net asset value -- end of period........... $ 15.49 $ 15.42 $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94
======== ======== ======== ======== ======== ======== ========
Total return............................... 4.50% 18.62% 40.85% (18.46)% 45.35% 14.06% 7.47%+
-------- -------- -------- -------- -------- -------- --------
Ratios (to average net assets)/Supplemental
data:
======== ======== ======== ======== ======== ======== ========
Expenses............................... 2.21% 2.37% 2.44% 2.50% 2.52% 2.31% 2.25%+
-------- -------- -------- -------- -------- -------- --------
Net investment Income (loss)........... (1.55)% (1.85)% (1.00)% (0.27)% 0.37% 1.08% 0.09%+
-------- -------- -------- -------- -------- -------- --------
Portfolio turnover......................... 106% 22% 59% 79% 84% 146% 163%
-------- -------- -------- -------- -------- -------- --------
Net assets at end of period (000
omitted)................................. $232,982 $249,493 $190,232 $152,132 $180,416 $137,311 $134,762
-------- -------- -------- -------- -------- -------- --------
- ---------------
<FN>
** For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
+ Annualized.
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide capital appreciation. Dividend income, if any, is a
consideration incidental to the Fund's objective of capital appreciation.
The Fund seeks to achieve its investment objective by varying the weighting of
its portfolio among 13 equity sectors. The 13 sectors from among which the Fund
chooses its investments are: autos and housing; basic materials and consumer
staples; defense and aerospace; energy; financial services; health care;
industrial goods and services; leisure; retailing; technology; transportation;
utilities; and foreign securities. (For a description of the scope of each of
these industry sectors, see Appendix B to this Prospectus.) Certain sectors may
overlap; for example, the defense and aerospace sector and the technology sector
both include companies involved in the development of computer-related products.
Therefore, securities of certain companies or industries may simultaneously be
held in more than one industry sector. Occasionally, the number of sectors may
be increased if deemed appropriate by the Adviser due to the lack of desirable,
concentrated investment opportunities at a particular time.
In response to changes or anticipated changes in the general economy or within
one or more particular industry sectors, the Fund may increase, decrease or
eliminate entirely a particular sector's representation in the Fund's portfolio;
similarly, the Fund may acquire securities of a sector not then represented in
its portfolio. A sector or stock of a particular company will be added to or
eliminated from the Fund's portfolio based upon such factors as such sector's or
such company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
the Fund expects to remove such stocks from its portfolio. Any one sector or
cash may comprise up to 50% of the Fund's portfolio. The Fund has
5
<PAGE> 14
registered as a "non-diversified" investment company so that more than 5% of the
Fund's assets may be invested (subject to the tax limitations described below)
in the securities of any one or more issuers. As a result of its non-diversified
status, the Fund's shares may be more susceptible to adverse changes in the
value of securities of a particular company than would be the shares of a
diversified investment company. Similarly, due to the Fund's policy of generally
concentrating in no more than five industry sectors at any one time, some of
which may overlap, the value of the Fund's shares may be more susceptible to any
single economic, political or regulatory occurrence than would be the shares of
an investment company without a policy of concentration in particular industry
sectors.
While the Fund's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities such as non-convertible and
convertible bonds, convertible preferred stocks and warrants to purchase common
stock, when relative values make such investments appear attractive either as
individual issues or as types of securities in certain economic environments
(see "Risk Factors Regarding Lower Rated Securities" and "Additional Risk
Factors" below). The non-convertible bonds invested in by the Fund may include
(i) obligations issued or guaranteed by the U.S. Treasury or U.S. Government
agencies, authorities or instrumentalities, and (ii) obligations of the U.S.
Treasury that have been issued without interest coupons or stripped of their
unmatured interest coupons, interest coupons that have been stripped from such
debt obligations, and receipts and certificates for such stripped debt
obligations and stripped coupons. U.S. Government securities also include
interests in trusts or other entities representing interests in obligations that
are issued or guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. The Fund may invest in foreign securities, including emerging
market securities, and hold foreign currency (see "Foreign Securities" and
"Emerging Market Securities" below). The Fund may also enter into forward
foreign currency exchange contracts for the purchase or sale of foreign currency
for hedging purposes and non-hedging purposes, including transactions entered
into for the purpose of profiting from anticipated changes in foreign currency
exchange rates, as well as options on foreign currencies (see "Forward Contracts
on Foreign Currency" and "Options on Foreign Currencies" below).
The Fund may invest in corporate asset-backed securities (see "Corporate
Asset-Backed Securities" below). The Fund may write covered call and put options
and purchase call and put options on securities and stock indexes in an effort
to increase current income and for hedging purposes (see "Options" below). The
Fund may also purchase and sell stock index and interest rate futures contracts
and may write and purchase options thereon for hedging purposes and for
non-hedging purposes, subject to applicable law (see "Futures Contracts and
Options on Futures Contracts" below). In addition, the Fund may purchase
portfolio securities on a "when-issued" or on a "forward delivery" basis (see
"When-Issued Securities" below).
Subject to tax requirements, portfolio changes are made without regard to the
length of time a security has been held, or whether a sale would result in a
profit or loss.
FIXED INCOME SECURITIES: When and if available, the Fund may purchase fixed
income securities at a discount from face value. However, the Fund does not
intend to hold such securities to maturity for the purpose of achieving
potential capital gains, unless current yields on these securities remain
attractive.
FOREIGN SECURITIES: The Fund may also invest in foreign securities, which may be
traded on foreign exchanges. The Fund may invest up to 50% (and expects
generally to invest between 0% and 25%) of its total assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts ("ADRs")). Investing in foreign securities or on foreign
exchanges may present a greater degree of risk than investing in domestic
issuers. These risks include changes in currency rates, exchange control
regulations, governmental administration, economic or monetary policy (in this
country or abroad), war or expropriation. In particular, the dollar value of
portfolio securities of non-U.S. issuers fluctuates with changes in market and
economic conditions abroad and with changes in relative currency values (when
the value of the dollar increases as compared to a foreign currency, the dollar
value of a foreign-denominated security decreases, and vice versa). Costs may be
incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
6
<PAGE> 15
foreign countries could be affected by other factors including confiscatory
taxation and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods. Therefore, an investment in
shares of the Fund may be subject to a greater degree of risk than investments
in other investment companies which invest exclusively in domestic securities.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also invest in ADRs which are
certificates issued by a U.S. depositary (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Because ADRs trade on United States securities
exchanges, the Adviser does not treat them as foreign securities. However, they
are subject to many of the risks of foreign securities (described above) such as
changes in exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser 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 "Additional Risk
Factors -- Emerging Markets" below.
RISK FACTORS REGARDING LOWER RATED SECURITIES: The Fund may invest to a limited
extent in lower rated fixed income securities or comparable unrated securities.
Investments in such securities while generally providing greater income and
opportunity for gain than investments in higher rated securities, usually entail
greater risk of principal and income (including the possibility of default or
bankruptcy of the issuers of such securities), and involve greater volatility of
price (especially during periods of economic uncertainty or change) than
investments in higher rated securities and because yields may vary over time, no
specified level of income can ever be assured. In particular, securities rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard
& Poor's Ratings Services ("S&P") or by Fitch Investors Service, Inc. ("Fitch")
or comparable unrated securities (commonly known as "junk bonds") are considered
speculative. For a description of these ratings, see Appendix C to this
Prospectus. These lower rated high yielding fixed income securities generally
tend to reflect economic changes (and the outlook for economic growth),
short-term corporate and industry developments and the market's perception of
their credit quality (especially during times of adverse publicity) to a greater
extent than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates). In the past,
economic downturns or an increase in interest rates have under certain
circumstances caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on the Fund's lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. Changes
in the value of securities subsequent to their acquisition will not affect cash
income or yield to maturity to the Fund but will be reflected in the net asset
value of shares of the Fund. The market for these lower rated fixed income
securities may be less liquid than the market for investment grade fixed income
securities. Furthermore, the liquidity of these lower rated securities may be
affected by the market's perception of their credit quality. Therefore, the
Adviser's judgment may at times play a greater role in valuing these securities
than in the case of investment grade fixed income securities, and it also may
7
<PAGE> 16
be more difficult during times of certain adverse market conditions to sell
these lower rated securities at their fair value to meet redemption requests or
to respond to changes in the market. No minimum rating standard is required by
the Fund. To the extent the Fund invests in these lower rated fixed income
securities, the achievement of its investment objective may be more dependent on
the Adviser's own credit analysis than in the case of a fund investing in higher
quality bonds. While the Adviser may refer to ratings issued by established
credit rating agencies, it is not a policy of the Fund to rely exclusively on
ratings issued by these agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or by Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. Government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
dividends or interest on the securities loaned and would also receive either
interest (through investment of cash collateral) or a fee (if the collateral is
U S. Government securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are intended
to minimize risk.
WHEN-ISSUED SECURITIES: In order to help ensure the availability of suitable
securities for its portfolio, the Fund may purchase securities on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. It is expected that, under normal circumstances, the Fund will
take delivery of such securities. In general, the Fund does not pay for the
securities until received and does not start earning interest on the obligations
until the contractual settlement date. While awaiting delivery of the
obligations purchased on such bases, the Fund will establish a segregated
account consisting of cash, short-term money market instruments or high quality
debt securities equal to the amount of the commitments to purchase "when-issued"
securities. See the SAI for additional information regarding "when-issued"
securities.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933 (the "1933 Act") ("restricted
securities"), including those that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). The Trust's Board of Trustees determines, based upon a continuing
review of the trading markets for a specific Rule 144A security, whether such
security is liquid and thus not subject to the Fund's limitation on investing
not more than 15% of its net assets in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. The Board will carefully monitor the Fund's investments in Rule
144A securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of decreasing the level of liquidity in the Fund to the extent that
qualified institutional buyers become for a time uninterested in purchasing Rule
144A securities held in the Fund's portfolio. Subject to the Fund's 15%
limitation on investments in illiquid investments, the Fund may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Fund might not be able to sell these securities
when the Adviser wishes to do so, or might have to sell them at less than fair
value. In addition, market quotations are less readily
8
<PAGE> 17
available. Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
TRANSACTIONS IN OPTIONS, FUTURES AND FORWARD CONTRACTS -- The Fund may enter
into transactions in options, futures and forward contracts on a variety of
instruments and indexes, in order to protect against declines in the value of
portfolio securities or increases in the cost of securities or other assets to
be acquired and, subject to applicable law, to increase the Fund's gross income.
The types of instruments to be purchased and sold by the Fund are described in
the SAI, which should be read in conjunction with the following section. In
addition, the SAI contains a further discussion of the nature of the
transactions which may be entered into and the risks associated therewith.
OPTIONS
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options
and purchase call and put options on securities. The Fund will write options on
securities for the purpose of increasing its return on such securities and/or to
protect the values of its portfolio. In particular, where the Fund writes an
option which expires unexercised or is closed out by the Fund at a profit, it
will retain the premium paid for the option which will increase its gross income
and will offset in part the reduced value of the portfolio security underlying
the option, or the increased cost of portfolio securities to be acquired. In
contrast, however, if the price of the underlying security moves adversely to
the Fund's position, the option may be exercised and the Fund will be required
to purchase or sell the underlying security at a disadvantageous price, which
may only be partially offset by the amount of the premium. The Fund may also
write combinations of put and call options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations occur, the Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
which may be referred to as "reset" options or "adjustable strike" options.
These options provide for periodic adjustment of the strike price and may also
provide for the periodic adjustment of the premium during the term of the
option.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices. The Fund may write options
on stock indices for the purpose of increasing its gross income and to protect
its portfolio against declines in the value of securities it owns or increases
in the value of securities to be acquired. When the Fund writes an option on a
stock index, and the value of the index moves adversely to the holder's
position, the option will not be exercised, and the Fund will either close out
the option at a profit or allow it to expire unexercised. The Fund will thereby
retain the amount of the premium, less related transaction costs, which will
increase its gross income and offset part of the reduced value of portfolio
securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges
9
<PAGE> 18
against adverse price fluctuations, since any such fluctuations will be offset
only to the extent of the premium received by the Fund for the writing of the
option, less related transaction costs. In addition, if the value of an
underlying index moves adversely to the Fund's option position, the option may
be exercised, and the Fund will experience a loss which may only be partially
offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS: The Fund may enter into interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, futures contracts on
indices and foreign currency futures contracts are collectively referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect the
Fund's current or intended stock investments from broad fluctuations in stock
prices, and foreign currency futures contracts are purchased or sold to attempt
to hedge against the effects of exchange rate changes on the Fund's current or
intended investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result of
a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the adverse effects of such changes may be offset, in whole or
part, by gains on the sale of Futures Contracts. Conversely, the increased cost
of portfolio securities to be acquired, caused by a general rise in the stock
market, a general decline in interest rates or a rise in the dollar value of
foreign currencies, may be offset, in whole or part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and it will be required to make and
maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options to buy or
sell interest rate futures contracts and options on stock index futures
contracts. (Unless otherwise specified, options on interest rate futures
contracts and options on stock index futures contracts are collectively referred
to as "Options on Futures Contracts.") Such investment strategies will be used
for hedging and non-hedging purposes, subject to applicable law. Put and call
Options on Futures Contracts may be traded by the Fund in order to protect
against declines in the values of portfolio securities or against increases in
the cost of securities to be acquired. Purchases of Options on Futures Contracts
may present less risk in hedging the portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts since the potential loss is limited to
the amount of the premium plus related transaction costs. The writing of such
options, however, does not present less risk than the trading of Futures
Contracts and will constitute only a partial hedge, up to the amount of the
premium received. In addition, if an option is exercised, the Fund may suffer a
loss on the transaction.
FORWARD CONTRACTS ON FOREIGN CURRENCY: The Fund may enter into forward foreign
currency exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date at a price set at the time of the contract (a
"Forward Contract"). The Fund will enter into Forward Contracts for hedging and
non-hedging purposes including transactions entered into for the purpose of
profiting from anticipated changes in foreign currency exchange rates.
Transactions in Forward Contracts entered into for hedging purposes may include
forward purchases or sales of foreign currencies for the purpose of protecting
the dollar value of securities denominated in a foreign currency or protecting
the dollar equivalent of interest or dividends to be paid on such securities.
The Fund may also enter into Forward Contracts for "cross hedging" purposes,
e.g., the purchase or sale of a Forward Contract on one type of currency as a
hedge against adverse fluctuations in the value of a second type of currency. By
entering into such transactions, however, the Fund may be required to forgo the
benefits of advantageous changes in exchange rates. The Fund may also enter into
transactions in Forward Contracts for other than hedging purposes. For example,
if the Adviser believes that the value of a particular foreign currency will
increase or decrease relative to the value of the U.S. dollar, the Fund may
purchase or sell such currency, respectively, through a Forward Contract. If the
expected changes in the value of the currency occur, the Fund will realize
profits which will increase its gross income. Such transactions, however, may be
considered
10
<PAGE> 19
speculative and could involve significant risk of loss, as set forth below. The
Fund has established procedures consistent with statements of the Securities and
Exchange Commission (the "SEC") and its staff regarding the use of Forward
Contracts by registered investment companies, which requires use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
Forward Contracts are traded over-the-counter, and not on organized commodities
or securities exchanges. As a result, such contracts operate in a manner
distinct from exchange-traded instruments, and their use involves certain risks
beyond those associated with transactions in the Futures and Options contracts
described above.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies for the purpose of protecting against declines in
the dollar value of portfolio securities, and against increases in the dollar
cost of securities to be acquired. As in the case of other types of options,
however, the writing of an option on foreign currency will constitute only a
partial hedge, up to the amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on foreign currency
may constitute an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse to the Fund's position, it may
forfeit the entire amount of the premium plus related transaction costs. As in
the case of Forward Contracts, certain options on foreign currencies are traded
over-the-counter and involve risks which may not be present in the case of
exchange-traded instruments.
RISKS OF TRANSACTIONS IN OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS:
Although the Fund will enter into certain transactions in Futures Contracts,
Options on Futures Contracts, Forward Contracts and options for hedging
purposes, such transactions do involve certain risks. For example, a lack of
correlation between the index or instrument underlying an option, Futures
Contract or Forward Contract and the assets being hedged, or unexpected adverse
price movements, could render the Fund's hedging strategy unsuccessful and could
result in losses. "Cross hedging" transactions may involve greater correlation
risks. In addition, there can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
As noted, the Fund may also enter into transactions in such instruments (except
for options on foreign currencies) for other than hedging purposes (subject to
applicable law), including speculative transactions, which involve greater risk.
In particular, in entering into such transactions, the Fund may experience
losses which are not offset by gains on other portfolio positions, thereby
reducing its gross income. In addition, the markets for such instruments may be
extremely volatile from time to time, as discussed in the SAI, which could
increase the risks incurred by the Fund in entering into such transactions.
Transactions in options may be entered into on U.S. exchanges regulated by the
SEC, in the over-the-counter market and on foreign exchanges, while Forward
Contracts may be entered into only in the over-the-counter market. Futures
Contracts and Options on Futures Contracts may be entered into on U.S. exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC") and on
foreign exchanges. The securities underlying options and Futures Contracts
traded by the Fund may include domestic as well as foreign securities. Investors
should recognize that transactions involving foreign securities or foreign
currencies, and transactions entered into in foreign countries, may involve
considerations and risks not typically associated with investing in U.S.
markets.
Transactions in options, Futures Contracts, Options on Futures Contracts and
Forward Contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
For example, the Fund may sell Futures Contracts on an index of securities in
order to profit from any anticipated decline in the value of the securities
comprising the underlying index. In such instances, any losses on the futures
transaction will not be offset by gains on any portfolio securities comprising
such index, as might occur in connection with a hedging transaction. The risks
related to transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts entered into by the Fund are set forth in
greater detail in the SAI, which should be reviewed in conjunction with the
foregoing discussion.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES: During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or
11
<PAGE> 20
all of the assets of the Fund may be invested in cash or cash equivalents
including, but not limited to, obligations of banks (including certificates of
deposit, bankers' acceptances and repurchase agreements) with assets of $1
billion or more, commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. Government or any of its agencies, authorities or
instrumentalities and related repurchase agreements. See Appendix D to this
Prospectus for a description of certain short-term obligations.
The investment objective and policies discussed above may be changed without
shareholder approval.
ADDITIONAL RISK FACTORS
The net asset value of the shares of an open-end investment company which may
invest to a limited extent in fixed income securities changes as the general
levels of interest rates fluctuate. When interest rates decline, the value of a
fixed income portfolio can be expected to rise. Conversely, when interest rates
rise, the value of a fixed income portfolio can be expected to decline.
Although changes in the value of securities subsequent to their acquisition are
reflected in the net asset value of shares of the Fund, such changes will not
affect the income received by the Fund from such securities. However, the
dividends paid by the Fund, if any, will increase or decrease in relation to the
income received by the Fund from its investments, which would in any case be
reduced by the Fund's expenses before it is distributed to shareholders.
In addition, the use of options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies may result in the
loss of principal, particularly where such instruments are traded for other than
hedging purposes (e.g., to enhance current yield).
The portfolio of the Fund is aggressively managed and, therefore, the value of
its shares is subject to greater fluctuation and investments in its shares
involve the assumption of a higher degree of risk than would be the case with an
investment in a conservative equity fund or a growth fund investing entirely in
proven growth equities.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
In that event, the Fund may promptly convert such currencies into dollars at the
then-current exchange rate. Under certain circumstances, however, such as where
the Adviser believes that the applicable exchange rate is unfavorable at the
time the currencies are received or the Adviser anticipates, for any other
reason, that the exchange rate will improve, the Fund may hold such currencies
for an indefinite period of time.
In addition, the Fund may be required to receive delivery of the foreign
currency underlying forward foreign currency contracts it has entered into. This
could occur, for example, if an option written by the Fund is exercised or the
Fund is unable to close out a forward contract it has entered into. The Fund may
also hold foreign currency in anticipation of purchasing foreign securities. The
Fund may also elect to take delivery of the currencies underlying options or
forward contracts if, in the judgment of the Adviser, it is in the best interest
of the Fund to do so. In such instances as well, the Fund may promptly convert
the foreign currencies to dollars at the then-current exchange rate, or may hold
such currencies for an indefinite period of time.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to the Fund's position.
Such losses could reduce any profits or increase any losses sustained by the
Fund from the sale or redemption of securities, and could reduce the dollar
value of interest of securities, and could reduce the dollar value of interest
or dividend payments received. In addition, the holding of currencies could
adversely affect the Fund's profit or loss on currency options or forward
contracts, as well as its hedging strategies.
Costs may be incurred in connection with conversions between various currencies.
Foreign brokerage commissions are generally higher than in the United States and
foreign securities markets may be less liquid, more volatile and less subject to
governmental
12
<PAGE> 21
supervision than in the United States. See the SAI for further discussion of
foreign securities and the holding of foreign currency as well as the associated
risks.
The risks of investing in foreign securities may be intensified in the case of
investments in emerging markets. Securities of many issuers in emerging markets
may be less liquid and more volatile than securities of comparable domestic
issuers. Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Fund due to subsequent
declines in value of the portfolio security, a decrease in the level of
liquidity in the Fund's portfolio, or, if the Fund has entered into a contract
to sell the security, possible liability to the purchaser. Certain markets may
require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economics. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
of assets, and may have less protection of property rights than more developed
countries. The economics of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
The Fund has registered as a "non-diversified" investment company. As a result,
the Fund is limited as to the percentage of its assets that may be invested in
the securities of any one issuer only by its own investment restrictions and the
diversification requirements of the Internal Revenue Code of 1986, as amended
(the "Code"). U.S. Government securities are not subject to any investment
limitation. Since the Fund may invest a relatively high percentage of its assets
in the securities of a limited number of issuers, the Fund may be more
susceptible to any single economic, political or regulatory occurrence.
Given the above average investment risk inherent in the Fund, investment in
shares of the Fund should not be considered a complete investment program and
may not be appropriate for all investors.
PORTFOLIO TRADING
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of other investment company clients of MFD as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to
13
<PAGE> 22
time, the Adviser may direct certain portfolio transactions to broker-dealer
firms which, in turn, have agreed to pay a portion of the Fund's operating
expenses (e.g., fees charged by the custodian of the Fund's assets). For the
fiscal year ended August 31, 1996, the Fund had a portfolio turnover rate in
excess of 100%. Transaction costs incurred by the Fund and the realized capital
gains and losses of the Fund may be greater than that of a fund with a lesser
portfolio turnover rate. For a further discussion of portfolio trading, see the
SAI.
Since shares of the Fund represent an investment in securities with fluctuating
market prices, shareholders should understand that the value of their shares
will vary as the aggregate value of the Fund's portfolio securities increases or
decreases. Moreover, any dividends the Fund pays will increase or decrease in
relation to the income received from its investments.
------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
5. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. Kenneth J. Enright, a Vice President of
the Adviser, has been the Fund's portfolio manager since September 1, 1993. Mr.
Enright has been employed as a portfolio manager by the Adviser since 1986.
Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives a management fee, computed and paid monthly, in an amount equal to
0.75% of the Fund's average daily net assets for its then-current fiscal year.
For the Fund's fiscal year ended August 31, 1996, MFS received management fees
under the Advisory Agreement of $2,731,358 (0.75% of the Fund's average daily
net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS[Registered Trademark] Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Variable Insurance Trust, MFS Union Standard Trust, MFS Institutional
Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisors,
Inc., also provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.3 billion on behalf of approximately 2.2 million investor
accounts as of November 29, 1996. As of such date, the MFS organization managed
approximately $28.1 billion of assets invested in equity securities and
approximately $20.3 billion of assets invested in fixed income securities.
Approximately $4.1 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life of Canada (U.S.), which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, Arnold D. Scott,
John D. McNeil and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is
the President and Mr. Scott is the Secretary and a Senior Executive Vice
President of MFS. Messrs. McNeil and Stewart are the Chairman and President,
respectively, of Sun Life. Sun Life, a mutual life insurance company, is one of
the largest international life insurance companies and has been
14
<PAGE> 23
operating in the United States since 1895, establishing a headquarters office
here in 1973. The executive officers of MFS report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James R.
Bordewick, Jr. and James O. Yost, all of whom are officers of MFS, are officers
of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische 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 Foreign & Colonial 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 Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial 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 the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
6. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A and B shares of the Fund may be purchased at the public offering price
through any dealer and other financial institutions ("dealers") having a selling
agreement with MFD. Dealers may also charge their customers fees relating to
investment in the Fund.
This Prospectus offers Class A, B and C shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF DEALER ALLOWANCE
------------------------------ AS A PERCENTAGE
OFFERING NET AMOUNT OF OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000................................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000................... 4.75 4.99 4.00
$100,000 but less than $250,000.................. 4.00 4.17 3.20
$250,000 but less than $500,000.................. 2.95 3.04 2.25
$500,000 but less than $1,000,000................ 2.20 2.25 1.70
$1,000,000 or more............................... None** None** See Below**
- ---------------------------------------------------------------------------------------------------------------
<FN>
* Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
15
<PAGE> 24
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price, as shown in the above table. In the case of
the maximum sales charge, the dealer retains 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds would be in an aggregate amount of
at least $250,000 within a reasonable period of time, as determined by MFD
in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
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 PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID
BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------- --------------------------
<S> <C>
1.00%............................. On the first $2,000,000, plus
0.80%............................. Over $2,000,000 to $3,000,000, plus
0.50%............................. Over $3,000,000 to $50,000,000, plus
0.25%............................. Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
16
<PAGE> 25
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
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 upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- ---------------
<S> <C>
First........................................ 4%
Second....................................... 4%
Third........................................ 3%
Fourth....................................... 3%
Fifth........................................ 2%
Sixth........................................ 1%
Seventh and following........................ 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are
17
<PAGE> 26
eligible to purchase Class A shares of the Funds 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 the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request.
18
<PAGE> 27
Accounts under common ownership or control, including accounts administered by
market timers, will be aggregated for purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A and Class B shares. In addition, from time to time, MFD may pay
dealers 100% of the applicable sales charge on sales of Class A shares of
certain specified MFS Funds sold by such dealer during a specified sales period.
In addition, MFD or its affiliates may, from time to time, pay dealers an
additional commission equal to 0.50% of the net asset value of all of the Class
B shares of certain specified MFS Funds sold by such dealer during a specified
sales period. In addition, from time to time, MFD, at its expense, may provide
additional commissions, compensation or promotional incentives ("concessions")
to dealers which sell shares of the Fund. Such concessions provided by MFD may
include financial assistance to dealers in connection with preapproved
conferences or seminars, sales or training programs for invited registered
representatives, payment for travel expenses, including lodging, incurred by
registered representatives for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding one or more MFS Funds,
and/or other dealer-sponsored events. From time to time, MFD may make expense
reimbursements for special training of a dealer's registered representatives in
group meetings or to help pay the expenses of sales contests. Other concessions
may be offered to the extent not prohibited by state laws or any self-regulatory
agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below).
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<PAGE> 28
With respect to an exchange involving shares subject to a CDSC, the CDSC will be
unaffected by the exchange and the holding period for purposes of calculating
the CDSC will carry over to the acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in the case of retirement plan
participants whose sponsoring organizations subscribe to the MFS FUNDamental
401(k) Plan or another similar 401(k) recordkeeping system made available by the
Shareholder Servicing Agent) or all the shares in the account. If an Exchange
Request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the exchange will occur on that day if all the requirements set forth
above have been complied with at that time and subject to the Fund's right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
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<PAGE> 29
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or a
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designated to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class A or Class B shares
("Direct Purchases") will be subject to a CDSC for a period of (i) with respect
to Class A shares, 12 months (however, the CDSC on Class A shares is only
imposed with respect to purchases of $1 million or more of Class A shares or
purchases by certain retirement plans of Class A shares) or (ii) with respect to
Class B shares, six years. Purchases of Class A shares made during a calendar
month, regardless of when during the month the investment occurred, will age one
month on the last day of the month and each subsequent month. Class B shares
purchased on or after January 1, 1993 will be aggregated on a calendar month
basis -- all transactions made during a calendar month, regardless of when
during the month they have occurred, will age one year at the close of business
on the last day of such month in the following calendar year and each subsequent
year. For Class B shares of the Fund purchased prior to January 1, 1993,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or
21
<PAGE> 30
more of Class A shares or purchases by certain retirement plans of Class A
shares) of Direct Purchases may be redeemed without charge ("Free Amount").
Moreover, no CDSC is ever assessed on additional shares acquired through the
automatic reinvestment of dividends or capital gain distributions ("Reinvested
Shares"). Therefore, at the time of redemption of a particular class, (i) any
Free Amount is not subject to the CDSC and (ii) the amount of redemption equal
to the then-current value of Reinvested Shares is not subject to the CDSC, but
(iii) any amount of the redemption in excess of the aggregate of the then-
current value of Reinvested Shares and the Free Amount is subject to a CDSC. The
CDSC will first be applied against the amount of Direct Purchases which will
result in any such charge being imposed at the lowest possible rate. The CDSC to
be imposed upon redemptions will be calculated as set forth in "Purchases"
above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for certain
Class A share purchases, a CDSC will be imposed upon redemption. Such purchases
under the Reinstatement Privilege are subject to all limitations in the SAI
regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Distribution Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
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<PAGE> 31
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A or Class B shares,
as appropriate) (the "Designated Class") annually in order that MFD may pay
expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH DISTRIBUTION PLAN: The Distribution Plans have certain
features that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.10% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission 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). In addition, to the extent that the aggregate service
and distribution fees paid under the Class A Distribution Plan do not exceed
0.35% per annum of the average daily net assets of the Fund attributable to
Class A shares, the Fund is permitted to pay such distribution-related expenses
or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
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<PAGE> 32
Under the Class B Distribution Plan, the Fund pays MFD a distribution fee equal,
on an annual basis, to 0.75% of the Fund's average daily net assets attributable
to Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A and Class B
distribution and service fees for its current fiscal year are 0.35% and 1.00%
per annum, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income for any
calendar year to its shareholders as dividends on an annual basis. In
determining the net investment income available for distributions, the Fund may
rely on projections of its anticipated net investment income over a longer term,
rather than its actual net investment income for the period. The Fund may make
one or more distributions during the calendar year to its shareholders from any
long-term capital gains, and may also make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. See "Tax Status" below and "Shareholder Services -- Distribution Options."
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B shares because expenses
attributable to Class B shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund has elected and intends to qualify each
year as a "regulated investment company" under Subchapter M of the Code. Because
the Fund intends to distribute all of its net investment income and net realized
capital gains to its shareholders in accordance with the timing requirements
imposed by the Code, it is not expected that the Fund will be required to pay
any federal income or excise taxes, although the Fund's foreign-source income
may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the dividend or distribution is in cash or in
additional shares. A portion of the dividends received from the Fund (but none
of the Fund's capital gain distributions) may qualify for the dividends received
deduction for corporations. Shortly after the end of each calendar year, each
shareholder will receive a statement setting forth the federal income tax status
of all dividends and distributions for that year, including the portion taxable
as ordinary income, the portion taxable as long-term capital gain, the portion,
if any, representing a return of capital (which generally is free of current
taxes but results in a basis reduction), and the amount, if any, of federal
income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at the rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
of an investment in the Fund.
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<PAGE> 33
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on such Exchange by deducting the
amount of the liabilities attributable to the class from the value of the Fund's
assets and dividing the difference by the number of outstanding shares of the
class outstanding. Assets in the Fund's portfolio are valued on the basis of
their current values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value of each class of shares is
effective for orders received by the dealer prior to its calculation and
received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of thirteen series of the Trust, has two classes of shares which
it offers to the general public, entitled Class A and Class B Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors, entitled Class I
shares. The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of shares of that particular series. Shareholders are entitled to one vote
for each share held and shares of each series would be entitled to vote
separately to approve investment advisory agreements or changes in investment
restrictions, but shares of all series would vote together in the election of
Trustees and ratification of selection of accountants. Additionally, each class
of shares of a series will vote separately on any material increases in the fees
under the Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The Declaration of Trust provides that a Trustee
may be removed from office in certain instances (see "Description of Shares,
Voting Rights and Liabilities" in the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
the Fund with each other class share, subject to the liabilities of the
particular class. Shares have no pre-emptive or conversion rights (except as set
forth above under "Purchases -- Conversion of Class B Shares"). Shares are fully
paid and non-assessable. Should the Fund be liquidated, shareholders of each
class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued except
in connection with pledges and assignments and in certain other limited
circumstances.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance (e.g., fidelity bonding and errors and omissions insurance) existed
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Services, Inc. and
Wiesenberger Investment Companies Service. Total rate of return quotations will
reflect the average annual percentage change over stated periods in the value of
an investment in a class of shares of the Fund made at the maximum public
offering price of shares of that class with all distributions reinvested and
which will give effect to the imposition of any applicable CDSC assessed upon
redemptions of the Fund's Class B shares. Such total rate of return quotations
may be accompanied by quotations which do not reflect the reduction in value of
the initial investment due to the sales charge or the deduction of a CDSC, and
which will thus be higher. The Fund offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer
25
<PAGE> 34
class initially was offered for sale to the public. See the SAI for further
information on the calculation of total rate of return for share classes
initially offered for sale to the public on different dates.
The Fund's total rate of return quotations are based on historical performance
and are not intended to indicate future performance. Total rate of return
reflects all components of investment return over a stated period of time. The
Fund's quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders. For a discussion of the manner
in which the Fund will calculate its total rate of return, see the SAI. For
further information about the Fund's performance for the fiscal year ended
August 31, 1996, please see the Fund's Annual Report. A copy of the Annual
Report may be obtained without charge by contacting the Shareholder Servicing
Agent (see back cover for address and phone number). In addition to information
provided in shareholder reports, the Fund may, in its discretion, from time to
time, make a list of all or a portion of its holdings available to investors
upon request.
7. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of all classes of all MFS Funds
or the MFS Fixed Fund (a bank collective investment fund) within a 13-month
period (or 36-month period for purchases of $1 million or more), the shareholder
may obtain such shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum, subject to escrow agreements
and the appointment of an attorney for redemptions from the escrow amount if the
intended purchases are not completed, by completing the Letter of Intent section
of the Account Application.
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<PAGE> 35
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments,
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares in any year pursuant to a SWP will not
be subject to a CDSC and are generally limited to 10% of the value of the
account at the time of the establishment of the SWP. The CDSC will not be waived
in the case of SWP redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder if such fund is available for
sale. Under the Automatic Exchange Plan, exchanges of at least $50 each may be
made to up to six different funds. A shareholder should consider the objectives
and policies of a fund and review its prospectus before electing to exchange
money into such fund through the Automatic Exchange Plan. No transaction fee is
imposed in connection with exchange transactions under the Automatic Exchange
Plan. However, exchanges of shares of MFS Money Market Fund, MFS Government
Money Market Fund or Class A shares of MFS Cash Reserve Fund will be subject to
any applicable sales charge. For federal and (generally) state income tax
purposes, an exchange is treated as a sale of the shares exchanged, and
therefore, could result in a capital gain or loss to the shareholder making the
exchange. See the SAI for further information concerning the Automatic Exchange
Plan. Investors should consult their tax advisers for information regarding the
potential capital gain and loss consequences of transactions under the Automatic
Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
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<PAGE> 36
The Fund's SAI, dated January 1, 1997, contains more detailed information about
the Fund, including, but not limited to, information related to (i) investment
objective, policies and restrictions, (ii) the Trustees, officers and investment
adviser, (iii) portfolio trading, (iv) the Fund's shares, including rights and
liabilities of shareholders, (v) tax status of dividends and distributions, (vi)
the Distribution Plan, (vii) the method used to calculate total rate of return
quotations and (viii) various services and privileges provided by the Fund for
the benefit of its shareholders, including additional information with respect
to the exchange privilege.
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<PAGE> 37
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("CDSC") for Class A shares are waived (Section II), and
the CDSC for Class B shares is waived (Section III).
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to an MFS Fund; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("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;
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<PAGE> 38
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. (the "Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds. The sales
charges will be waived in the case of a redemption of all of the 401(a)
or ESP Plan's shares in all MFS Funds (i.e., all the assets of the 401(a)
or ESP Plan invested in the MFS Funds are withdrawn), unless immediately
prior to the redemption, the aggregate amount invested by the 401(a) or
ESP Plan in shares of the MFS Funds (excluding the reinvestment of
distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
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.
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<PAGE> 39
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
III. WAIVERS OF CLASS B SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
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4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
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<PAGE> 41
APPENDIX B
DESCRIPTION OF INDUSTRY SECTORS
The Fund seeks to achieve its investment objective by varying the
weighting of its portfolio among the following 13 industry sectors (i.e.,
industry groupings).
(1) AUTOS AND HOUSING SECTOR: companies engaged in the design,
production and sale of automobiles, automobile parts, mobile homes and
related products, and in the design, construction, renovation and
refurbishing of residential dwellings. The value of automobile industry
securities is affected by foreign competition, consumer confidence, consumer
debt and installment loan rates. The housing construction industry is
affected by the level of consumer confidence, consumer debt, mortgage rates
and the inflation outlook.
(2) BASIC MATERIALS AND CONSUMER STAPLES SECTOR: companies engaged in
providing consumer goods and services such as: the design, processing,
production and storage of packaged, canned, bottled and frozen foods and
beverages; and the design, production and sale of home furnishings,
appliances, clothing, accessories, cosmetics and perfumes. Certain such
companies are subject to government regulation affecting the permissibility
of using various food additives and production methods, which regulations
could affect company profitability. Also, the success of food- and
fashion-related products may be strongly affected by fads, marketing
campaigns and other factors affecting supply and demand.
(3) DEFENSE AND AEROSPACE SECTOR: companies engaged in the research,
manufacture or sale of products or services related to the defense and
aerospace industries, such as: air transport; data processing or
computer-related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch vehicles
and spacecraft; units for guidance, propulsion and control of flight
vehicles; and airborne and ground-based equipment essential to the test,
operation and maintenance of flight vehicles. Since such companies rely
largely on U.S. (and other) governmental demand for their products and
services, their financial conditions are heavily influenced by federal (and
other governmental) defense spending policies.
(4) ENERGY SECTOR: companies in the energy field, including oil, gas,
electricity and coal as well as nuclear, geo-thermal, oil shale and solar
sources of energy. The business activities of companies comprising this
sector may include: production, generation, transmission, marketing, control
or measurement of energy or energy fuels; provision of component parts or
services to companies engaged in such activities; energy research or
experimentation; environmental activities related to the solution of energy
problems; and activities resulting from technological advances or research
discoveries in the energy field. The value of such companies' securities
varies based on the price and supply of energy fuels and may be affected by
events relating to international politics, energy conservation, the success
of exploration projects, and the tax and other regulatory policies of
various governments.
(5) FINANCIAL SERVICES SECTOR: companies providing financial services to
consumers and industry, such as: commercial banks and savings and loan
associations; consumer and industrial finance companies; securities
brokerage companies; leasing companies; and firms in all segments of the
insurance field (such as multiline, property and casualty, and life
insurance). These kinds of companies are subject to extensive governmental
regulations, some of which regulations are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as a
result of volatile interest rates and general economic conditions.
(6) HEALTH CARE SECTOR: companies engaged in the design, manufacture or
sale of products or services used in connection with health care or
medicine, such as: pharmaceutical companies; firms that design, manufacture,
sell or supply medical, dental and optical products, hardware or services;
companies involved in biotechnology, medical diagnostic and biochemical
research and development; and companies involved in the operation of health
care facilities. Many of these companies are subject to government
regulation, which could affect the price and availability of their products
and services. Also, products and services in this sector could quickly
become obsolete.
(7) INDUSTRIAL GOODS AND SERVICES SECTOR: companies engaged in the
research, development, manufacture or marketing of products, processes or
services related to the agriculture, chemicals, containers, forest products,
non-ferrous metals, steel and pollution control industries, such as:
synthetic and natural materials, for example, chemicals, plastics,
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<PAGE> 42
fertilizers, gases, fibers, flavorings and fragrances; paper; wood products;
steel and cement. Certain companies in this sector are subject to regulation
by state and federal authorities, which could require alteration or
cessation of production of a product, payment of fines or cleaning of a
disposal site. In addition, since some of the materials and processes used
by these companies involve hazardous components, there are risks associated
with their production, handling and disposal. The risk of product
obsolescence is also present.
(8) LEISURE SECTOR: companies engaged in the design, production or
distribution of goods or services in the leisure industry, such as:
television and radio broadcast or manufacture; motion pictures and
photography; recordings and musical instruments; publishing; sporting goods,
camping and recreational equipment; sports arenas; toys and games; amusement
and theme parks; travel-related services and airlines; hotels and motels;
fast food and other restaurants; and gaming casinos. Many products produced
by companies in this sector -- for example, video and electronic
games -- may quickly become obsolete.
(9) RETAILING SECTOR: companies engaged in the retail distribution of
home furnishings, food products, clothing, pharmaceuticals, leisure products
and other consumer goods, such as: department stores; supermarkets; and
retail chains specializing in particular items such as shoes, toys or
pharmaceuticals. The value of securities in this sector will fluctuate based
on consumer spending patterns, which depend on inflation and interest rates,
level of consumer debt and seasonal shopping habits. The success or failure
of a particular company in this highly competitive sector will depend on
such company's ability to predict rapidly changing consumer tastes.
(10) TECHNOLOGY SECTOR: companies which are expected to have or develop
products, processes or services which will provide or will benefit
significantly from technological advances and improvements or future
automation trends in the office and factory, such as: semiconductors;
computers and peripheral equipment; scientific instruments; computer
software; telecommunications; and electronic components, instruments and
systems. Such companies are sensitive to foreign competition and import
tariffs. Also, many products produced by companies in this sector may
quickly become obsolete.
(11) TRANSPORTATION SECTOR: companies involved in the provision of
transportation of people and products, such as: airlines, railroads and
trucking firms. Revenues of companies in this sector will be affected by
fluctuations in fuel prices resulting from domestic and international
events, and government regulation of fares.
(12) UTILITIES SECTOR: companies in the public utilities industry and
companies deriving a substantial majority of their revenues through
supplying public utilities such as: companies engaged in the manufacture,
production, generation, transmission and sale of gas and electric energy;
and companies engaged in the communications field, including telephone,
telegraph, satellite, microwave and the provision of other communication
facilities to the public. The gas and electric public utilities industries
are subject to various uncertainties, including the outcome of political
issues concerning the environment, prices of fuel for electric generation,
availability of natural gas, and risks associated with the construction and
operation of nuclear power facilities.
(13) FOREIGN SECTOR: companies whose primary business activity takes
place outside of the United States. The securities of foreign companies
would be heavily influenced by the strength of national economies, inflation
levels and the value of the U.S. dollar versus foreign currencies.
Investments in the Foreign Sector will be subject to certain risks not
generally associated with domestic investments.
Diversified companies will generally be included in the sector of their
predominant industry activity, as determined by the Adviser.
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APPENDIX C
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various debt instruments. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE
NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, DEBT INSTRUMENTS WITH THE SAME
MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE DEBT INSTRUMENTS OF
THE SAME MATURITY AND COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue. Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
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STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated 'AAA' has the highest rating assigned by S&P's. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-'rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
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FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Fitch does not rate the specific issue.
CONDITIONAL: A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED: A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN: A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving", where ratings may
be raised or lowered. FitchAlert is relatively short-term, and should be
resolved within 12 months.
C-3
<PAGE> 46
APPENDIX D
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
D-1
<PAGE> 47
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P, Moody and Fitch's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
D-2
<PAGE> 48
[MFS LOGO]
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116 MFS[REGISTERED TRADEMARK] MANAGED
(617) 954-5000 SECTORS FUND
Distributor Prospectus
MFS Fund Distributors, Inc. January 1, 1997
500 Boylston Street
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll-free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS[REGISTERED TRADEMARK] MANAGED SECTORS FUND
500 Boylston Street
Boston, MA 02116
MMS-1-1/97/125M 08/208
<PAGE> 49
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
<TABLE>
<S> <C>
MFS(R) MANAGED STATEMENT OF
SECTORS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1997
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 14
Trustees.............................................................................. 14
Officers.............................................................................. 15
Investment Adviser.................................................................... 15
Investment Advisory Agreement......................................................... 15
Custodian............................................................................. 16
Shareholder Servicing Agent........................................................... 16
Distributor........................................................................... 16
4. Portfolio Transactions and Brokerage Commissions...................................... 17
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs.................................................... 19
Exchange Privilege.................................................................... 21
Tax-Deferred Retirement Plans......................................................... 21
6. Tax Status............................................................................ 22
7. Distribution Plan..................................................................... 23
8. Determination of Net Asset Value and Performance...................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 27
Appendix A - Trustee Compensation Table............................................... A-1
Appendix B - Performance Information.................................................. B-1
</TABLE>
MFS MANAGED SECTORS FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
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> 50
1. DEFINITIONS
"Fund" -- MFS Managed Sectors Fund, a
non-diversified series of
MFS Series Trust I (the
"Trust"). The Fund was known
as MFS Lifetime Managed
Sectors Fund and was a
separate open-end
diversified management
company, organized as a
Massachusetts business trust
in 1986 and known as Life-
time Managed Sectors Trust
prior to August 3, 1992. The
Fund became a series of the
Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1997, as
amended or supplemented from
time to time.
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
The investment objective, policies and techniques are described in the
Prospectus. In addition, certain of the Fund's investment policies are described
in greater detail below.
SECURITIES LENDING
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the Adviser
determines to make securities loans, it is not intended that the value of the
securities loaned would exceed 20% of the value of the Fund's total assets.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a "when-issued" or on a "forward delivery"
basis. It is expected that, under normal circumstances, the Fund will take
delivery of such securities. When the Fund commits to purchase a security on a
"when-issued" or on a "forward delivery" basis, it will set up procedures
consistent with the General Statement of Policy of the Securities and Exchange
Commission (the "SEC") concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Fund will always have cash, short-term money market instruments or high quality
debt securities sufficient to cover any commitments or to limit any potential
risk. However, although the Fund does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, the Fund may have to sell assets which have been set
aside in order to meet redemptions. Also, if the Fund determines it is necessary
to sell the "when-issued" or "forward delivery" securities before delivery, it
may incur a loss because of market fluctuations since the time the commitment to
purchase such securities was made and any gain would not be tax-exempt. When the
time comes to pay for "when-issued" or "forward delivery" securities, the Fund
will meet its obligations from the then-available cash flow on the sale of
securities, or, although it would not normally expect to do so, from the sale of
the "when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Fund's payment obligation).
CORPORATE ASSET-BACKED SECURITIES
The Fund may invest in corporate asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a pool of
assets, such as credit card and automobile loan receivables, representing the
obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on
2
<PAGE> 51
these securities. The underlying assets (e.g., loans) are also subject to
prepayments which shorten the securities' weighted average life and may lower
their return.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with sellers who are member firms
(or subsidiaries thereof) of the Exchange, members of the Federal Reserve
System, recognized primary U.S. Government securities dealers or institutions
which the Adviser has determined to be of comparable creditworthiness. The
securities that the Fund purchases and holds through its agent are U.S.
Government securities, the values, including accrued interest, of which are
equal to or greater than the repurchase price agreed to be paid by the seller.
The repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund has the
right to make margin calls at any time if the value of the securities falls
below the agreed upon margin.
FOREIGN SECURITIES
The Fund may invest up to 50% (and expects generally to invest between 0% and
25%) of its total assets in foreign securities which are not traded on a U.S.
exchange (not including American Depositary Receipts). As discussed in the
Prospectus, investing in foreign securities generally presents a greater degree
of risk than investing in domestic securities due to possible exchange rate
fluctuations, less publicly available information, more volatile markets, less
securities regulation, less favorable tax provisions, war or expropriation. As a
result of its investments in foreign securities, the Fund may receive interest
or dividend payments, or the proceeds of the sale or redemption of such
securities, in the foreign currencies in which such securities are denominated.
Under certain circumstances, such as where the Adviser believes that the
applicable exchange rate is unfavorable at the time the currencies are received
or the Adviser anticipates, for any other reason, that the exchange rate will
improve, the Fund may hold such currencies for an indefinite period of time. The
Fund may also hold foreign currency in anticipation of purchasing foreign
securities. While the holding of currencies will permit the Fund to take
advantage of favorable movements in the applicable exchange rate, such strategy
also exposes the Fund to risk of loss if exchange rates move in a direction
adverse to the Fund's position. Such losses could reduce any profits or increase
any losses sustained by the Fund from the sale or redemption of securities and
could reduce the dollar value of interest or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS
The Fund may invest in American Depositary Receipts ("ADRs") which are
certificates issued by a U.S. depositary (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored
ADR is issued by a depositary which has an exclusive relationship with the
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositaries. Under the terms of most sponsored arrangements,
depositaries agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. The
depositary of an unsponsored ADR, on the other hand, is under no obligation to
distribute shareholder communications received from the issuer of the deposited
securities or to pass through voting rights to ADR holders in respect of the
deposited securities. The Fund may invest in either type of ADR. Although the
U.S. investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depositary receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Fund may purchase securities in local markets and direct delivery of these
ordinary shares
3
<PAGE> 52
to the local depositary of an ADR agent bank in a foreign country.
Simultaneously, the ADR agents create a certificate which settles at the Fund's
custodian in five days. The Fund may also execute trades on the U.S. markets
using existing ADRs. A foreign issuer of the security underlying an ADR is
generally not subject to the same reporting requirements in the United States as
a domestic issuer. Accordingly, the information available to a U.S. investor
will be limited to the information the foreign issuer is required to disclose in
its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer of the underlying security. ADRs may
also be subject to exchange rate risks if the underlying foreign securities are
traded in foreign currency.
OPTIONS
OPTIONS ON SECURITIES -- As noted in the Prospectus, the Fund may write covered
call and put options and purchase call and put options on securities. Call and
put options written by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short-term money market
instruments or high quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high quality debt securities in a
segregated account with its custodian. Put and call options written by the Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high quality debt securities. Such transactions permit the Fund
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call the Fund determines to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the Fund's maximum gain
will be the premium received by it for writing the option, adjusted upwards or
downwards by the difference between the Fund's purchase price of the security
and the exercise price, less related transaction costs. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received, less
4
<PAGE> 53
related transaction costs. If the market price of the underlying security
declines or otherwise is below the exercise price, the Fund may elect to close
the position or retain the option until it is exercised, at which time the Fund
will be required to take delivery of the security at the exercise price; the
Fund's return will be the premium received from the put option minus the amount
by which the market price of the security is below the exercise price, which
could result in a loss. Out-of-the-money, at-the-money and in-the-money put
options may be used by the Fund in the same market environments that call
options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Fund solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions constitute
only a partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the amount of
the premium.
The Fund may purchase options for hedging purposes or to increase its return.
Put options may be purchased to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. If such increase
occurs, the call option will permit the Fund to purchase the securities at the
exercise price, or to close out the options at a profit. The premium paid for
the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
In certain instances, the Fund may enter into options on U.S. Treasury
securities which provide for periodic adjustment of the strike price and may
also provide for the periodic adjustment of the premium during the term of each
such option. Like other types of options, these transactions, which may be
referred to as "reset" options or "adjustable strike options," grant the
purchaser the right to purchase (in the case of a "call") or sell (in the case
of a "put"), a specified type and series of U.S. Treasury security at any time
up to a stated expiration date (or, in certain instances, on such date). In
contrast to other types of options, however, the price at which the underlying
security may be purchased or sold under a "reset" option is determined at
various intervals during the term of the option, and such price fluctuates from
interval to interval based on changes in the market value of the underlying
security. As a result, the strike price of a "reset" option, at the time of
exercise, may be less advantageous to the Fund than if the strike price had been
fixed at the initiation of the option. In addition, the premium paid for the
purchase of the option may be determined at the termination, rather than the
initiation, of the option. If the premium is paid at termination, the Fund
assumes the risk that (i) the premium may be less than the premium which would
otherwise have been received at the initiation of the option because of such
factors as the volatility in yield of the underlying Treasury security over the
term of the option and adjustments made to the strike price of the option, and
(ii) the option purchaser may default on its obligation to pay the premium at
the termination of the option.
OPTIONS ON STOCK INDICES -- As noted in the Prospectus, the Fund may write
(sell) covered call and put options and purchase call and put options on stock
indices. In contrast to an option on a security, an option on a stock index
provides the holder with the right but not the obligation to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (i) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (ii) a fixed "index multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be
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fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Fund may also cover call options on stock
indices by holding a call on the same index and in the same principal amount as
the call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, short-term money market instruments or high quality debt securities in
a segregated account with its custodian. The Fund may cover put options on stock
indices by maintaining cash, short-term money market instruments or high quality
debt securities with a value equal to the exercise price in a segregated account
with its custodian, or by holding a put on the same stock index and in the same
principal amount as the put written where the exercise price of the put held is
equal to or greater than the exercise price of the put written or where the
exercise price of the put held is less than the exercise price of the put
written if the difference is maintained by the Fund in cash, short-term money
market instruments or high quality debt securities in a segregated account with
its custodian. Put and call options on stock indices may also be covered in such
other manner as may be in accordance with the rules of the exchange on which, or
the counterparty with which, the option is traded and applicable laws and
regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index, writing
covered put options on indices will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
The index underlying a stock index option may be a "broad-based" index, such as
the Standard & Poor's 500 Index or the New York Stock Exchange Composite Index,
the changes in value of which ordinarily will reflect movements in the stock
market in general. In contrast, certain options may be based on narrower market
indices, such as the Standard & Poor's 100 Index, or on indices of securities of
particular industry groups, such as those of oil and gas or technology
companies. A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
so included. The composition of the index is changed periodically.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may enter into
interest rate futures contracts, stock index futures contracts and/or foreign
currency futures contracts. (Unless otherwise specified, interest rate futures
contracts, futures contracts on indices and foreign currency futures contracts
are collectively referred to as "Futures Contracts.") Such investment strategies
will be used for hedging purposes and for non-hedging purposes, subject to
applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
is delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the
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Futures Contract fluctuates, making positions in the Futures Contract more or
less valuable -- a process known as "marking to the market."
Purchases or sales of stock index futures contracts are used to attempt to
protect the Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
Interest rate futures contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Fund's current or intended
investments in fixed income securities. For example, if the Fund owned long-term
bonds and interest rates were expected to increase, the Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could then be
used to buy long-term bonds on the cash market. The Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows the Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
OPTIONS ON FUTURES CONTRACTS -- As noted in the Prospectus, the Fund may
purchase and write options to buy or sell futures contracts in which it may
invest ("Options on Futures Contracts"). Such investment strategies will be used
for hedging purposes and for non-hedging purposes, subject to applicable law.
An Option on a Futures Contract provides the holder with the right to enter into
a "long" position in the underlying Futures Contract, in the case of a call
option, or a "short" position in the underlying Futures Contract, in the case of
a put option, at a fixed exercise price up to a stated expiration date or, in
the case of certain options, on such date. Upon exercise of the option by the
holder, the contract market clearinghouse establishes a corresponding short
position for the writer of the option, in the case of a call option, or a
corresponding long position in the case of a put option. In the event that an
option is exercised, the parties will be subject to all the risks associated
with the trading of Futures Contracts, such as payment of initial and variation
margin deposits. In addition, the writer of an Option on a Futures Contract,
unlike the holder, is subject to initial and variation margin requirements on
the option position.
A position in an Option on a Futures Contract may be terminated by the purchaser
or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
Options on Futures Contracts that are written or purchased by the Fund on U.S.
exchanges are traded on the same contract
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<PAGE> 56
market as the underlying Futures Contract, and, like Futures Contracts, are
subject to regulation by the Commodities Futures Trading Commission ("CFTC") and
the performance guarantee of the exchange clearinghouse. In addition, Options on
Futures Contracts may be traded on foreign exchanges.
The Fund may cover the writing of call Options on Futures Contracts (a) through
purchases of the underlying Futures Contract, (b) through ownership of the
instrument, or instruments included in the index, underlying the Futures
Contract, or (c) through the holding of a call on the same Futures Contract and
in the same principal amount as the call written where the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or securities in a segregated account with its
custodian. The Fund may cover the writing of put Options on Futures Contracts
(a) through sales of the underlying Futures Contract, (b) through segregation of
cash, short-term money market instruments or high quality debt securities in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
where the exercise price of the put held is less than the exercise price of the
put written if the difference is maintained by the Fund in cash, short-term
money market instruments or high quality debt securities in a segregated account
with its custodian. Put and call Options on Futures Contracts may also be
covered in such other manner as may be in accordance with the rules of the
exchange on which the option is traded and applicable laws and regulations. Upon
the exercise of a call Option on a Futures Contract written by the Fund, the
Fund will be required to sell the underlying Futures Contract which, if the Fund
has covered its obligation through the purchase of such Contract, will serve to
liquidate its futures position. Similarly, where a put Option on a Futures
Contract written by the Fund is exercised, the Fund will be required to purchase
the underlying Futures Contract which, if the Fund has covered its obligation
through the sale of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due to
a market advance or changes in interest or exchange rates, the Fund could
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts.
FORWARD CONTRACTS ON FOREIGN CURRENCY
As noted in the Prospectus, the Fund may enter into forward foreign currency
exchange contracts ("Forward Contracts") for hedging and non-hedging purposes.
Forward Contracts may be used for hedging to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the U.S. dollar and
foreign currencies. The Fund intends to enter into Forward Contracts for hedging
purposes similar to those described above in connection with foreign currency
futures contracts. In particular, a Forward Contract to sell a currency may be
entered into in lieu of the sale of a foreign currency futures contract where
the Fund seeks to protect against an anticipated increase in the exchange rate
for a specific currency which could reduce the dollar value of portfolio
securities denominated in such currency. Conversely, the Fund may enter into a
Forward Contract to purchase a given currency to protect against a projected
increase in the dollar value of securities denominated in such currency which
the Fund intends to acquire. The Fund also may enter into a Forward Contract in
order to assure itself of a predetermined exchange rate in connection with a
fixed income security denominated in a foreign currency. In addition, the Fund
may enter into Forward Contracts for "cross hedging" purposes; e.g., the
purchase or sale of a Forward Contract on one type of currency as a hedge
against adverse fluctuations in the value of a second type of currency.
If a hedging transaction in Forward Contracts is successful, the decline in the
value of portfolio securities or other assets or the increase in the cost of
securities or other assets to be acquired may be offset, at least in part, by
profits on the Forward Contract. Nevertheless, by entering into such Forward
Contracts, the Fund may be required to forgo all or a portion of the benefits
which otherwise could have been obtained from favorable movements in exchange
rates or natural resources prices, but will usually seek to close out positions
in such contracts by entering into offsetting transactions, which will
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<PAGE> 57
serve to fix the Fund's profit or loss based upon the value of the contracts at
the time the offsetting transaction is executed.
The Fund will also enter into transactions in Forward Contracts for other than
hedging purposes, which present greater profit potential but also involve
increased risk. For example, the Fund may purchase a given foreign currency
through a Forward Contract if, in the judgment of the Adviser, the value of such
currency is expected to rise relative to the U.S. dollar. Conversely, the Fund
may sell the currency through a Forward Contract if the Adviser believes that
its value will decline relative to the dollar.
The Fund will profit if the anticipated movements in foreign currency exchange
rates occurs, which will increase its gross income. Where exchange rates do not
move in the direction or to the extent anticipated, however, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative and could involve significant risk of loss.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high quality debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority to
regulate Forward Contracts. In such event, the Fund's ability to utilize Forward
Contracts in the manner set forth above may be restricted.
OPTIONS ON FOREIGN CURRENCIES
As noted in the Prospectus, the Fund may purchase and write options on foreign
currencies for hedging purposes in a manner similar to that in which futures
contracts on foreign currencies, or Forward Contracts, will be utilized. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell such currency for a fixed amount
in dollars and will thereby offset, in whole or in part, the adverse effect on
its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forgo a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund also may be required to forgo all or a portion of the benefits which
might otherwise have been obtained from favorable movements in exchange rates.
RISK FACTORS IN OPTIONS, FUTURES AND FORWARD TRANSACTIONS
RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S PORTFOLIO.
The Fund's abilities effectively to hedge all or a portion of its portfolio
through transactions in options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies depend on the
degree to which price movements in the underlying index or instrument correlate
with price movements in the relevant portion of the Fund's portfolio. In the
case of futures and options based on an index, the portfolio will not duplicate
the components of the index, and in the case of futures and options on fixed
income securities, the portfolio securities which are being hedged may not be
the same type of obligation underlying such contract. The use of Forward
Contracts for "cross hedging" purposes may involve greater correlation risks. As
a result, the correlation probably will not be exact. Consequently, the Fund
bears the risk that the price of the portfolio securities being hedged will not
move in the same amount or direction as the underlying index or obligation.
For example, if the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset
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by the put option. It is also possible that there may be a negative correlation
between the index or obligation underlying an option or Futures Contract in
which the Fund has a position and the portfolio securities the Fund is
attempting to hedge, which could result in a loss on both the portfolio and the
hedging instrument. In addition, the Fund may enter into transactions in Forward
Contracts or options on foreign currencies in order to hedge against exposure
arising from the currencies underlying such forwards. In such instances, the
Fund will be subject to the additional risk of imperfect correlation between
changes in the value of the currencies underlying such forwards or options and
changes in the value of the currencies being hedged.
It should be noted that stock index futures contracts or options based upon a
narrower index of securities, such as those of a particular industry group, may
present greater risk than options or futures based on a broad market index. This
is due to the fact that a narrower index is more susceptible to rapid and
extreme fluctuations as a result of changes in the value of a small number of
securities. Nevertheless, where the Fund enters into transactions in options or
futures on narrow-based indices for hedging purposes, movements in the value of
the index should, if the hedge is successful, correlate closely with the portion
of the Fund's portfolio or the intended acquisitions being hedged.
The trading of Futures Contracts, options and Forward Contracts for hedging
purposes entails the additional risk of imperfect correlation between movements
in the futures or option price and the price of the underlying index or
obligation. The anticipated spread between the prices may be distorted due to
the differences in the nature of the markets, such as differences in margin
requirements, the liquidity of such markets and the participation of speculators
in the options, futures and forward markets. In this regard, trading by
speculators in options, futures and Forward Contracts has in the past
occasionally resulted in market distortions, which may be difficult or
impossible to predict, particularly near the expiration of such contracts.
The trading of Options on Futures Contracts also entails the risk that changes
in the value of the underlying Futures Contract will not be fully reflected in
the value of the option. The risk of imperfect correlation, however, generally
tends to diminish as the maturity date of the Futures Contract or expiration
date of the option approaches.
Further, with respect to options on securities, options on stock indexes,
options on currencies and Options on Futures Contracts, the Fund is subject to
the risk of market movements between the time that the option is exercised and
the time of performance thereunder. This could increase the extent of any loss
suffered by the Fund in connection with such transactions.
In writing a covered call option on a security, index or Futures Contract, the
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where the Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Fund may be
required to forgo the benefits which might otherwise have been obtained from an
increase in the value of portfolio securities or other assets or a decline in
the value of securities or assets to be acquired.
In the event of the occurrence of any of the foregoing adverse market events,
the Fund's overall return may be lower than if it had not engaged in the hedging
transactions.
It should also be noted that the Fund may enter into transactions in options
(except for options on foreign currencies), Futures Contracts, Options on
Futures Contracts and Forward Contracts not only for hedging purposes, but also
for non-hedging purposes intended to increase portfolio returns. Non-hedging
transactions in such investments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Fund will only write
covered options, such that cash or securities necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, the method
of covering an option employed by the Fund may not fully protect it against risk
of loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains.
The Fund also may enter into transactions in Futures Contracts, Options on
Futures Contracts and Forward Contracts for other than hedging purposes, which
could expose the Fund to significant risk of loss if foreign currency exchange
rates, equity prices or interest rates do not move in the direction or to the
extent anticipated. In this regard, the foreign currency may be extremely
volatile from time to time, as discussed in the Prospectus and in this Statement
of Additional Information, and the use of such transactions for non-hedging
purposes could therefore involve significant risk of loss.
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With respect to the writing of straddles on securities, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET. Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contracts at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved the
daily limit on a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where the Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where the Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolio
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk the Fund assumes when
it purchases an Option on a Futures Contract is the premium paid for the option,
plus related transaction costs. In order to profit from an option purchased,
however, it may be necessary to exercise the option and to liquidate the
underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES. Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in
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connection with other transactions. Moreover, because the foreign currency
market is a global, 24-hour market, events could occur in that market which will
not be reflected in the forward, futures or options markets until the following
day, thereby making it more difficult for the Fund to respond to such events in
a timely manner.
Settlements of exercises of over-the-counter Forward Contracts or foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such
currencies in conformity with any U.S. or foreign restrictions and regulations
regarding the maintenance of foreign banking relationships, fees, taxes or other
charges.
Unlike transactions entered into by the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. The
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indexes, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
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The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if as a result more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby ensuring that the leveraging effect of such Futures Contract is
minimized.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities held by a fund, cannot
exceed 15% of the fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized as such by the
Federal Reserve Bank of New York. Also, the contracts the Fund has in place with
such primary dealers provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula generally is based on a multiple of the
premium received by the Fund for writing the option, plus the amount, if any of
the option's intrinsic value (i.e., the amount that the option is in-the-money).
The formula may also include a factor to account for the difference between the
price of the security and the strike price of the option if the option is
written out-of-the-money. The Fund will treat all or a portion of the formula as
illiquid for purposes of the SEC illiquidity ceiling test imposed by the SEC
staff. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers (where applicable), and will treat the assets
used to cover these options as illiquid for purposes of such SEC illiquidity
ceiling test.
------------------------
THE POLICIES STATED ABOVE ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT
SHAREHOLDER APPROVAL, AS MAY THE FUND'S INVESTMENT OBJECTIVE.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or of a class or series, as applicable,
or (ii) 67% or more of the outstanding shares of the Trust or of a series or
class, as applicable, present at a meeting if holders of more than 50% of the
outstanding shares of the Trust or a series or class, as applicable, are
represented in person or by proxy). Except for Investment Restriction (1), these
investment restrictions and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for extraordinary or emergency purposes, or
pledge, mortgage or hypothecate an amount of its assets (taken at market
value) in excess of 15% of its total assets, in each case taken at the lower
of cost or market value. For the purpose of this restriction, collateral
arrangements with respect to options, Futures Contracts, Options on Futures
Contracts, Forward Contracts and options on foreign currencies, and payments
of initial and variation margin in connection therewith, are not considered a
pledge of assets.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein and securities secured by real
estate), or mineral leases, commodities or commodity contracts (except
contracts for the future or forward delivery of securities or foreign
currencies and related options, and except Futures Contracts and Options on
Futures Contracts) in the ordinary course of its business. The Fund reserves
the freedom of action to hold and to sell real estate or mineral leases,
commodities or commodity contracts acquired as a result of the ownership of
securities.
(4) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market value).
Not more than 10% of the Fund's total assets (taken at market value) may be
invested in repurchase agreements maturing in more than seven days. The Fund
may purchase all or a portion of an issue of debt securities distributed
privately to financial institutions. For these purposes the purchase of
short-term commercial paper or a portion or all of an issue of debt securities
which are part of an issue to the public shall not be considered the making of
a loan.
(5) Purchase the securities of any issuer if (as to 50% of the value of its
total assets) such purchase, at the time thereof, would cause more than 5% of
its total assets (taken at market value) to be invested in the securities of
such issuer, other than U.S. Government securities.
(6) Purchase voting securities of any issuer if (as to 50% of the value of
its total assets) such purchase, at the time thereof, would cause more than
10% of the outstanding voting securities of such issuer to be held by the
Fund. For this purpose all indebtedness of an issuer shall be deemed a
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single class and all preferred stock of an issuer shall be deemed a single
class.
(7) Invest for the purpose of exercising control or management.
(8) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value.
(9) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities and the Fund may make
margin deposits in connection with options, Futures Contracts, Options on
Futures Contracts, Forward Contracts and options on foreign currencies.
(10) Sell any security which the Fund does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to obtain
securities without payment of further consideration equivalent in kind and
amount to the securities sold and provided that if such right is conditional
the sale is made upon equivalent conditions.
(11) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase such securities if such purchase at
the time thereof would cause more than 10% of its total assets (taken at
market value) to be invested in the securities of such issuers; and, provided
further, that the Fund will not purchase securities issued by an open-end
investment company.
(12) Write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent the Fund from writing,
purchasing and selling puts, calls or combinations thereof with respect to
securities, indexes of securities or foreign currencies, and with respect to
Futures Contracts.
(13) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder. For the purposes of this restriction,
collateral arrangements with respect to options, Futures Contracts and Options
on Futures Contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior security.
As a non-fundamental policy, the Fund will not knowingly invest in securities
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 15% of the Fund's net assets (taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years'
continuous operation.
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be changed without
shareholder approval.
3. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the investment management of the
Fund's assets and the officers of the Trust are responsible for its operations.
The Trustees and officers of the Trust are listed below, together with their
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN*, Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor. Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery. Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman. Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director. Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. Address: 110 Broad Street, Boston,
Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
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J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President. 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 0. 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
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Adviser, whose address is 500 Boylston
Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 75 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current years service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable, under the retirement plan.
As of November 29, 1996, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with respect to
any matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interest of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Declaration of Trust, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.) which is a wholly
owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives a
management fee, computed and paid monthly, in an amount equal to the sum of
0.75% of the Fund's average daily net assets.
For the fiscal years ended August 31 1996 and 1995 and the nine-month period
ended August 31, 1994, MFS received fees under the Advisory Agreement of
$2,731,358, $2,505,884, and $1,952,229, respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
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The Fund pays all of the Fund's expenses (other than those assumed by the
Adviser or MFD) including Trustees fees discussed above; governmental fees;
interest charges; taxes; membership dues in the Investment Company Institute
allocable to the Fund; fees and expenses of independent auditors, of legal
counsel, and of any transfer agent, registrar or dividend disbursing agent of
the Fund; expenses of repurchasing and redeeming shares and servicing
shareholder accounts; expenses of preparing, printing and mailing share
certificates, periodic reports, notices and proxy statements to shareholders and
to governmental officers and commissions; brokerage and other expenses connected
with the execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. Payment by the Fund of brokerage commissions for
brokerage and research services of value to the Adviser in serving its clients
is discussed under the caption "Portfolio Transactions and Brokerage
Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 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 Fund's shares (as defined in "Investment Restrictions") and, in either case,
by a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value and public offering price of each class of shares of the Fund. The
Custodian does not determine the investment policies of the Fund or decide which
securities the Fund will buy or sell. The Fund may, however, invest in
securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Trustees have reviewed and approved as in the best
interests of the Fund and the shareholders the custodial arrangements with The
Chase Manhattan Bank for securities of the Fund held outside the United States.
The Custodian also serves as the dividend and distribution disbursing agent of
the Fund. The Custodian has contracted with the Adviser for the Adviser to
perform certain accounting functions related to options transactions for which
the Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Trust, dated as of September 10,
1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively. In addition, the Shareholder Servicing Agent will
be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. The Custodian has contracted with the
Shareholder Servicing Agent to administer and perform certain dividend and
distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
dated as of January 1, 1995 (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to
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MFD in relation to the receipt or payment of money with respect to a period or
periods prior to January 1, 1995, such reference shall be deemed to include FSI,
as the predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of the Class A shares of the Fund is their
net asset value next computed after the sale plus a sales charge which varies
based upon the quantity purchased. The public offering price of a Class A share
of the Fund is calculated by dividing the net asset value of a Class A share by
the difference (expressed as a decimal) between 100% and the sales charge
percentage of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" in this SAI). A
group might qualify to obtain quantity sales charge discounts (see "Investment
and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain transactions as described in the Prospectus. Such sales
are made without a sales charge to promote good will with employees and others
with whom MFS, MFD and/or the Fund have business relationships, and because the
sales effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge
the dealer retains 5% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD pays a commission to dealers who initiate and
are responsible for purchases of $1 million or more as described in the
Prospectus.
CLASS B AND CLASS I SHARES: MFD acts as agent in selling Class B and Class I
shares of the Fund to dealers. The public offering price of Class B and Class I
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus and the Prospectus Supplement pursuant to which Class I shares
are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Funds shares.
During the fiscal year ended August 31, 1996, MFD received sales charges of
$29,911 and dealers received sales charges of $173,534 (as their concession on
gross sales charges of $203,445) for selling Class A shares of the Fund; the
Fund received $7,215,368 representing the aggregate net asset value of such
shares. During the fiscal year ended August 31, 1995, MFD received sales charges
of $16,545 and dealers received sales charges of $102,485 (as their concession
on gross sales charges of $119,030) for selling Class A shares of the Fund; the
Fund received $3,843,850 representing the aggregate net asset values of such
shares. During the nine-month period ended August 31, 1994, MFD received sales
charges of $18,287 and dealers received sales charges of $111,235 (as their
concession on gross sales charges of $129,522) for selling Class A shares of the
Fund; the Fund received $3,347,931 representing the aggregate net asset values
of such shares.
During the fiscal years ended August 31, 1996 and 1995, the nine-month period
ended August 31, 1994, and the fiscal year ended November 30, 1993 the CDSC
imposed on redemptions of Class A shares was approximately $86, $0, $0 and $0,
respectively.
During the fiscal years ended August 31, 1996 and 1995, the nine-month period
ended August 31, 1994, and the fiscal year ended November 30, 1993 the CDSC
imposed on redemptions of Class B shares was approximately $122,087 $175,565,
$221,844 and $362,000, respectively.
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
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to
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achieve this result by selecting broker-dealers to execute portfolio
transactions on behalf of the Fund and other clients of the Adviser on the basis
of their professional capability, the value and quality of their brokerage
services, and the level of their brokerage commissions. In the case of
securities, such as government securities, which are principally traded in the
over-the-counter market (where no stated commissions are paid but the prices
include a dealer's markup or markdown), the Adviser normally seeks to deal
directly with the primary market makers, unless in its opinion, better prices
are available elsewhere. In the case of securities purchased from underwriters,
the cost of such securities generally includes a fixed underwriting commission
or concession. Securities firms or futures commission merchants may receive
brokerage commissions on transactions involving options, Futures Contracts and
Options on Futures Contracts and the purchase and sale of underlying securities
upon exercise of options. The brokerage commissions associated with buying and
selling options may be proportionately higher than those associated with general
securities transactions. From time to time, soliciting dealer fees are available
to the Adviser on the tender of the Fund's portfolio securities in so-called
tender or exchange offers. Such soliciting dealer fees are in effect recaptured
for the Fund by the Adviser. At present no other recapture arrangements are in
effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the fiscal year ended August 31, 1996, the Fund paid total brokerage
commissions of $1,192,850 on total transactions of $654,444,462. For the fiscal
year ended August 31, 1995, the Fund paid total brokerage commissions of
$1,220,258 on total transactions of $570,627,486. For the nine-month period
ended August 31, 1994, the Fund paid total brokerage commissions of $1,382,311
on total transactions of $573,327,855.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security,
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the securities are allocated among clients in a manner believed by the Adviser
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Fund is concerned. In other cases, however, it is believed that the Fund's
ability to participate in volume transactions will produce better executions for
the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with all classes of shares of other MFS Funds or MFS
Fixed Fund (a bank collective investment fund) within a 13-month period (or
36-month period in the case of purchases of $1 million or more), the shareholder
may obtain Class A shares of the Fund at the same reduced sales charge as though
the total quantity were invested in one lump sum by completing the Letter of
Intent section of the Fund's Account Application or filing a separate Letter of
Intent application (available from the Shareholder Servicing Agent) within 90
days of the commencement of purchases. Subject to acceptance by MFD and the
conditions mentioned below, each purchase will be made at a public offering
price applicable to a single transaction of the dollar amount specified in the
Letter of Intent application. The shareholder or his dealer must inform MFD that
the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable) the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts
on the purchase of Class A shares when that shareholder's new investment,
together with the current offering price value of all the holdings of all
classes of shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level (see "Purchases" in the
Prospectus for the sales charges on quantity purchases). For example, if a
shareholder owns shares with a current offering price value of $75,000 and
purchases an additional $25,000 of Class A shares of the Fund, the sales charge
for the $25,000 purchase would be at the rate of 4% (the rate applicable to
single transactions of $100,000). A shareholder must provide the Shareholder
Servicing Agent (or his investment dealer must provide MFD) with information to
verify that the quantity sales charge discount is applicable at the time the
investment is made.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
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SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B shares made in any year pursuant to a SWP
generally are limited to 10% of the value of the account at the time of
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B shares will be made in the following
order: (i) any "Free Amount"; (ii) to the extent necessary, any "Reinvested
Shares"; and (iii) to the extent necessary, the "Direct Purchase" subject to the
lowest CDSC (as such terms are defined in "Contingent Deferred Sales Charge" in
the Prospectus). The CDSC will be waived in the case of redemptions of Class B
shares pursuant to a SWP but will not be waived in the case of SWP redemptions
of Class A shares which are subject to a CSDC. To the extent that redemptions
for such periodic withdrawals exceed dividend income reinvested in the account,
such redemptions will reduce and may eventually exhaust the number of shares in
the shareholder's account. All dividend and capital gain distributions for an
account with a SWP will be received in full and fractional shares of the Fund at
the net asset value in effect at the close of business on the record date for
such distributions. To initiate this service, shares having an aggregate value
of at least $5,000 either must be held on deposit by, or certificates for such
shares must be deposited with, the Shareholder Servicing Agent. With respect to
Class A shares, maintaining a withdrawal plan concurrently with an investment
program would be disadvantageous because of the sales charges included in share
purchases and the imposition of a CDSC on certain redemptions. The shareholder
may deposit into the account additional shares of the Fund, change the payee or
change the amount of each payment. The Shareholder Servicing Agent may charge
the account for services rendered and expenses incurred beyond those normally
assumed by the Fund with respect to the liquidation of shares. No charge is
currently assessed against the account, but one could be instituted by the
Shareholder Servicing Agent on 60 days' notice in writing to the shareholder in
the event that the Fund ceases to assume the cost of these services. The Fund
may terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be made at
any time by mailing a check payable to the Fund directly to the Shareholder
Servicing Agent. The shareholder's account number and the name of his investment
dealer must be included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of the
other MFS Funds (if available for sale) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to six different funds
effective on the seventh day of each month or of every third month, depending
whether monthly or quarterly exchanges are elected by the shareholder. If the
seventh day of the month is not a business day, the transaction will be
processed on the next business day. Generally, the initial exchange will occur
after receipt and processing by the Shareholder Servicing Agent of an
application in good order. Exchanges will continue to be made from a
shareholder's account in any MFS Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing signed by the
record owner(s) exactly as shares are registered; if by telephone proper account
identification is given by the dealer or shareholder of record). Each Exchange
Change Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change
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Request is received by telephone or in writing before the close of business on
the last business day of the month, the Exchange Change Request will be
effective for the following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of other MFS
Funds (except MFS Money Market Fund MFS Government Money Market Fund and holders
of Class A shares of MFS Cash Reserve Fund in the case where such shares are
acquired through direct purchase of reinvested dividends) who have redeemed
their shares have a one-time right to reinvest the redemption proceeds in the
same class of shares of any of the MFS Funds (if shares of the fund are
available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
the MFS Money Market Fund, MFS Government Money Market Fund and Class A shares
of MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares or shares of another MFS Fund at net asset value pursuant to the exchange
privilege described below. Such a reinvestment must be made within 90 days of
the redemption and is limited to the amount of the redemption proceeds. If the
shares credited for any CDSC paid are then redeemed within six years of the
initial purchase, in the case of Class B shares or 12 months of the initial
purchase in the case of certain Class A shares, a CDSC will be imposed upon
redemption. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of any loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for shares of the same class of
any of the other MFS Funds (if available for sale and if the purchaser is
eligible to purchase the class of shares) at net asset value. Exchanges will be
made only after instructions in writing or by telephone (an "Exchange Request")
are received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing signed by the
record owner(s) exactly as the shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If an Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange, the exchange usually will occur on that day if all of the requirements
set forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to the Shareholder Servicing Agent by facsimile
subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except shares of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the MFS Funds, subject to the conditions, if
any, set forth in their respective prospectuses. In addition, unitholders of the
MFS Fixed Fund (a bank collective investment fund) have the right to exchange
their units (except units acquired through direct purchases) for shares of the
Fund, subject to the conditions, if any, imposed upon such unitholders by the
MFS Fixed Fund.
Any state income tax advantages for investment in shares of state-specific
shares of each series of MFS Municipal Series Trust may only benefit residents
of such states. Investors should consult with their own tax advisers to be sure
this is an appropriate investment based on their residency and each state's
income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund are available for purchase
by all types of tax-deferred retirement
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<PAGE> 70
plans. MFD makes available through investment dealers plans and/or custody
agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
As long as it qualifies as a regulated investment company under the Code, the
Fund will not be required to pay Massachusetts income or excise taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or in
additional shares. A portion of the Fund's ordinary income dividends is normally
eligible for the dividends received deduction for corporations if the recipient
otherwise qualifies for that deduction with respect to its holding of Fund
shares. Availability of the deduction to particular shareholders is subject to
certain limitations, and deducted amounts may be subject to the alternative
minimum tax and result in certain basis adjustments. Distributions of net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses), whether paid in cash or in additional shares, are
taxable to the Fund's shareholders as long-term capital gains for federal income
tax purposes, without regard to the length of time the shareholders have held
their shares. Any Fund dividend that is declared in October, November, or
December, that is payable to shareholders of record in such a month, and that is
paid the following January will be treated as if received by the shareholders on
December 31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the end
of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 90 days after their purchase
followed by any purchase without payment of an additional sales charge
(including purchases by exchange or by reinvestment) of Class A shares of the
Fund or of another MFS Fund (or other shares of an MFS Fund generally sold
subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing and character of distributions to shareholders, and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities, deferred interest bonds, certain stripped
securities, and certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
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The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Fund income and distributions to shareholders. For example, certain
positions held by the Fund on the last business day of each taxable year will be
marked to market (i.e., treated as if closed out) on that day, and any gain or
loss associated with such positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, and
Forward Contracts, to the extent necessary to meet the requirements of
Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund generally will be
treated as ordinary income and losses. The use of foreign currencies for
non-hedging purposes and investment by the Fund in certain "passive foreign
investment companies" may be limited in order to avoid taxes on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to its shareholders foreign tax credits or deductions with
respect to such foreign taxes. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amounts of the Fund's
assets to be invested within various countries are not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold U.S. federal income tax at the rate of 30% on taxable dividends and
other payments to Non-U.S. Persons that are subject to such withholding,
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdictions. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a Non-U.S. person) who does not furnish to the Fund certain
information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A and Class B shares
(the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and Rule
12b-1 thereunder (the "Rule") after having concluded that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and each respective
class of shareholders. The provisions of the Distribution Plan are severable
with respect to each class of shares offered by the Fund. The Distribution Plan
is designed to promote sales, thereby increasing the net assets of the Fund.
Such an increase may reduce the Fund's expense ratio to the extent that the
Fund's fixed costs are spread over a larger net asset base. Also, an increase in
net assets may lessen the adverse effect that could result were the Fund
required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amount as may be determined from time to time by MFD (MFD, however, may waive
this minimum amount requirement from time to time); or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. Dealers may from time to time be
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<PAGE> 72
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
<TABLE>
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1996, the Fund paid the following Distribution
Plan expenses:
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 715,542 $ 279,749 $435,793
Class B Shares $1,597,402 $1,252,174 $345,228
</TABLE>
GENERAL: The Distribution Plan 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"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interested person" has any financial
interest in the Distribution Plan or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. As of the date of this SAI, the
Exchange is open for trading every weekday except for the following holidays (or
the days on which they are observed): New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. This determination is made once during each such day as of the
close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Forward Contracts will be valued using a pricing model taking into
consideration market data from an external pricing source. Use of the pricing
services has been approved by the Board of Trustees. All other securities,
futures contracts and options in the Fund's portfolio (other than short-term
obligations) for which the principal market is one or more securities or
commodities exchanges (whether domestic or foreign) will be valued at the last
reported sale price or at the settlement price prior to the determination (or if
there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, Futures Contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Debt securities (other than
short-term obligations) in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yields, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities. Short-
term obligations, if any, in the Fund's portfolio are valued at amortized cost,
which constitutes fair value as determined by the Board of Trustees. Short-term
securities with a remaining maturity in excess of 60 days will be valued based
upon dealer supplied valuations. Portfolio securities and over-the-counter
options and Forward Contracts, for which there are no quotations or valuations
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees. A share's net asset value is effective for orders
received by the dealer prior
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<PAGE> 73
to its calculation and received by MFD, in its capacity as the Fund's
distributor, prior to the close of the business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return since the value of
the initial account will not be reduced by the current maximum sales charge
(currently 5.75%) and/or (iii) total rates of return which represent aggregate
performance over a period or year-by-year performance and which may or may not
reflect the effect of the maximum sales charge or CDSC.
The fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
Total rate of return quotations for each class are presented in Appendix B
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS -- The performance results for Class B shares presented in
Appendix B attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class B shares, and cover the period from
December 29, 1986 through December 31, 1995. It has been assumed that dividend
and capital gain distributions were reinvested in additional shares. Any
performance results or total rate of return quotation provided by the Fund
should not be considered as representative of the performance of the Fund in the
future since the net asset value of shares of the Fund will vary based not only
on the type, quality and maturities of the securities held in the Fund's
portfolio, but also on changes in the current value of such securities and on
changes in the expenses of the Fund. These factors and possible differences in
the methods used to calculate total rates of return should be considered when
comparing the total rate of return of the Fund to total rates of return
published for other investment companies or other investment vehicles. Total
rate of return reflects the performance of both principal and income. Current
net asset value and account balance information may be obtained by calling
1-800-MFS-TALK (637-8255).
From time to time the Fund may, as appropriate, quote Fund rankings or reprint
all or a portion of evaluations of fund performance and operations appearing in
various independent publications, including but not limited to the following:
Money, Fortune, U.S. News and World Report, Kiplinger's Personal Finance, The
Wall Street Journal, Barron's, Investors Business Daily, Newsweek, Financial
World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
may use charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The Fund may
advertise examples of the effects of periodic investment plans, including the
principle of dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer
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<PAGE> 74
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against a loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
From time to time the fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning[Servicemark] program, an intergenerational
financial planning assistance program; issues with respect to insurance (e.g.,
disability and life insurance and Medicare supplemental insurance); and issues
regarding financial and health care management for elderly.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS[Registered Trademark] 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[Registered Trademark] World Governments Fund is established
as America's first globally diversified fixed/income mutual fund.
-- 1984 -- MFS[Registered Trademark] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS[Registered Trademark] Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS[Registered Trademark] Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS[Registered Trademark] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
-- 1989 -- MFS[Registered Trademark] Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS[Registered Trademark] World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS[Registered Trademark] World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS[Registered Trademark] Union
Standard Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders of experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any series
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Trustees have currently
authorized shares of the Fund and thirteen other series. The Declaration of
Trust further authorizes the Trustees to classify or reclassify any series of
shares into one or more classes. Pursuant thereto, the Trustees have authorized
the issuance of three classes of shares of the Fund, Class A shares, Class B
shares and Class I shares. Each share of a class of the Fund represents an equal
proportionate interest in the assets of the Fund allocable to that class. Upon
liquidation of the Fund, shareholders of each class are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
would participate equally in the earnings, dividends and assets allocable to
that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of
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the Trust's shares. Shares have no pre-emptive or conversion rights (except as
described in "Purchases -- Conversion of Class B Shares" in the Prospectus).
Shares are fully paid and non-assessable. The Trust may enter into a merger or
consolidation, or sell all or substantially all of its assets (or all or
substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
10. INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1996, the Statement of Assets and
Liabilities at August 31, 1996, the Statement of Operations for the year ended
August 31, 1996, the Statement of Changes in Net Assets for the years ended
August 31, 1996 and 1995, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the Fund, are incorporated by reference into this SAI in reliance upon the
report of Deloitte & Touche LLP, independent auditors, given upon their
authority as experts in accounting and auditing. A copy of the Annual Report
accompanies this SAI.
27
<PAGE> 76
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,275 $ 875 10 $263,815
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 4,400 1,879 14 148,624
Dr. Lawrence Cohn.................... 3,950 542 18 135,874
Sir David Gibbons.................... 3,950 1,460 13 135,874
Abby M. O'Neill...................... 3,500 670 10 129,499
Walter E. Robb, III.................. 4,400 2,087 15 148,624
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 3,950 542 20 135,874
Ward Smith........................... 4,400 820 13 148,624
- -------------
<FN>
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 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).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,948 $442 $ 737 $1,032 $1,474
3,326 499 832 1,164 $1,663
3,705 556 926 1,297 $1,852
4,083 612 1,021 1,429 $2,042
4,462 669 1,115 1,562 $2,231
4,840 726 1,210 1,694 $2,420
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
A-1
<PAGE> 77
APPENDIX B
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS
<TABLE>
CLASS B SHARES
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31, 1986(1)............................... $ 9,846 $ 0 $ 0 $ 9,846
December 31, 1987.................................. 11,846 0 42 11,888
December 31, 1988.................................. 12,353 0 178 12,531
December 31, 1989.................................. 17,230 0 301 17,531
December 31, 1990.................................. 14,876 0 260 15,136
December 31, 1991.................................. 23,738 0 414 24,152
December 31, 1992.................................. 23,707 971 413 25,091
December 31, 1993.................................. 20,276 5,339 400 26,015
December 31, 1994.................................. 18,092 5,924 1,078 25,094
December 31, 1995.................................. 19,692 8,348 5,113 33,153
- --------------
<FN>
(1) Based on initial investment made on December 29, 1986, the initial public
offering date of Class B shares.
</TABLE>
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. No adjustment has been made
for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended August 31, 1996.
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
10 YEAR
OR LIFE
1 YEAR 5 YEAR OF FUND
------ ------ -------
<S> <C> <C> <C>
Class A shares with sales charge.................................. -2.07% 10.56%(1) 13.17%(1)
Class A shares without sales charge............................... 3.92% 11.64%(1) 13.74%(1)
Class B shares with CDSC.......................................... -0.23% 10.90% 13.49%(2)
Class B shares without CDSC....................................... 3.17% 11.16% 13.49%(2)
(1) Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class A shares
on September 20, 1993. Sales charges, expenses and expense ratios, and
therefore performance, for Class A and Class B shares differ. Class A share
performance has been adjusted to reflect that Class A shares generally are
subject to an initial sales charge (unless the performance quotation does
not give effect to the initial sales charge) whereas Class B shares
generally are subject to a CDSC. Class A share performance has not, however,
been adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are higher for Class B shares.
(2) From the initial public offering date of Class B shares on December 29,
1986.
</TABLE>
B-1
<PAGE> 78
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[REGISTERED TRADEMARK]
MANAGED SECTORS
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MMS-13-1/97/500 08/208
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICEMARK]
<PAGE> 79
Table of Contents
Letter from the Chairman ..................... 1
A Discussion with the Fund Manager .......... 3
Fund Manager's Profile ...................... 6
Performance Summary ......................... 7
Fund Facts .................................. 8
Portfolio Concentration ..................... 9
Portfolio of Investments .................... 10
Financial Statements ........................ 12
Notes to Financial Statements ............... 18
Independent Auditors' Report ................ 23
The MFS Family of Funds ..................... 24
Trustees and Officers ....................... 25
Highlights
[bullet] While the Fund's technology holdings hindered performance during the
last quarter of 1995 and the first quarter of 1996, this was partly
offset by good performance in the Fund's holdings in energy, financial
services, and leisure.
[bullet] The Fund's concentration in health care and technology was increased,
while weightings in the financial services and retail sectors were
reduced.
[bullet] The Fund has sought companies that we expect to increase earnings
through cost cutting, greater productivity, increased market share, and
better balance sheet management.
<PAGE>
Letter from the Chairman
[Photo: A. Keith Brodkin]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of fairly reasonable growth and moderate inflation -- two
factors that we think can be important contributors to a favorable long-term
investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis,
followed by a rate of 4.7% in the second quarter. Real growth in gross
domestic product has exceeded our expectations so far this year, and we now
expect that growth for all of 1996 could accelerate slightly and exceed 2.5%.
Although the individual consumer appears to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread
job growth. However, the economies of Europe and Japan continue to be in the
doldrums, weakening U.S. exports while subduing the capital spending plans of
American corporations.
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. Although we believe the equity market represents fair value at current
levels, the expected slowdown in the growth of corporate earnings and the
increases in interest rates experienced so far this year have raised some
near-term concerns, as was seen in July's stock market correction. Further
increases in interest rates, and an acceleration of inflation coupled with an
additional slowdown in corporate earnings growth, could have a negative
effect on the stock market. However, to the extent that some earnings
disappointments are taken as a sign that the economy is not overheating, this
may prove beneficial for the longer-term health of the equity market. We
continue to believe that many of the technology-driven productivity gains
that U.S. companies have made in recent years will continue to enhance
corporate America's competitiveness and profitability. Therefore, while we
have some near-term concerns, we remain quite constructive on the long-term
viability of the equity market.
Finally, you may notice, this report to shareholders incorporates a number of
changes which we hope you will find informative and useful. Following the
Discussion with the Fund Manager, we have added new information on the
1
<PAGE>
Letter from the Chairman - continued
Fund's holdings, including charts illustrating the portfolio's concentration
in the different investments that meet its criteria. Near the back of the
report is a list of phone numbers and addresses, in case you need to contact
MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 20, 1996
2
<PAGE>
A Discussion with the Fund Manager
[Photo: Kenneth J. Enright]
For the 12 months ended August 31, 1996, the Fund's Class A shares provided a
total return of 3.92%, while Class B shares returned 3.17%. These returns,
which assume the reinvestment of distributions but exclude the effects of any
sales charges, compare to an 18.72% return for the unmanaged Standard &
Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index of
common stock performance.
Q. What do you think were some of the things that affected performance, Ken?
A. Consistent with the Fund's charter to be non-diversified, the Fund was
overweighted in a number of industries, particularly technology. For most of
calendar year 1995, this helped overall performance, but hindered results in
the last quarter of that year and the first quarter of 1996. In addition,
weakness in the Fund's gaming positions and continued softness in stocks of
health maintenance organizations, recent additions to the Fund, have also
hurt results. Also, many of the sectors in which the Fund invested are in the
NASDAQ industrials and that index lagged the S&P 500 by over 10% over the
past year. This has been offset to some degree by good performance in the
Fund's energy holdings as well as strong individual performance in names such
as First Interstate, Freddie Mac, Intel, BMC Software, Promus Hotels, Tyco
International, and ADT Ltd.
Q. How would you describe the business and economic environment you faced
over the past 12 months, particularly as it relates to the sectors in the
Fund?
A. Generally, the backdrop for financial assets remains, as it has for the
past 18 months, quite constructive, with modest economic growth, a fairly
benign inflation environment, and the continued potential for fiscal
discipline in Washington. All this did not go unnoticed by investors as the
market surged in 1995, although additional gains in 1996 have been harder to
achieve. For most of this year, the breadth of the market has been decidedly
narrower, which has led to increased volatility. Investors have been reacting
aggressively to news on the economic data front and earnings reports. Given
the sector orientation of the Fund, this type of action increases short-term
volatility as the market rotates among industry sectors, with individual
groups having price changes ranging from 10% to 20% in either direction while
the overall market makes little headway.
3
<PAGE>
A Discussion with the Fund Manager -- continued
Q. The Fund normally focuses on five sectors at a time. Which ones are you
emphasizing now, and why?
A. The Fund has recently narrowed its sector focus to four areas. The
technology weighting has been increased to approximately 30% of the portfolio
from a low of 17% in late 1995. Dramatic price corrections in many of that
industry's segments have presented the Fund with what we believe is an
opportunity to buy high-quality companies at relative valuations well below
the market and historic averages despite our expectations of above average
earnings growth. Energy weightings, primarily oil service companies, have
been modestly increased as the prospect for consolidation-driven cost-savings
and enhanced operating leverage in a favorable overall environment for
energy, both natural gas and oil, continues to bode well for superior
earnings growth. The Fund's allocation to the leisure sector, primarily
gaming and wireless communications, has remained approximately the same,
although a reduction in gaming issues has been offset by an increase in
Telephone Data Systems, the Fund's largest holding. The current market value
of this stock is well below what we believe to be the sum of its individual
parts and, in our view, the prospect for a corporate restructuring to unlock
these values is very high.
The health care sector has been added over the past six months and consists
primarily of health maintenance organizations (HMO). Stocks in this
controversial area suffered major corrections as earnings growth slowed, due
primarily to weaker-than-expected pricing. We still believe the prospects for
unit growth are very positive and pricing expectations have improved, and
expect earnings for the HMOs to reaccelerate in 1997 and beyond. Finally, the
"other" category, which consists of prospective future sectors and/or
individual ideas where we believe the Fund is better off owning than not, has
been concentrated to reduce the number of holdings and increase weightings in
stocks we believe represent attractive values. Some examples are Tyco
International, ADT LTD., Wisconsin Central, Loral Space and Communications,
Office Depot, McDonnell Douglas, Sears, and Equitable of Iowa.
Q. Have you made any significant changes in your holdings or sector
weightings over the past year, and why?
A. Yes, as I mentioned, the Fund's concentration in particular sectors has
increased modestly, with health care being added and technology getting a
higher weighting, while weightings in the financial services and retail
sectors were dramatically lowered. Financial service stocks have performed
well in 1996, which reduced their relative attractiveness. Retail prospects
4
<PAGE>
were mixed after a weak Christmas but rotation by investors to this sector
allowed the Fund to reduce its holdings.
Q. Can you name some stocks or sectors that performed well, or better than
expected, and tell us why you think they did well?
A. One successful theme the Fund has pursued cuts across a number of
industries, including oil services, banks, and aerospace and defense. This
theme was the consolidation of slow-growth industries where valuations
reflect the prospects for continued but anemic growth, as opposed to an
acceleration of earnings growth through cost cutting, greater productivity,
increased market share, and better balance sheet management. Weatherford, BJ
Services, Cooper Cameron, First Interstate, Fleet Financial Group, Loral, and
McDonnell Douglas are all successful examples of companies whose prospects
for accelerating earnings growth became apparent, increasing the appeal of
these companies to other investors.
Q. Now what about some stocks or sectors that did not perform as well as you
expected?
A. Technology is surely one, as expectations got ahead of fundamentals.
Investors focused too heavily on the positive demand outlook, which now
appears to have been partly overstated due to the industry's practice of
double ordering and ignored the industry's rush to add capacity. These
factors all collided and caused a severe correction in the sector that has
taken almost a year to shake out. A second example was our expectation for
state gaming license growth. We did not properly weigh the negative political
impact on this process, either in the approval of state gaming or, once
approval was granted, limitations on the number of licenses. That industry
has seen a major shake-out of participants and only the well-financed,
strongly managed companies appear positioned to prosper in what we still see
as an above-average growth industry.
Q. Looking ahead, what changes do you see in the overall market environment
as it relates to your Fund?
A. We still believe the economy will continue to grow, albeit at a moderate
rate. Also, this subdued level of growth should help inflation remain modest.
This environment will put a premium on the visibility and growth of earnings.
That means the market is likely to keep trading in a narrow range marked by
volatile rotations among sectors. In this environment, we believe the best
course of action for the Fund is to concentrate holdings in companies led by
strong management teams and which have visible earnings growth and attractive
relative valuations.
5
<PAGE>
A Discussion with the Fund Manager -- continued
Q. How are you positioning the Fund to try and take advantage of those
changes?
A. The Fund has concentrated its holdings and is overweighted in four
sectors, each of which we believe offers a favorable risk/reward ratio. For
example, we believe the technology industry continues to represent an area
where demand will grow at levels above that of the overall economy.
Well-positioned companies that execute properly are more likely to show
strong earnings growth, and the recent stock market correction has presented
an opportunity to purchase quality names at price-earnings ratios well below
these expected growth rates. The HMO area also presents an opportunity to
invest in what we see as a growth sector where the market perception is
different from ours. We believe earnings for a number of HMOs will more
closely approximate unit growth expectations of 18% to 25%, while current
valuations of the stocks appear to discount a decidedly slower progression.
/s/ Kenneth J. Enright
Kenneth J. Enright
Fund Manager
- --------------------------------------------------------------------------------
Fund Manager's Profile
Kenneth Enright joined the MFS Research Department in 1986. A graduate of Boston
State College and of the Babson College Graduate School of Business
Administration, he was named Assistant Vice President - Investments in 1987 and
Vice President - Investments in 1988. Mr. Enright became Fund Manager of MFS
Managed Sectors Fund in 1993. He is a Chartered Financial Analyst (C.F.A.).
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Federal Income Tax Information
Dividend received deduction: 7.93%
For the year ended August 31, 1996, the distributions from
long-term capital gains were $28,890,777.
- --------------------------------------------------------------------------------
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Managed Sectors Fund Class B shares in comparison to
various market indicators. Class B share results do not reflect the deduction
of any contingent deferred sales charge (CDSC) since the CDSC is not
applicable after a six-year period. Benchmark comparisons are unmanaged and
do not reflect any fees or expenses. You cannot invest in an index. All
results reflect the reinvestment of all dividends and capital gains.
The performance of Class A shares will be greater than or less than the line
shown, based on differences in loads and fees paid by shareholders investing
in different classes.
Class A shares were offered effective September 20, 1993. Information on
Class A share performance appears on the next page.
- --------------------------------------------------------------------------------
Line chart
Growth of Hypothetical $10,000 Investment
(For the Period from January 1, 1987 through August 31, 1996)
MFS
Managed Consumer
Sectors Price S&P 500
Fund Index Composite
---- ----- ---------
1/1/87 10000 10000 10000
8/31/87 16455 10350 13883
8/31/88 12318 10764 11403
8/31/89 17678 11270 15864
8/31/90 15341 11903 15064
8/30/91 20364 12356 19118
8/31/92 22065 12744 20627
8/31/93 26261 13097 23762
8/31/94 26762 13477 25058
8/31/95 33505 13830 30402
8/31/96 34566 14225 36070
- --------------------------------------------------------------------------------
Class A share performance on the next page includes the performance of the
Fund's Class B shares for periods prior to the commencement of offering of
Class A shares on September 20, 1993. Sales charges and operating expenses
for Class A and Class B shares differ. Class B share performance which is
included within the Class A SEC share performance has been
7
<PAGE>
Performance Summary -- continued
adjusted to reflect the maximum initial sales charge generally applicable to
Class A shares rather than the CDSC generally applicable to Class B shares.
Class A share performance has not been adjusted, however, to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are higher for Class B shares.
Average Annual Total Returns
Life of
Class
through
1 Year 3 Years 5 Years 8/31/96
-------------------------------- --------- --------- --------- ---------
MFS Managed Sectors Fund
(Class A) including 5.75%
sales charge -2.07% +8.60% +10.56% +13.17%
-------------------------------- --------- --------- --------- ---------
MFS Managed Sectors Fund
(Class A) at net asset value +3.92% +10.37% +11.64% +13.74%
-------------------------------- --------- --------- --------- ---------
MFS Managed Sectors Fund
(Class B) with CDSC -0.23% +8.90% +10.90% +13.49%
-------------------------------- --------- --------- --------- ---------
MFS Managed Sectors Fund
(Class B) without CDSC +3.17% +9.59% +11.16% +13.49%
-------------------------------- --------- --------- --------- ---------
Average specialty/miscellaneous
fund +11.64% +10.83% +14.86% +12.18%
-------------------------------- --------- --------- --------- ---------
Standard & Poor's 500 Composite
Index +18.72% +14.98% +13.57% +13.36%
-------------------------------- --------- --------- --------- ---------
Consumer Price Index[S] +2.86% +2.79% +2.86% +3.67%
-------------------------------- --------- --------- --------- ---------
[S] The Consumer Price Index is a popular measure of change in prices.
Class A SEC results include the maximum 5.75% sales charge. Class B SEC
results reflect the applicable CDSC, which declines over six years as
follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results.
- --------------------------------------------------------------------------------
Fund Facts
Strategy: The Fund's investment objective is to provide
capital appreciation. As much as 50% of the Fund's
assets may be in one sector or cash.
Commencement of
investment operations: December 29, 1986
Size: $337.4 million as of August 31, 1996
- --------------------------------------------------------------------------------
8
<PAGE>
Portfolio Concentration as of August 31, 1996
Top Ten Holdings
Telephone & Data Systems, Inc.
Provides rural and local telephone services
Intel Corp.
Semiconductor manufacturer
Tyco International Ltd.
Manufacturer of fire protection,
packaging, and electronic equipment
Harrah's Entertainment, Inc.
Operates gaming operations in
several states
Occidental Petroleum
Worldwide oil and natural gas
production company
ADT Ltd.
Commercial and residential
security company
National Semiconductor Corp.
Semiconductor manufacturer
Electronic Arts, Inc.
Entertainment software company
Healthsource, Inc.
Health maintenance organization
Cabletron Systems, Inc.
Provides local area networks (LANs)
for computer systems
Largest Sectors
[Graphic: Pie Chart]
Technology 31.6%
Other 25.1%
Leisure 18.5%
Energy 12.4%
Health Care 12.4%
9
<PAGE>
Portfolio of Investments - August 31, 1996
Common Stocks - 96.8%
==========================================================================
Issuer Shares Value
- --------------------------------------------------------------------------
Energy - 12.4%
BJ Services Co.* 150,000 $ 5,643,750
Camco International, Inc. 105,000 3,556,875
Cooper Cameron Corp.* 109,000 5,749,750
Occidental Petroleum Corp. 400,000 9,300,000
Seacor Holdings, Inc.* 134,900 6,137,950
Tidewater, Inc. 95,000 3,645,625
Weatherford Enterra, Inc.* 269,400 7,745,250
---------------
$ 41,779,200
- --------------------------------------------------------------------------
Health Care - 12.4%
CIGNA Corp. 26,500 $ 3,077,312
Coventry Corp.* 543,700 7,170,044
Healthsource, Inc.* 550,800 8,262,000
Healthsouth Corp.* 72,900 2,360,137
Pacificare Health Systems, Inc., "A"* 3,600 274,500
Pacificare Health Systems, Inc., "B"* 72,200 5,812,100
Pharmacia & Upjohn, Inc. 83,000 3,486,000
St. Jude Medical, Inc.* 110,800 3,974,950
United Healthcare Corp. 184,000 7,107,000
Ventritex, Inc.* 30,900 421,013
---------------
$ 41,945,056
- --------------------------------------------------------------------------
Leisure - 18.5%
American Portable Telecom, Inc.* 200,000 $ 1,900,000
Argosy Gaming Corp.* 350,000 2,275,000
Harrah's Entertainment, Inc.* 596,000 11,324,000
MGM Grand, Inc.* 94,200 3,556,050
Promus Hotel Corp.* 237,000 7,139,625
Showboat, Inc. 175,000 3,478,125
Telephone & Data Systems, Inc. 770,000 32,821,250
---------------
$ 62,494,050
- --------------------------------------------------------------------------
Technology - 31.6%
Adobe Systems, Inc. 132,000 $ 4,603,500
ADT Ltd.* 450,100 8,833,213
Analog Devices, Inc.* 280,000 6,755,000
Atmel Corp.* 135,000 3,493,125
BMC Software, Inc.* 69,800 5,200,100
Cabletron Systems, Inc.* 130,000 7,930,000
Digital Equipment Corp.* 150,000 5,793,750
Electronic Arts, Inc.* 275,600 8,509,150
Intel Corp. 185,000 14,765,312
Microsoft Corp.* 30,000 3,675,000
National Semiconductor Corp.* 472,000 8,673,000
Oracle Systems Corp.* 123,000 4,335,750
Spectrum Holobyte, Inc.* 800,000 4,100,000
Sun Microsystems, Inc.* 136,000 7,395,000
Sybase, Inc.* 215,000 3,463,516
U.S. Robotics Corp.* 135,000 7,087,500
Xilinx, Inc.* 60,000 2,100,000
---------------
$106,712,916
- --------------------------------------------------------------------------
10
<PAGE>
Other - 21.9%
Advanta Corp., "B" 123,300 $ 5,486,850
AGCO Corp. 301,700 7,127,662
Colgate-Palmolive Co. 57,000 4,631,250
Equitable of Iowa Cos. 210,000 7,717,500
Federated Department Stores, Inc.* 103,900 3,597,538
Loral Space & Communications Corp.* 305,700 4,279,800
McDonnell Douglas Corp. 100,000 5,012,500
Office Depot, Inc.* 455,000 7,223,125
PowerGen PLC (United Kingdom) 626,100 3,538,431
Sears, Roebuck & Co. 160,200 7,048,800
Tyco International Ltd. 313,000 13,224,250
Wisconsin Central Transportation Corp.* 137,400 4,843,350
---------------
$ 73,731,056
- --------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $305,967,668) $326,662,278
- --------------------------------------------------------------------------
Convertible Bonds - 0.1%
- --------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------
Spectrum Holobyte, Inc., 6.5s, 2002
(Technology)(##) $ 560 $ 327,600
Ventritex, Inc., 5.75s, 2001 (Other) 120 123,900
- --------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $680,000) $ 451,500
- --------------------------------------------------------------------------
Short-Term Obligations - 1.5%
- --------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due
9/04/96 $ 1,500 $ 1,499,348
Federal National Mortgage Assn., due
9/20/96 1,275 1,271,487
General Electric Capital Corp.,
due 9/03/96 2,080 2,079,390
- --------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 4,850,225
- --------------------------------------------------------------------------
Total Investments (Identified Cost, $311,497,893) $331,964,003
Other Assets, Less Liabilities - 1.6% 5,398,547
- --------------------------------------------------------------------------
Net Assets - 100.0% $337,362,550
- --------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
11
<PAGE>
Financial Statements
Statement of Assets and Liabilities
========================================================================
August 31, 1996
-----------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $311,497,893) $331,964,003
Cash 5,253
Receivable for investments sold 10,458,880
Receivable for Fund shares sold 78,450
Interest and dividends receivable 135,163
Other assets 12,761
---------------
Total assets $342,654,510
---------------
Liabilities:
Payable for investments purchased $ 4,417,435
Payable for Fund shares reacquired 536,614
Payable to affiliates -
Management fee 13,986
Shareholder servicing agent fee 3,301
Distribution fee 158,864
Accrued expenses and other liabilities 161,760
---------------
Total liabilities $ 5,291,960
---------------
Net assets $337,362,550
---------------
Net assets consist of:
Paid-in capital $278,805,599
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 20,466,179
Accumulated undistributed net realized gain on
investments and foreign currency transactions 38,348,182
Accumulated net investment loss (257,410)
---------------
Total $337,362,550
---------------
Shares of beneficial interest outstanding 25,647,219
---------------
Class A shares:
Net asset value per share (net assets of $207,504,082
/ 15,767,359 shares of beneficial interest
outstanding) $13.16
---------------
Offering price per share (100/94.25) $13.96
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $129,858,468 / 9,879,860 shares of
beneficial interest outstanding) $13.14
---------------
On sales of $50,000 or more, the offering price of
Class A shares is reduced. A contingent deferred sales
charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
12
<PAGE>
Statement of Operations
=========================================================================
Year Ended August 31, 1996
- -------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 2,972,654
Interest 206,009
----------------
Total investment income $ 3,178,663
----------------
Expenses -
Management fee $ 2,731,358
Trustees' compensation 46,448
Shareholder servicing agent fee (Class A) 306,661
Shareholder servicing agent fee (Class B) 351,428
Distribution and service fee (Class A) 715,542
Distribution and service fee (Class B) 1,597,402
Custodian fee 167,222
Postage 97,783
Printing 40,198
Auditing fees 22,945
Miscellaneous 271,311
----------------
Total expenses $ 6,348,298
Fees paid indirectly (12,804)
----------------
Net expenses $ 6,335,494
----------------
Net investment loss $ (3,156,831)
----------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 62,520,394
Foreign currency transactions (61,695)
----------------
Net realized gain on investments and foreign currency
transactions $ 62,458,699
----------------
Change in unrealized appreciation (depreciation) -
Investments $(45,740,155)
Translation of assets and liabilities in foreign
currencies 69
----------------
Net unrealized loss on investments and foreign
currency translation $(45,740,086)
----------------
Net realized and unrealized gain on investments and
foreign currency $ 16,718,613
----------------
Increase in net assets from operations $ 13,561,782
----------------
See notes to financial statements
13
<PAGE>
Statement of Changes in Net Assets
=========================================================================
Year Ended August 31, 1996 1995
- -------------------------------------------- ---------------- ----------------
Increase (decrease) in net assets:
From operations -
Net investment loss $ (3,156,831) $ (2,610,783)
Net realized gain on investments
and foreign currency transactions 62,458,699 52,247,905
Net unrealized gain (loss) on
investments and foreign currency
translation (45,740,086) 29,148,730
---------------- ----------------
Increase in net assets from operations $ 13,561,782 $ 78,785,852
---------------- ----------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ (37,126,652) $ (8,991,673)
From net realized gain on investments and
foreign currency transactions (Class B) (28,912,351) (14,927,407)
---------------- ----------------
Total distributions declared to
shareholders $ (66,039,003) $ (23,919,080)
---------------- ----------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 105,543,935 $ 126,368,710
Net asset value of shares issued to
shareholders in reinvestment of
distributions 60,342,057 21,847,531
Cost of shares reacquired (154,185,704) (160,496,119)
---------------- ----------------
Increase (decrease) in net assets
from Fund share transactions $ 11,700,288 $ (12,279,878)
---------------- ----------------
Total increase (decrease) in
net assets $ (40,776,933) $ 42,586,894
Net assets:
At beginning of period 378,139,483 335,552,589
---------------- ----------------
At end of period (including accumulated
net investment loss of $257,410,
and $69,538, respectively) $ 337,362,550 $ 378,139,483
---------------- ----------------
See notes to financial statements
14
<PAGE>
Financial Highlights
=========================================================================
Nine
Year Ended Months Ended Period Ended
August 31, August 31, November 30,
------------------ ------------- -------------
1996 1995 1994 1993*
- ----------------------------------------------------------------------------
Class A
- ----------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value --
beginning of period $15.55 $13.41 $15.50 $15.68
----------------- ------------- -------------
Income from investment
operations# --
Net investment loss $(0.08) $(0.05) $(0.03) $(0.02)
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.58 3.22 0.77 (0.16)
----------------- ------------- -------------
Total from investment
operations $ 0.50 $ 3.17 $ 0.74 $(0.18)
----------------- ------------- -------------
Less distributions declared
to shareholders
from net realized gain on
investments and foreign
currency transactions $(2.89) $(1.03) $(2.83) $ --
----------------- ------------- -------------
Net asset value -- end of
period $13.16 $15.55 $13.41 $15.50
----------------- ------------- -------------
Total return++ 3.92% 26.12% 5.12%+++ (5.99)%+
Ratios (to average net
assets)/Supplemental
data:
Expenses## 1.43% 1.46% 1.52%+ 1.59%+
Net investment loss (0.56)% (0.34)% (0.26)%+ (0.75)%+
Portfolio turnover 117% 115% 76% 106%
Average commission rate### $0.0411 $ -- $ -- $ --
Net assets at end of period
(000 omitted) $207,504 $178,367 $121,498 $136,179
*For the period from the commencement of offering of Class A shares,
September 20, 1993 to November 30, 1993.
+ Annualized.
+++ Not annualized.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
# Per share data for the periods subsequent to November 30, 1993 are based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
15
<PAGE>
Financial Highlights - continued
=========================================================================
Nine
Months
Year Ended Ended
August 31, August 31,
---------------------- -------------
1996 1995 1994
- --------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 15.46 $ 13.35 $15.49
----------- ----------- -------------
Income from investment operations# -
Net investment loss $ (0.18) $ (0.14) $(0.10)
Net realized and unrealized gain
on investments and foreign
currency transactions 0.58 3.20 0.75
----------- ----------- -------------
Total from investment
operations $ 0.40 $ 3.06 $ 0.65
----------- ----------- -------------
Less distributions declared to
shareholders from net realized
gain on investments and foreign
currency transactions $ (2.72) $ (0.95) $(2.79)
----------- ----------- -------------
Net asset value - end of period $ 13.14 $ 15.46 $13.35
----------- ----------- -------------
Total return 3.17% 25.19% 4.47%+++
Ratios (to average net assets)/Supplemental data:
Expenses## 2.15% 2.18% 2.26%+
Net investment loss (1.27)% (1.06)% (1.01)%+
Portfolio turnover 117% 115% 76%
Average commission rate### $0.0411 $ -- $ --
Net assets at end of period
(000 omitted) $129,858 $199,773 $214,055
Year Ended November 30,
-----------------------------------
1993 1992 1991
-----------------------------------------------------------------------
Class B
-----------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $15.42 $13.00 $ 9.23
----------- ----------- --------
Income from investment operations# -
Net investment loss $(0.25) $(0.24) $(0.12)
Net realized and unrealized gain
on investments and foreign
currency transactions 0.94 2.66 3.89
----------- ----------- --------
Total from investment
operations $ 0.69 $ 2.42 $ 3.77
----------- ----------- --------
Less distributions declared to
shareholders from net realized
gain on investments and foreign
currency transactions $(0.62) $ -- $ --
----------- ----------- --------
Net asset value - end of period $15.49 $15.42 $ 13.00
----------- ----------- --------
Total return 4.50% 18.62% 40.85%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.21% 2.37% 2.44%
Net investment loss (1.55)% (1.85)% (1.00)%
Portfolio turnover 106% 22% 59%
Average commission rate### $ -- $ -- $ --
Net assets at end of period
(000 omitted) $232,982 $249,493 $190,232
+ Annualized.
+++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993 are based
on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
16
<PAGE>
Financial Highlights - continued
=========================================================================
Year Ended November 30, 1990 1989 1988 1987**
- -------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 11.32 $ 7.86 $ 6.94 $ 6.50
--------- --------- --------- ---------
Income from investment
operations -
Net investment income (loss) $ (0.03) $ 0.03 $ 0.09 $ 0.03
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions (2.06) 3.51 0.89 0.42
--------- --------- --------- ---------
Total from investment
operations $ (2.09) $ 3.54 $ 0.98 $ 0.45
--------- --------- --------- ---------
Less distributions declared to
shareholders from net realized
gain on investments and
foreign currency transactions $ -- $(0.08) $(0.06) $(0.01)
--------- --------- --------- ---------
Net asset value - end of period $ 9.23 $11.32 $ 7.86 $ 6.94
--------- --------- --------- ---------
Total return (18.46)% 45.35% 14.06% 7.47%+
Ratios (to average net
assets)/Supplemental data:
Expenses 2.50% 2.52% 2.31% 2.25%+
Net investment income (loss) (0.27)% 0.37% 1.08% 0.09%+
Portfolio turnover 79% 84% 146% 163%
Net assets at end of period (000
omitted) $152,132 $180,416 $137,311 $134,762
** For the period from the commencement of investment operations,
December 29, 1986 to November 30, 1987.
+ Annualized.
See notes to financial statements
17
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Managed Sectors Fund (the Fund) is a non-diversified series of MFS Series
Trust I (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment Valuations - Equity securities listed on securities exchanges
or reported through the NASDAQ system are valued at last sale prices.
Unlisted equity securities or listed equity securities for which last sale
prices are not available are valued at last quoted bid prices. Debt
securities (other than short-term obligations which mature in 60 days or
less), including listed issues, are valued on the basis of valuations
furnished by dealers or by a pricing service with consideration to factors
such as institutional-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and
other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the
Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Investment Transactions and Income - Investment transactions are recorded
on the trade date. Interest income is recorded on the accrual basis. All
premium and original issue discount are amortized or accreted for financial
statement and tax reporting purposes as required by federal income tax
regulations. Dividend
18
<PAGE>
income is recorded on the ex-dividend date for dividends received in cash.
Dividend payments received in additional securities are recorded on the ex-
dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based
on the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the
basis on which these financial statements are prepared. Accordingly, the
amount of net investment income and net realized gain reported on these
financial statements may differ from that reported on the Fund's tax return
and, consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on
Form 1099-DIV. Foreign taxes have been provided for on interest and dividend
income earned on foreign investments in accordance with the applicable
country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a
financial reporting basis and requires that only distributions in excess of
tax basis earnings and profits are reported in the financial statements as a
tax return of capital. Differences in the recognition or classification of
income between the financial statements and tax earnings and profits which
result in temporary over-distributions for financial statement purposes, are
classified as distributions in excess of net investment income or accumulated
net realized gains. During the year ended August 31, 1996, $2,968,959 was
reclassified from accumulated net realized gain on investments and foreign
currency transactions to accumulated net investment loss due to differences
between book and tax accounting for currency transactions and the offset of
short-term capital gains against accumulated net investment loss. This change
had no effect on the net assets or net asset value per share. At August 31,
1996, the realized gain on investments and foreign currency transactions
under book accounting were different from tax accounting due to temporary
differences in accounting for tax spillback.
19
<PAGE>
Multiple Classes of Shares of Beneficial Interest - The Fund offers both
Class A and Class B shares. The two classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.75%
of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $14,174 for the year ended August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor,
received $29,911 for the year ended August 31, 1996, as its portion of the
sales charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and
Class B shares pursuant to Rule 12b-1 of the Investment Company Act of 1940
as follows:
The Class A distribution plan provides that the Fund will pay MFD up to
0.35% per annum of its average daily net assets attributable to Class A
shares in order that MFD may pay expenses on behalf of the Fund related to
the distribution and servicing of its shares. These expenses include a
service fee to each securities dealer that enters into a sales agreement with
MFD of up to 0.25% per annum of the Fund's average daily net assets
attributable to Class A shares which are attributable to that securities
dealer, a distribution fee to MFD of up to 0.10% per annum of the Fund's
average daily net assets attributable to Class A shares, commissions to
dealers and payments to MFD wholesalers for sales at or above a certain
dollar level, and other such distribution-related expenses that are approved
by the Fund. MFD retains the service fee for accounts not attributable to a
securities dealer which amounted to $75,308 for the year ended August 31,
1996. Fees incurred under the
20
<PAGE>
distribution plan during the year ended August 31, 1996 were 0.35% of average
daily net assets attributable to Class A shares on an annualized basis.
The Class B distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $54,123
for Class B shares for the year ended August 31, 1996. Fees incurred under
the distribution plan during the year ended August 31, 1996 were 1.00% of
average daily net assets attributable to Class B shares on an annualized
basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended August 31, 1996 were $86
and $122,087 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS,
earns a fee for its services as shareholder servicing agent. The fee is
calculated as a percentage of the average daily net assets of each class of
shares at an effective annual rate of up to 0.15% and up to 0.22%
attributable to Class A and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated
$424,505,698 and $492,973,362, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $311,583,773
---------------
Gross unrealized appreciation $ 49,223,844
Gross unrealized depreciation (28,843,614)
---------------
Net unrealized appreciation $ 20,380,230
---------------
21
<PAGE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
Class A Shares Year Ended Year Ended
August 31, 1996 August 31, 1995
---------------------------- -----------------------------
Shares Amount Shares Amount
- ------------------ ------------- -------------- ----------------------------
Shares sold 4,380,258 $ 63,996,858 3,546,423 $ 50,859,620
Shares issued to
shareholders
in
reinvestment of
distributions 2,625,824 33,269,508 694,041 8,168,939
Shares reacquired (2,712,657) (38,139,937) (1,829,247) (24,588,500)
------------- -------------- ----------------------------
Net increase 4,293,425 $ 59,126,429 2,411,217 $ 34,440,059
------------- -------------- ----------------------------
Class B Shares Year Ended Year Ended
August 31, 1996 August 31, 1995
---------------------------- -----------------------------
Shares Amount Shares Amount
- ------------------ ------------- -------------- ----------------------------
Shares sold 2,993,295 $ 41,547,077 5,728,388 $ 75,509,090
Shares issued to
shareholders in
reinvestment of
distributions 2,128,326 27,072,549 1,162,148 13,678,592
Shares reacquired (8,163,355) (116,045,767) (10,002,205) (135,907,619)
------------- -------------- ----------------------------
Net decrease (3,041,734) $ (47,426,141) (3,111,669) $ (46,719,937)
------------- -------------- ----------------------------
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to
each fund, based on its borrowings, at a rate equal to the bank's base rate.
In addition, a commitment fee, based on the average daily unused portion of
the line of credit, is allocated among the participating funds at the end of
each quarter. The commitment fee allocated to the Fund for the year ended
August 31, 1996 was $4,230.
22
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust I and Shareholders of MFS
Managed Sectors Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Managed Sectors Fund as of
August 31, 1996, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended August 31, 1996,
and 1995, and the financial highlights for the years ended August 31, 1996
and 1995, the nine months ended August 31, 1994, and each of the years in the
seven-year period ended November 30, 1993. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1996 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Managed
Sectors Fund at August 31, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 4, 1996
-----------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
23
<PAGE>
The MFS Family of Funds(R)
America's Oldest Mutual Fund Group
The members of the MFS Family of Funds are grouped below according to the
types of securities in their portfolios. For free prospectuses containing
more complete information, including the exchange privilege and all charges
and expenses, please contact your financial adviser or call MFS at
1-800-637-2929 any business day from 9 a.m. to 5 p.m. Eastern time (or, leave
a message anytime). This material should be read carefully before investing
or sending money.
Stock
- -------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Capital Growth Fund
MFS(R) Emerging Growth Fund
MFS(R) Gold & Natural Resources Fund
MFS(R) Growth Opportunities Fund
MFS(R) Managed Sectors Fund
MFS(R) OTC Fund
MFS(R) Research Fund
MFS(R) Value Fund
Stock and Bond
- -------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- -------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- -------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
- -------------------------------------------------------------
World
- ----------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging Markets Equity Fund
MFS(R)/Foreign & Colonial International Growth Fund
MFS(R)/Foreign & Colonial International Growth and Income Fund
MFS(R) World Asset Allocation Fund(SM)
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
National Tax-Free Bond
- ----------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
State Tax-Free Bond
- ----------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia,
Maryland, Massachusetts, Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia,
West Virginia
Money Market
- ----------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
- ----------------------------------------------------------------
24
<PAGE>
MFS(R) Managed Sectors Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Marshall N. Cohan - Private Investor
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; Chairman, Bank of N.T. Butterfield &
Son Ltd.
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. (investment advisers)
Walter E. Robb, III - President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting Group,
Inc. (office services); Trustee, Landmark Funds (mutual funds)
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
J. Dale Sherratt - President, Insight Resources, Inc. (acquisition planning
specialists)
Ward Smith - Former Chairman (until 1994), NACCO Industries; Director,
Sundstrand Corporation
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Fund Manager
Kenneth J. Enright
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditor
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
Web Site
http://www.mfs.com
DALBAR SEAL
[Dalbar seal:] For the second year in a
- ------------------- row, MFS earned a #1
MFS Rated #1 ranking in DALBAR,
TOP-RATED SERVICE Inc.'s Broker/Dealer
- ------------------- Survey, Main Office
Operations Service
Quality category. The
Firm achieved a 3.49
overall score -- on a scale of 1 to 4 -- in the 1995
survey. A total of 71 firms responded, offering
input on the quality of service they receive from
36 mutual fund companies nationwide. The
survey contained questions about service quality
in 17 categories, including "knowledge of phone
service contacts," "accuracy of transaction
processing," and "overall ease of doing business
with the firm." The 1996 survey results were not
available at the time of this printing.
25
<PAGE>
[Dalbar seal:]
MFS(R) -------------------
Managed MFS Rated #1
Sectors Fund TOP-RATED SERVICE
-------------------
500 Boylston Street
Boston, MA 02116
[MFS logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C) MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MMS-2-10/96 54M 08/208
[Front Cover]
[MFS logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Managed Sectors Fund
[Photo: close-up of computer keyboard keys]
Annual Report
for Year Ended
August 31, 1996
<PAGE> 80
PROSPECTUS
JANUARY 1, 1997
MFS(R) CASH CLASS A SHARES OF BENEFICIAL INTEREST
RESERVE FUND CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary........................................................................... 2
2. The Fund.................................................................................. 3
3. Condensed Financial Information........................................................... 4
4. Investment Objective and Policies......................................................... 6
5. Investment Techniques..................................................................... 7
6. Management of the Fund.................................................................... 8
7. Information Concerning Shares of the Fund................................................. 9
Purchases................................................................................. 9
Exchanges................................................................................. 12
Redemptions and Repurchases............................................................... 12
Distribution Plan......................................................................... 15
Distributions............................................................................. 17
Tax Status................................................................................ 18
Description of Shares, Voting Rights and Liabilities...................................... 18
Performance Information................................................................... 19
8. Shareholder Services...................................................................... 19
APPENDIX A................................................................................ A-1
APPENDIX B................................................................................ B-1
APPENDIX C................................................................................ C-1
APPENDIX D................................................................................ D-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MFS CASH RESERVE FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of MFS Cash Reserve Fund (the "Fund") is to provide as
high a level of current income as is considered consistent with the preservation
of capital and liquidity. The Fund is a diversified series of MFS Series Trust I
(the "Trust"), an open-end management investment company. The minimum initial
investment generally is $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF MUTUAL FUNDS ARE SUBJECT TO
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND
WILL FLUCTUATE IN VALUE. YOU MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU
REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Trust and
Fund that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission a
Statement of Additional Information (the "SAI"), dated January 1, 1997, as
amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 21 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI materials that are incorporated by reference into the
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 81
<TABLE>
1. EXPENSE SUMMARY
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases
(as a percentage of offering price)......... None None None
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable)......... None 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees (after applicable fee
reduction)(1)............................... 0.45% 0.45% 0.45%
Rule 12b-1 Fees............................... 0.00%(2) 1.00%(3) 1.00%(3)
Other Expenses (4)............................ 0.39% 0.47% 0.34%(5)
Total Operating Expenses (after applicable fee
reduction)(6)............................... 0.84% 1.92% 1.79%
- ---------------
(1) The Adviser has voluntarily agreed to reduce its advisory fee to 0.45% per
annum of the Fund's average daily net assets. This fee reduction may be
rescinded at any time without notice to shareholders. Absent this reduction,
management fees would have been 0.55%.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/services fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. Payment of the 0.25% per annum Class A service fee will commence on
the date that the value of the net assets of the Fund attributable to Class
A shares first equals or exceeds $40 million. Payment of the 0.10% per annum
Class A distribution fee will commence on such date as the Trustees of the
Trust may determine. Distribution and service expenses paid under this Plan
may cause long-term shareholders to pay more than the maximum sales charge
that would have been permissible if imposed entirely as an initial sales
charge. (See "Information Concerning Shares of the Fund -- Distribution
Plan" below).
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to 1.00% per annum of the average daily net assets
attributable to Class B and Class C shares. Distribution and service
expenses paid under the Distribution Plan with respect to Class B or Class C
shares, together with any contingent deferred sales charge (a "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. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(4) 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."
(5) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended August
31, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(6) Absent the fee reduction, "Total Operating Expenses" would have been 0.94%
for Class A shares, 2.02% for Class B shares and 1.89% for Class C shares.
</TABLE>
2
<PAGE> 82
EXAMPLE OF EXPENSES
-------------------
<TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
PERIOD CLASS A CLASS B CLASS C(1)
--------------------------------------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 year................................ $ 9 60 20(2) 28 $ 18(2)
3 years............................... 27 90 60 56 56
5 years............................... 47 124 104 97 97
10 years............................... 104 196(3) 196(3) 211 211
- ---------------
<FN>
(1) Purchases after April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC.
(2) Assumes no redemption.
(3) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying CDSCs -- "Purchases"; (ii)
management fees -- "Investment Adviser"; and (iii) Rule 12b-1 (i.e.,
distribution plan) fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
Each class of shares of the Fund has been created primarily for the convenience
of shareholders seeking a temporary investment vehicle pending an investment in
the same class of shares of a Fund in the MFS Family of Funds. However, other
money market funds managed by MFS have lower expense ratios than the Fund and,
unlike the Fund, do not have Distribution Plans and, with respect to Class B
shares, impose no CDSC upon redemption.
2. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts on July 30, 1986. The Trust presently consists of
thirteen series (four of which are offered through separate prospectuses and
nine of which are offered through a single combined prospectus), each of which
represents a portfolio with separate investment objectives and policies. Shares
of the Fund are continuously sold to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Three classes of shares of the
Fund currently are offered for sale to the general public. Class A shares are
offered at net asset value and are subject to an annual distribution fee and
service fee up to a maximum of 0.35% per annum. Class B shares are offered at
net asset value without an initial sales charge but are subject to a CDSC upon
redemption (declining from 4.00% during the first year to 0% after six years)
and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class B shares 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 of 1.00% upon redemption during the first
year and an annual distribution fee and service fee up to a maximum of 1.00% per
annum. Class C shares do not convert to any other class of shares of the Fund.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. A majority of the Trustees are not affiliated with the Adviser. The
Adviser is responsible for the management of the Fund's assets and the officers
of the Trust are responsible for the Fund's operations. The Adviser manages the
portfolio from day to day in accordance with the Fund's investment objective and
policies. The Fund also offers to buy back (redeem) its shares from its
shareholders at any time at net asset value, less any applicable CDSC.
3
<PAGE> 83
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited for at least the latest five fiscal
years of the Fund and should be read in conjunction with the financial
statements included in the Fund's Annual Report to shareholders which are
incorporated by reference into the SAI in reliance upon the report of the Fund's
independent auditors given upon their authority, as experts in accounting and
auditing. The Fund's current independent auditors are Deloitte & Touche LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
CLASS A, CLASS B AND CLASS C SHARES
<CAPTION>
CLASS A
-----------------------------------------------
NINE
YEAR ENDED MONTHS
AUGUST 31, ENDED YEAR ENDED
------------------- AUGUST 31, NOVEMBER 30,
1996 1995 1994 1993*
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period.................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ -------
Net investment income#.................................................... $ 0.04 $ 0.05 $ 0.02 $ 0.01
Less distributions declared to shareholders from net investment income.... (0.04) (0.05) (0.02) (0.01)
------- ------- ------ -------
Net asset value -- end of period.......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ -------
Total return.............................................................. 4.75% 4.91% 2.89%+ 2.28%+
Ratios (to average net assets)/Supplemental data#:
Expenses##.............................................................. 0.84% 0.90% 0.86%+ 0.92%+
Net investment income................................................... 4.62% 4.94% 3.11%+ 2.26%+
Net assets at end of period (000 omitted)................................. $37,872 $10,852 $2,156 $ 49
- ---------------
<FN>
+ Annualized.
* For the period from the commencement of offering of Class A shares, September 7, 1993 to November
30, 1993.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
# The investment adviser did not impose a portion of its management fee for the periods indicated.
If this fee had been incurred by the Fund, the net investment income per share and ratios would have been:
<S> <C> <C> <C> <C>
Net investment income................................................ $ 0.04 $ 0.05 $ 0.02 $ 0.01
Ratios (to average net assets):
Expenses........................................................... 0.94% 1.00% 0.96%+ 1.02%+
Net investment income.............................................. 4.52% 4.84% 3.01%+ 2.16%+
</TABLE>
4
<PAGE> 84
<TABLE>
<CAPTION>
NINE
YEAR ENDED AUGUST 31 MONTHS ENDED YEAR ENDED NOVEMBER 30
-------------------- AUGUST 31, ----------------------
1996 1995 1994 1993 1992
-------- -------- ------------ -------- --------
CLASS B
-------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income#..................................... $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Less distributions declared to shareholders
from net investment income............................... (0.04) (0.04) (0.01) (0.01) (0.02)
-------- -------- -------- -------- --------
Net asset value -- end of period........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Total return............................................... 3.64% 3.81% 1.79%+ 1.16% 1.79%
Ratios (to average net assets)/Supplemental data#:
Expenses##............................................... 1.92%+ 1.93% 1.94%+ 2.00% 2.22%
Net investment income.................................... 3.58% 3.69% 1.88%+ 1.19% 1.83%
Net assets at end of period (000 omitted).................. $251,192 $166,519 $213,635 $155,274 $125,439
- ---------------
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
# The investment adviser did not impose a portion of its management fee for the periods indicated.
If this fee had been incurred by the Fund, the net investment income per share and ratios would
have been:
<S> <C> <C> <C> <C> <C>
Net investment income................................. $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Ratios (to average net assets):
Expenses............................................ 2.02% 2.03% 2.04%+ 2.10% 2.32%
Net investment income............................... 3.48% 3.59% 1.78%+ 1.09% 1.73%
</TABLE>
5
<PAGE> 85
<TABLE>
<CAPTION> YEAR ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
-------------------------------------------------------------------- ----------
1991 1990 1989 1988 1987** 1996***
---------- ----------- ------------ ---------- ------------ ----------
CLASS B CLASS C
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each period):
Net asset value -- beginning of period....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- ------
Net investment income#....................... $ 0.04 $ 0.06 $ 0.07 $ 0.06 $ 0.04 $ 0.01
Less distributions declared to shareholders
from net investment income................. (0.04) (0.06) (0.07) (0.06) (0.04) (0.01)
-------- -------- -------- -------- ------- ------
Net asset value -- end of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- ------
Total return................................. 4.56% 6.12% 7.34% 5.85% 4.42%+ 3.67%+
Ratios (to average net assets)/Supplemental
data#:
Expenses##................................. 2.04% 2.23% 2.24% 2.06% 2.06%+ 1.79%+
Net investment income...................... 4.53% 6.06% 7.10% 5.59% 5.59%+ 3.60%+
Net assets at end of period (000 omitted).... $161,040 $203,314 $146,885 $139,518 $83,845 $6,642
- ---------------
+ Annualized.
** For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
*** For the period from the commencement of offering of Class C shares, April 1, 1996 to August 31, 1996.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
# The investment adviser did not impose a portion of its management fee for the periods indicated.
If this fee had been incurred by the Fund, the net investment income per share and ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income................... $ 0.04 -- -- -- -- $ 0.01
Ratios (to average net assets):
Expenses.............................. 2.13% -- -- -- -- 1.89%+
Net investment income................. 4.44% -- -- -- -- 3.50%+
</TABLE>
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide as high a level of current income as is considered
consistent with the preservation of capital and liquidity. The Fund seeks to
achieve its investment objective by investing primarily (i.e., at least 80% of
its assets under normal circumstances) in the following instruments:
(i) obligations issued or guaranteed as to interest and principal by the
U.S. Government or any agency, authority or instrumentality thereof
(including repurchase agreements collateralized by such securities);
(ii) obligations of banks (including certificates of deposit and bankers'
acceptances) which at the date of investment have capital, surplus and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100 million; and obligations of other banks or
savings and loan associations if such obligations are insured by the Federal
Deposit Insurance Corporation ("FDIC"), provided that not more than 10% of
the total assets of the Fund will be invested in such insured obligations;
(iii) commercial paper which at the date of investment is rated A-1 by
Standard & Poor's Ratings Services ("S&P") or by Fitch Investors Service,
Inc. ("Fitch") or P-1 by Moody's Investors Service, Inc. ("Moody's"), if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue
rated AA or better by S&P or Aa or better by Moody's or Fitch; and
(iv) short-term (maturing in 13 months or less) corporate obligations which
at the date of investment are rated AA or better by S&P or Aa or better by
Moody's or Fitch.
The Fund may also invest up to 20% of its total assets in debt instruments not
specifically described in (i) through (iv) above, provided that such instruments
are deemed by the Trustees to be of comparable high quality and liquidity. The
Fund may invest its assets in the U.S. dollar-denominated securities of foreign
issuers and in the securities of foreign branches of U.S. banks such
6
<PAGE> 86
as negotiable certificates of deposit (Eurodollars). Since the portfolio of the
Fund may contain such securities, an investment therein may involve a greater
degree of risk than an investment in a fund which invests only in debt
obligations of U.S. domestic issuers, due to the possibility that there may be
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. The Fund may
invest up to 75% of its assets in all finance companies as a group, all banks
and bank holding companies as a group and all utility companies as a group, when
in the opinion of the Adviser yield differentials and money market conditions
suggest such investments are advisable and when cash is available for such
investment and instruments are available for purchase which fulfill the Fund's
objectives in terms of quality and marketability.
For a further description of the instruments and ratings discussed above and a
description of the risks associated with such investments, see Appendices B, C
and D to this Prospectus.
All the assets of the Fund will be invested in obligations which mature in less
than 13 months and generally these investments will be held to maturity;
however, securities collateralizing repurchase agreements may have maturities in
excess of 13 months. The Fund will, to the extent feasible, make portfolio
investments primarily in anticipation of or in response to changing economic and
money market conditions and trends. Under regulations currently in effect, the
average maturity of the investments of the Fund may not exceed 90 days. The Fund
does not intend to enter into options transactions.
For a discussion of the manner in which the Fund will calculate its yield, see
the SAI.
The investment objective and policies described above may be changed without
shareholder approval.
5. INVESTMENT TECHNIQUES
LENDING OF SECURITIES: The Fund may make loans of its portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and member firms (and subsidiaries thereof) of the New York Stock Exchange (the
"Exchange") and would be required to be secured continuously by collateral in
cash, U.S. government securities or an irrevocable letter of credit maintained
on a current basis at an amount at least equal to the market value of the
securities loaned. The Fund would continue to collect the equivalent of the
interest on the securities loaned and would also receive either interest
(through investment of cash collateral) or a fee (if the collateral is U.S.
government securities or a letter of credit).
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures which are intended
to minimize risk.
PORTFOLIO TRADING
The Fund intends to manage its portfolio by buying and selling securities to
help attain its investment objective. This may result in increases or decreases
in the Fund's current income available for distribution to the Fund's
shareholders and in the holding by the Fund of debt securities which sell at
moderate to substantial premiums or discounts from face value. The Fund will
engage in portfolio trading if it believes a transaction, net of costs
(including custodian charges), will help in attaining its investment objective.
(See "Portfolio Transactions and Brokerage Commissions" in the SAI.)
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees may determine, the Adviser may consider
sales of shares of the Fund and of other investment company clients of MFD, as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions. From time to time, the Adviser may direct certain portfolio
transactions to broker-dealer firms which, in turn, have agreed to pay a portion
of the
7
<PAGE> 87
Fund's operating expenses (e.g., fees charged by the custodian of the Fund's
assets). For a further discussion of portfolio trading, see the SAI.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). The Fund's investment limitations, policies and rating standards
are adhered to at the time of purchase or utilization of assets; a subsequent
change in circumstances will not be considered to result in a violation of
policy.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993, as amended (the "Advisory Agreement"). The
Adviser provides the Fund with overall investment advisory and administrative
services, as well as general office facilities. Geoffrey L. Kurinsky has been
the Fund's portfolio manager since January 1, 1992. Mr. Kurinsky, a Senior Vice
President of the Adviser, has been an Investment Analyst with the Adviser since
1987. Subject to such policies as the Trustees may determine, the Adviser makes
investment decisions for the Fund. For its services and facilities, the Adviser
receives an annual management fee, computed and paid monthly, in an amount equal
to 0.55% of the Fund's average daily net assets for its then-current fiscal
year. The Adviser agreed voluntarily to reduce its fee with respect to the Fund
to 0.45% of the Fund's average daily net assets. This temporary fee reduction
for the Fund may be rescinded at any time by the Adviser, upon written notice to
the Fund, as to fees accruing after the date of such rescission. For the Fund's
fiscal year ended August 31, 1996, MFS received management fees under the
Advisory Agreement of $1,191,151 (0.55% of the Fund's average daily net assets)
before a reduction of $215,813.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS[Registered Trademark] Municipal
Income Trust, MFS Multimarket Income Trust, MFS Government Markets Income Trust,
MFS Intermediate Income Trust, MFS Charter Income Trust, MFS Special Value
Trust, MFS Union Standard Trust, MFS Variable Insurance Trust, MFS Institutional
Trust, MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisors,
Inc., provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.3 billion on behalf of approximately 2.2 million investor
accounts as of November 29, 1996. As of such date, the MFS organization managed
approximately $28.1 billion of assets invested in equity securities and
approximately $20.3 billion of assets invested in fixed income securities.
Approximately $4.1 billion of the assets managed by MFS are invested in
securities of foreign issuers and non-U.S. dollar denominated securities of U.S.
issuers. MFS is a subsidiary of Sun Life Assurance Company of Canada (U.S.),
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L.
Shames, Arnold D. Scott and John D. McNeil and Donald A. Stewart. Mr. Brodkin is
the Chairman, Mr. Shames is the President and Mr. Scott is the Secretary and a
Senior Executive Vice President of MFS. Messrs. McNeil and Stewart are the
Chairman and President, respectively, of Sun Life. Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the United States since 1895, establishing a
headquarters office here in 1973. The executive officers of MFS report to the
Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is the Chairman, President
and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James R.
Bordewick, Jr., and James O. Yost, all of whom are officers of MFS, are officers
of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust
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<PAGE> 88
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 Foreign & Colonial will share their views on a
variety of investment related issues, such as the economy, securities markets,
portfolio securities and their issuers, investment recommendations, strategies
and techniques, risk analysis, trading strategies and other portfolio management
matters. MFS has access to the extensive international equity investment
expertise of Foreign & Colonial, and Foreign & Colonial has access to the
extensive U.S. equity investment expertise of MFS. MFS and Foreign & Colonial
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 the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency,
certain dividend disbursing agency and other services for the Fund.
7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at net asset value through
any dealer and other financial institution ("dealers") having selling agreements
with MFD. Dealers may charge their customers fees relating to investments in the
Fund.
This Prospectus offers Class A, Class B and Class C shares, which bear
distribution fees in different forms and amounts and which, in the case of Class
B shares, are offered subject to a CDSC as described below:
CLASS A SHARES: Class A shares are offered at net asset value per share.
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First........................................ 4%
Second....................................... 4%
Third........................................ 3%
Fourth....................................... 3%
Fifth........................................ 2%
Sixth........................................ 1%
Seventh and following........................ 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for a
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee
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<PAGE> 89
equal to 0.25% of the purchase price). Class B shares purchased by a retirement
plan whose 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") 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. With respect to such purchases, MFD pays an
amount to dealers equal to 3.00% of the amount purchased through such dealers
(rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with, any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan. See
"Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES. Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption during the first
year. Class C shares do not convert to any other class of shares. The maximum
investment in Class C shares is $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. In
certain circumstances, the CDSC imposed upon redemption of Class C shares is
waived. Circumstances under which sales charges imposed on Class B shares are
waived are described above. The CDSC imposed upon redemption of Class C shares
is waived in the same circumstances that apply to the waiver of the Class B
CDSC. 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 Fund's Distribution Plan by
the Fund to MFD for the first year after purchase (see "Distribution Plan"
below). 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 Class C
shares sold by such dealer during the sale period.
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<PAGE> 90
Class C shares are not currently available for purchase by any retirement plan
qualified under Section 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRAs)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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 the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
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<PAGE> 91
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the Class B and
Class C shares in an account for which payment has been received by the Fund
(i.e., an established account) may be exchanged for Class B or Class C shares of
any of the other MFS Funds (if available for sale) at net asset value. With
respect to an exchange involving shares subject to a CDSC, the CDSC will be
unaffected by the exchange, and the holding period for purposes of calculating
the CDSC will carry over to the acquired shares.
Class A shares may be exchanged for Class A shares of any of the other MFS Funds
at net asset value plus their normal sales charge (if available for sale).
However, this sales charge will not apply to: (i) shares exchanged from the Fund
acquired by an exchange from any other MFS Fund; (ii) shares exchanged from the
Fund acquired by automatic investment of dividends from any other MFS Fund; or
(iii) shares exchanged from the Fund where the shares being exchanged would
have, at the time of purchase, been eligible for purchase at net asset value
without the imposition of a sales charge had the shareholder made a direct
investment in the MFS Fund into which the exchange is being made. Exchanges will
be made only after instructions in writing or by telephone (an "Exchange
Request") are received for an established account by the Shareholder Servicing
Agent in proper form (i.e., if in writing -- signed by the record owner(s)
exactly as the shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record). Each exchange
must involve either shares having an aggregate value of at least $1,000 ($50 in
the case of retirement plan participants whose sponsoring organizations
subscribe to the MFS FUNDamental 401(k) Plan or another similar 401(k)
recordkeeping system made available by the Shareholder Servicing Agent) or all
the shares in the account. If the Exchange Request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange, the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. No more than
five exchanges may be made in any one Exchange Request by telephone. Additional
information concerning this exchange privilege and prospectuses for any of the
other MFS Funds may be obtained from investment dealers or the Shareholder
Servicing Agent. A shareholder should read the prospectus of the other MFS Fund
and consider the differences in objectives and policies before making any
exchange. For federal and (generally) state income tax purposes, an exchange is
treated as a sale of the shares exchanged and, therefore, an exchange could
result in a gain or loss to the shareholder making the exchange. Exchanges by
telephone are automatically available to most non-retirement plan accounts and
certain retirement plan accounts. For further information regarding exchanges by
telephone, see "Redemptions and Repurchases -- Redemptions By Telephone." The
exchange privilege (or any aspect of it) may be changed or discontinued and is
subject to certain limitations, including certain restrictions on purchases by
market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption), normally $1.00, or by selling such shares to the
Fund through a dealer
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<PAGE> 92
(a repurchase). Certain redemptions and repurchases are, however, subject to a
CDSC. See "Contingent Deferred Sales Charge" below. When a shareholder withdraws
an amount from his account, the shareholder is deemed to have tendered for
redemption a sufficient number of full and fractional shares in his account to
cover the amount withdrawn. The proceeds of a redemption or repurchase will
normally be available within seven days, except for shares purchased or received
in exchange for shares purchased by check (including certified checks or
cashier's checks). Payment of redemption proceeds may be delayed for up to 15
days from the purchase date in an effort to assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or a
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature Guarantee." The proceeds of such a redemption,
reduced by the amount of any applicable CDSC and the amount of any income tax
required to be withheld, are mailed by check to the designated account, without
charge, if the redemption proceeds do not exceed $1,000, and are wired in
federal funds to the designated account if the redemption proceeds exceed
$1,000. If a telephone redemption request is received by the Shareholder
Servicing Agent by the close of regular trading on the Exchange on any business
day, shares will be redeemed at the closing net asset value of the Fund on that
day. Subject to the conditions described in this section, proceeds of a
redemption are normally mailed or wired on the next business day following the
date of receipt of the order for redemption. The Shareholder Servicing Agent may
be liable for any losses resulting from unauthorized telephone transactions if
it does not follow reasonable procedures designated to verify the identity of
the caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
REPURCHASE THROUGH A DEALER: If a shareholder desires to sell his shares through
his dealer (a repurchase), the shareholder can place a repurchase order with his
dealer, who may charge the shareholder a fee. IF THE DEALER RECEIVES THE
SHAREHOLDER'S ORDER PRIOR TO THE CLOSE OF REGULAR TRADING ON THE EXCHANGE AND
COMMUNICATES IT TO MFD BEFORE THE CLOSE OF BUSINESS ON THE SAME DAY, THE
SHAREHOLDER WILL RECEIVE THE NET ASSET VALUE CALCULATED ON THAT DAY, REDUCED BY
THE AMOUNT OF ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO
BE WITHHELD.
REDEMPTION BY CHECK: Only Class A and Class C shares may be redeemed by check. A
shareholder owning Class A or Class C shares of the Fund may elect to have a
special account with State Street Bank and Trust Company (the "Bank") for the
purpose of redeeming Class A or Class C shares from his or her account by check.
The Bank will provide each Class A or Class C shareholder, upon request, with
forms of checks drawn on the Bank. Only shareholders having accounts in which no
share certificates have been issued will be permitted to redeem shares by check.
Checks may be made payable in any amount not less than $500. Shareholders
wishing to avail themselves of this redemption by check privilege should so
request on their Account Application, must execute signature cards (for
additional information, see the Account Application) with signature guaranteed
in
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<PAGE> 93
the manner set forth under the caption "Signature Guarantee" below, and must
return any Class A or Class C share certificates issued to them. Additional
documentation will be required from corporations, partnerships, fiduciaries or
other such institutional investors. All checks must be signed by the
shareholder(s) of record exactly as the account is registered before the Bank
will honor them. The shareholders of joint accounts may authorize each
shareholder to redeem by check. The check may not draw on monthly dividends
which have been declared but not distributed. SHAREHOLDERS WHO PURCHASE CLASS A
AND CLASS C SHARES BY CHECK (INCLUDING CERTIFIED CHECKS OR CASHIER'S CHECKS) MAY
WRITE CHECKS AGAINST THOSE SHARES ONLY AFTER THEY HAVE BEEN ON THE FUND'S BOOKS
FOR 15 DAYS. WHEN SUCH A CHECK IS PRESENTED TO THE BANK FOR PAYMENT, A
SUFFICIENT NUMBER OF FULL AND FRACTIONAL SHARES WILL BE REDEEMED TO COVER THE
AMOUNT OF THE CHECK, ANY APPLICABLE CDSC AND THE AMOUNT OF ANY INCOME TAX
REQUIRED TO BE WITHHELD. IF THE AMOUNT OF THE CHECK, PLUS ANY APPLICABLE CDSC
AND THE AMOUNT OF ANY INCOME TAX REQUIRED TO BE WITHHELD IS GREATER THAN THE
VALUE OF CLASS A OR CLASS C SHARES HELD IN THE SHAREHOLDER'S ACCOUNT, THE CHECK
WILL BE RETURNED UNPAID, AND THE SHAREHOLDER MAY BE SUBJECT TO EXTRA CHARGES. TO
AVOID DISHONOR OF CHECKS DUE TO FLUCTUATIONS IN ACCOUNT VALUE, SHAREHOLDERS ARE
ADVISED AGAINST REDEEMING ALL OR MOST OF THEIR ACCOUNT BY CHECK. CHECKS SHOULD
NOT BE USED TO CLOSE A FUND ACCOUNT BECAUSE WHEN THE CHECK IS WRITTEN, THE
SHAREHOLDER WILL NOT KNOW THE EXACT TOTAL VALUE OF THE ACCOUNT ON THE DAY THE
CHECK CLEARS. There is presently no charge to the shareholder for the
maintenance of this special account or for the clearance of any checks, but the
Fund and the Bank reserve the right to impose such charges or to modify or
terminate the redemption by check privilege at any time.
CONTINGENT DEFERRED SALES CHARGE: Investments in Class B shares or Class C
shares purchased on or after April 1, 1996 ("Direct Purchases") will be subject
to a CDSC upon redemption for a period of (i) with respect to Class C shares, 12
months, or (ii) with respect to Class B shares, six years. Class B shares 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 the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. 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.
At the time of a redemption of Class B or Class C shares, the amount by which
the value of a shareholder's Class B or Class C shares account represented by
Direct Purchases exceeds the sum of (i) the six calendar year aggregations of
Direct Purchases for Class B shares, and (ii) 12 months of Direct Purchases for
Class C shares may be redeemed without charge ("Free Amount"). Moreover, no CDSC
is ever assessed on additional shares acquired through the automatic
reinvestment of dividends or capital gain distributions ("Reinvested Shares").
Therefore, at the time of redemption of Class B or Class C shares, (i) any Free
Amount is not subject to the CDSC and (ii) the amount of redemption equal to the
then-current value of Reinvested Shares is not subject to the CDSC, but (iii)
any amount of the redemption in excess of the aggregate of the then-current
value of Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC
for Class B shares will first be applied against the amount of Direct Purchases
which will result in any such charge being imposed at the lowest possible rate.
The CDSC to be imposed upon redemptions will be calculated as set forth in
"Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their Class
B or Class C shares have a one-time right to reinvest the redemption proceeds in
Class B or Class C shares of any of the MFS Funds (if shares of such Fund are
available for
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<PAGE> 94
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 for
Class B shares and within one year for Class C shares, a CDSC will be imposed
upon redemption. Shareholders of the Fund who have acquired Class A shares of
the Fund by exchange from any other MFS Fund or by automatic investment of
dividends from other MFS Funds and who have redeemed such Class A shares have a
one-time right to reinvest the redemption proceeds in Class A shares of any of
the MFS Funds (if shares of that Fund are available for sale) at net asset value
(with a credit for any CDSC paid) within 90 days of the redemption pursuant to
the Reinvestment Privilege. If the Class A shares credited for any CDSC paid are
then redeemed within twelve months of the initial purchase, a CDSC will be
imposed upon redemption. Such purchases under the Reinstatement Privilege are
subject to all limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions of the Fund, either totally or partially, by a
distribution in-kind of securities (instead of cash) from the Fund's portfolio.
The securities distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in-kind, the
shareholder could incur brokerage or transaction charges when converting the
securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan 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 Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A or Class B shares,
as appropriate) (the "Designated Class") annually in order that MFD may pay
expenses on behalf of the Fund relating to the servicing of shares of the
Designated Class. The service fee is used by MFD to compensate dealers which
enter into a sales agreement with MFD in consideration for all personal services
and/or account maintenance services rendered by the dealer with respect to
shares of the Designated Class owned by investors for whom such dealer is the
dealer or holder of record. MFD may from time to time reduce the amount of the
service fees paid for shares sold prior to a certain date. Service fees may be
reduced for a dealer that is the holder or dealer of record for an investor who
owns shares of the Fund having an aggregate net asset value at or above a
certain dollar level. Dealers may from time to time be required to meet certain
criteria in order to receive service fees. MFD or its affiliates are entitled to
retain all service fees payable under the Distribution Plan for which there is
no dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
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<PAGE> 95
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies, as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered at net asset value without
an initial sales charge. See "Purchases -- Class A Shares" above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to wholesalers
employed by MFD (e.g., MFD pays commission to dealers with respect to purchases
of $1 million or more of Class A shares which are sold at net asset value but
which are subject to a 1% CDSC for one year after purchase). See
"Purchases -- Class A Shares" above. In addition, to the extent that the
aggregate service and distribution fees paid under the Distribution Plan do not
exceed 0.35% per annum of the average daily net assets of the Fund attributable
to Class A shares, the Fund is permitted to pay such distribution-related
expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% per annum of the average daily net assets
attributable to Class C shares in order that MFD may pay expenses on behalf of
the Fund relating to the servicing of Class C shares. 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 Class C shares owned by investors for
whom such dealer is the dealer or holder of record. MFD may from time to time
reduce the amount of service fees paid for shares sold prior to a certain date.
Service fees may be reduced for a dealer that is the holder or dealer of record
for an investor who owns shares of the Fund having an aggregate net asset value
at or above a certain dollar level. Dealers may from time to time be required to
meet certain criteria in order to receive service fees. MFD or its affiliates
are entitled to retain
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<PAGE> 96
service fees 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.
The Distribution Plan also provides that the Fund may pay MFD a distribution fee
equal to 0.75% per annum of the Fund's average daily net assets attributable to
Class C shares as partial consideration for distribution services performed and
expenses incurred in the performance of MFD's obligations under its distribution
agreement with the Fund. See "Management of the Fund --Distributor" in the SAI.
While the amount of compensation received by MFD in the form of distribution
fees during any year may be more or less than the expense incurred by MFD under
its distribution agreement with the Fund, the Fund is not liable to MFD for any
losses MFD may incur in performing services under its distribution agreement
with the Fund.
As discussed under the caption "Purchases" above, Class C shares are offered at
net asset value without an initial sales charge but are subject to a CDSC of
1.00% upon redemption during the first year. 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 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.
Fees payable under the Class C Distribution Plan are charged to, and therefore
reduce, income allocated to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.00%,
1.00% and 1.00% per annum, respectively. Payment of the 0.25% per annum Class A
service fee will commence on the date that the net assets of the Fund
attributable to Class A shares first equals or exceeds $40 million. Payment of
the 0.10% per annum Class A distribution fee will commence on such date as the
Trustees of the Trust may determine.
DISTRIBUTIONS
The net income of each class of shares of the Fund is determined each day during
which the Exchange is open for trading. This determination is made once during
each such day as of the close of regular trading on such Exchange. All the net
income, as defined in the SAI, of each class so determined is declared as a
dividend to shareholders of record of that class at the time of such
determination. Shares purchased become entitled to dividends declared as of the
first day following the date of investment. Dividends are generally distributed
with respect to each class of shares on the last business day of each month in
the form of additional shares of that class at the rate of one share (and
fraction thereof) for each one dollar (and fraction thereof) of dividend income
attributable to that class, or, at the election of the shareholder, in cash;
except that if a shareholder redeems the entire amount in his account with the
Fund at any time during the month, all dividends declared by the Fund during the
month through the date of redemption will be paid to him at the same time as the
proceeds from the redemption of his shares. (For taxation information on
distributions, see "Tax Status" below.) Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with respect
to Class B and Class C shares because expenses attributable to Class B and Class
C shares will generally be higher.
Securities are valued at amortized cost, which the Trustees have determined in
good faith constitutes fair value for the purposes of complying with the 1940
Act. This valuation method will continue to be used until such time as the
Trustees determine that it does not constitute fair value for such purposes. The
determination of the net income of each class of shares of the Fund is made each
day just prior to the determination of the net asset value per share of each
class of shares of the Fund (i.e., the value of the net assets attributable to
that class divided by the number of shares of the class outstanding). The net
income of each class of shares is declared as a dividend each time the net
income of the class is determined. Consequently, the net asset value per share
of each class of shares remains at $1.00 per share immediately after each such
determination and dividend declaration. Any increase in the value of a
shareholder's investment in the Fund, representing the reinvestment of dividend
income, is reflected by an increase in the number of shares of the Fund in his
account.
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<PAGE> 97
It is expected that each class of shares of the Fund will have a positive net
income at the time of each determination thereof. If for any reason the net
income of the Fund determined at any time is a negative amount, the Fund will
first offset the negative amount with respect to each shareholder account from
the dividends declared during the month with respect to such account. Then, to
the extent necessary, the Fund will reduce the number of its outstanding shares
by treating each of its shareholders as having contributed to its capital that
number of full and fractional shares in the account of such shareholder which
represents his proportion of such excess. Each shareholder will be deemed to
have agreed to such contribution in these circumstances by his investment in the
Fund. This procedure will permit the net asset value per share of each class of
shares of the Fund to be maintained at a constant $1.00 per share.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund has elected to be treated and intends to
qualify each year as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and to make
distributions to its shareholders in accordance with the timing requirements set
out in the Code. It is not expected that the Fund will be required to pay any
federal income or excise taxes, although foreign-source income earned by the
Fund may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is in cash or in additional
shares. The Fund expects that none of its distributions will be eligible for the
dividends received deduction for corporations. Shareholders may not have to pay
state or local taxes on dividends derived from interest on U.S. Government
obligations. Investors should consult with their tax advisors in this regard.
Shortly after the end of each calendar year, each shareholder will receive a
statement setting forth the federal income tax status of all dividends and
distributions for that year including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is generally free of current taxes but results in a
basis reduction), the portion representing interest on U.S. Government
obligations, and the amount, if any, of federal income tax withheld.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and are made
to persons who are neither citizens nor residents of the U.S., regardless of
whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends paid to any shareholder (including a shareholder who is
neither a citizen nor a resident of the U.S.) who does not furnish to the Fund
certain information and certifications or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments which
have been subject to 30% withholding. Prospective investors should read the
Fund's Account Application for additional information regarding backup
withholding of federal income tax and should consult their own tax advisers as
to the tax consequences of an investment in the Fund.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of thirteen series of the Trust, has three classes of shares,
entitled Class A, Class B Shares and Class C shares of Beneficial Interest
(without par value). The Trust has reserved the right to create and issue
additional classes and series of shares, in which case shares of each class of a
series would participate equally in the earnings, dividends and assets
attributable to that class of that particular series. Shareholders are entitled
to one vote for each share held and shares of each series would be entitled to
vote separately to approve investment advisory agreements or changes in
investment restrictions, but shares of all series would vote together in the
election or selection of Trustees and accountants. Additionally, each class of
shares of a series will vote separately on any material increases in the fees
under the Distribution Plan or on any other matter that affects solely that
class of shares, but will otherwise vote together with all other classes of
shares of the series on all other matters. The Trust does not intend to hold
annual shareholder meetings. The 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).
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<PAGE> 98
Each share of each class of the Fund represents an equal proportionate interest
in the Fund, subject to the liabilities of that class, with each other share of
the Fund. Shares have no pre-emptive or conversion rights (except as set forth
in "Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should a series of the Fund be liquidated, the shareholders of
each class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions insurance)
existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its yield and effective yield for each
class of shares. Both yield and effective yield are based on historical earnings
and are not intended to indicate future performance. The yield of a class of
shares of the Fund refers to the income allocable to that class generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then annualized; that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in the class of shares of the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield and effective yield calculations for Class B and Class C shares
assumes no CDSC is paid. These yield quotations should not be considered as
representative of the yield of a class of shares of the Fund in the future.
The yield of shares of the Fund will vary based on the type, quality, and
maturities of the securities held in the portfolio, and fluctuations in
short-term interest rates; in addition to the foregoing, the yield of a
particular class will vary based on changes in the expenses of the Fund and
expenses allocated to particular classes. For a discussion of the manner in
which the Fund will calculate its yield, see the SAI. For further information
about the Fund's performance for the fiscal year ended August 31, 1996, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number.) In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account.
Cancelled checks, if any, will be sent to shareholders monthly. At the end of
each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends reinvested in additional shares. This option will be assigned
if no other option is specified.
-- Dividends in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares at the net asset value in effect at the close of business on
the record date. Dividends and capital gain distributions in amounts less than
$10 will automatically be reinvested in additional shares of the Fund. If a
shareholder has elected to receive dividends and/or capital gain distributions
in cash, and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, or the
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<PAGE> 99
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 a
reasonable period of time prior to the payment date for a dividend in order to
be effective for that dividend. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders and
may be changed or discontinued at any time by a shareholder or the Fund.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of distributions of dividends and capital gain
distributions from the same class of another MFS Fund. Furthermore,
distributions made by the Fund may be automatically invested at net asset value
in shares of the same class of another MFS Fund, if shares of such fund are
available for sale (and without any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send him (or anyone he designates) regular periodic payments
based upon the value of his account. Each payment under a Systematic Withdrawal
Plan ("SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B 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.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds under the Automatic Exchange Plan. The Automatic Exchange Plan
provides for automatic exchanges of funds from the shareholder's account in an
MFS Fund for investment in the same class of shares of other MFS Funds selected
by the shareholder if such fund is available for sale. Under the Automatic
Exchange Plan, exchanges at least $50 each may be made to up to six different
funds. A shareholder should consider the objectives and policies of a fund and
review its prospectus before electing to exchange money into such fund through
the Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of the Fund will be subject to any applicable sales charge. For federal
and (generally) state income tax purposes, an exchange treated as a sale of the
shares exchanged and, therefore, could result in a capital gain or loss to the
shareholder making the exchange. See the SAI for further information concerning
the Automatic Exchange Plan. Investors should consult their tax advisers for
information regarding the potential capital gain and loss consequences of
transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels.
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TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans, including IRAs, SEP-IRA plans, 401(k)
plans, 403(b) plans and other corporate pension and profit-sharing plans.
Investors should consult with their tax adviser before establishing any of the
tax-deferred retirement plans described above.
------------------------
The Fund's SAI, dated January 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to (i) investment techniques and restrictions,
(ii) the Trustees, officers and investment adviser, (iii) portfolio trading,
(iv) the Fund's shares, including rights and liabilities of shareholders, (v)
tax status of distributions, (vi) the Distribution Plan, and (vii) various
services and privileges provided by the Fund for the benefit of its
shareholders, including additional information with respect to the exchange
privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which the contingent
deferred sales charge is waived for Class B and Class C shares:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any fund in the MFS Family of Funds ("MFS Funds")
pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc.
("MFSI").
4. INVOLUNTARY REDEMPTIONS
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner; and
- Distributions made on or after the IRA owner has attained the age of
70 1/2 years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Distributions made on or after the 401(a) or ESP Plan participant, as
applicable, has attained the age of 70 1/2 years old, but only with
respect to the minimum distribution under applicable Code rules;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
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- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ( the "Shareholder Servicing
Agent");
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds; and
- The sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant;
- Distributions made on or after the SRO Plan participant has attained the
age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Death or disability of a SAR-SEP Plan participant; and
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules.
6. CERTAIN TRANSFERS OF REGISTRATION. Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
8. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
9. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent.).
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APPENDIX B
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES, AUTHORITIES OR INSTRUMENTALITIES
U.S. GOVERNMENT OBLIGATIONS -- are issued by the Treasury and include bills,
certificates of indebtedness, notes and bonds. Agencies and instrumentalities of
the U.S. Government are established under the authority of an act of Congress
and include, but are not limited to, the Tennessee Valley Authority, the Bank
for Cooperatives, the Farmers Home Administration, Federal Home Loan Banks,
Federal Intermediate Credit Banks and Federal Land Banks, as well as those
listed below.
FEDERAL FARM CREDIT CONSOLIDATED SYSTEMWIDE NOTES AND BONDS -- are bonds issued
by a cooperatively owned nationwide system of banks and associations supervised
by the Farm Credit Administration. These bonds are not guaranteed by the U.S.
Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued by the Department of
Transportation of the U.S. Government.
FHA DEBENTURES -- are debentures issued by the Federal Housing Administration of
the U.S. Government and are fully and unconditionally guaranteed by the U.S.
Government.
GNMA CERTIFICATES -- are mortgage-backed securities, with timely payment
guaranteed by the full faith and credit of the U.S. Government, which represent
a partial ownership interest in a pool of mortgage loans issued by lenders such
as mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is also insured or guaranteed by the Federal
Housing Administration, the Veterans Administration or the Farmers Home
Administration.
FEDERAL HOME LOAN MORTGAGE CORPORATION BONDS -- are bonds issued and guaranteed
by the Federal Home Loan Mortgage Corporation and are not guaranteed by the U.S.
Government.
FEDERAL HOME LOAN BANK BONDS -- are bonds issued by the Federal Home Loan Bank
System and are not guaranteed by the U.S. Government.
FINANCING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Financing Corporation.
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS -- are bonds issued and guaranteed
by the Federal National Mortgage Association and are not guaranteed by the U.S.
Government.
RESOLUTION FUNDING CORPORATION BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Resolution Funding Corporation.
STUDENT LOAN MARKETING ASSOCIATION DEBENTURES -- are debentures backed by the
Student Loan Marketing Association and are not guaranteed by the U.S.
Government.
TENNESSEE VALLEY AUTHORITY BONDS AND NOTES -- are bonds and notes issued and
guaranteed by the Tennessee Valley Authority.
Some of the foregoing obligations, such as Treasury bills and GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. Government;
others, such as securities of FNMA, by the right of the issuer to borrow from
the U.S. Treasury; still others, such as bonds issued by SLMA, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government will provide financial support to instrumentalities sponsored by
the U.S. Government as it is not obligated by law, in certain instances, to do
so.
Although this list includes a description of the primary types of U.S.
Government agency, authorities or instrumentality obligations in which the Fund
intends to invest, the Fund may invest in obligations of U.S. Government
agencies or instrumentalities other than those listed above.
B-1
<PAGE> 104
APPENDIX C
DESCRIPTION OF SHORT-TERM INVESTMENTS OTHER THAN
U.S. GOVERNMENT OBLIGATIONS
CERTIFICATES OF DEPOSIT -- are certificates issued against funds deposited in a
bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
BANKERS' ACCEPTANCES -- are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity.
COMMERCIAL PAPER -- refers to promissory notes issued by corporations in order
to finance their short-term credit needs.
CORPORATE OBLIGATIONS -- include bonds and notes issued by corporations in order
to finance long-term credit needs.
A-1 AND P-1 COMMERCIAL PAPER RATINGS
Description of S&P and Moody's highest commercial paper ratings:
The rating "A" is the highest commercial paper rating assigned by S&P and Fitch,
and issues so rated are regarded as having the greatest capacity for timely
payment. Issues in the "A" category are delineated with the numbers 1, 2 and 3
to indicate the relative degree of safety. The A-1 designation indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those A-1 issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated P-1 have a superior ability for repayment. P-1 repayment capacity
will normally be evidenced by the following characteristics: (1) leading market
positions in well established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and (5) well established
access to a range of financial markets and assured sources of alternate
liquidity.
C-1
<PAGE> 105
APPENDIX D
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS ARE NOT
ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME MATURITY,
COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME MATURITY AND
COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
D-1
<PAGE> 106
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
D-2
<PAGE> 107
[MFS LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-4500 MFS[REGISTERED TRADEMARK] CASH
RESERVE FUND
Distributor
MFS Fund Distributors, Inc. PROSPECTUS
500 Boylston Street January 1, 1997
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
[MFS LOGO]
MFS[REGISTERED TRADEMARK] CASH RESERVE FUND
500 Boylston Street
Boston, MA 02116
MCR-1-1/97/160M 01/201/301
<PAGE> 108
LOGO
<TABLE>
<S> <C>
MFS(R) CASH STATEMENT OF
RESERVE FUNDSM ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1997
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Techniques................................................................. 2
3. Investment Restrictions............................................................... 2
4. Management of the Fund................................................................ 4
Trustees.............................................................................. 4
Officers.............................................................................. 4
Investment Adviser.................................................................... 5
Custodian............................................................................. 6
Shareholder Servicing Agent........................................................... 6
Distributor........................................................................... 6
5. Portfolio Transactions and Brokerage Commissions...................................... 6
6. Shareholder Services.................................................................. 7
Investment and Withdrawal Programs.................................................... 7
Exchange Privilege.................................................................... 9
Tax-Deferred Retirement Plans......................................................... 10
7. Tax Status............................................................................ 10
8. Net Income and Distributions.......................................................... 11
9. Performance Information............................................................... 11
10. Distribution Plan..................................................................... 13
11. Description of Shares, Voting Rights and Liabilities.................................. 14
12. Independent Auditors and Financial Statements......................................... 15
Appendix A -- Trustee Compensation Table.............................................. A-1
Appendix B -- Performance Information................................................. B-1
</TABLE>
MFS CASH RESERVE FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
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> 109
1. DEFINITIONS
"Fund" -- MFS[Registered Trademark]
Cash Reserve Fund, a
series of MFS Series Trust I
(the "Trust"), a
Massachusetts business
trust. The Trust was previ-
ously known as "MFS Lifetime
Managed Sectors Fund" prior
to August 1, 1993. On August
3, 1992, the Trust changed
its name from "Lifetime
Managed Sectors Trust." The
Fund is the successor to MFS
Lifetime Money Market Fund,
which was reorganized as a
series of the Trust on
September 7, 1993.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1997, as
amended or supplemented from
time to time.
2. INVESTMENT TECHNIQUES
The investment policies and techniques are described in the Prospectus. In
addition, certain of the Fund's investment policies are described in greater
detail below.
SECURITIES LENDING
The Fund may seek to increase its income by lending portfolio securities. Such
loans will usually be made only to member banks of the Federal Reserve System
and to member firms (and subsidiaries thereof) of the New York Stock Exchange
(the "Exchange") and would be required to be secured continuously by collateral
in cash, U.S. Government securities or an irrevocable letter of credit
maintained on a current basis at an amount at least equal to the market value of
the securities loaned. The Fund would have the right to call a loan and obtain
the securities loaned at any time on customary industry settlement notice (which
will usually not exceed five days). During the existence of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation based on
investment of cash collateral or a fee. The Fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which could be earned currently
from securities loans of this type justifies the attendant risk. If the Adviser
determines to make securities loans, it is not intended that the value of the
securities loaned would exceed 20% of the value of the Fund's total assets.
REPURCHASE AGREEMENTS
As described in the Prospectus, the Fund may enter into repurchase agreements
with sellers who are member firms (or subsidiaries thereof) of the Exchange,
members of the Federal Reserve System, recognized primary U.S. Government
securities dealers or institutions which the Adviser has determined to be of
comparable creditworthiness. The securities that the Fund purchases and holds
through its agent are U.S. Government securities, the values, including accrued
interest, of which are equal to or greater than the repurchase price agreed to
be paid by the seller. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a standard rate due to the Fund
together with the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors the seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value, including
accrued interest, of the securities (which are marked to market every business
day) is required to be greater than the repurchase price, and the Fund has the
right to make margin calls at any time if the value of the securities falls
below the agreed upon margin.
3. INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which cannot be changed without
the approval of the holders of a majority of the Fund's shares (which, as used
in this SAI means the lesser of (i) more than 50% of the outstanding shares of
the Trust (or of a series or a class, as applicable) or (ii) 67% or more of the
outstanding shares of the Trust (or of a series or a class, as applicable)
present at a meeting if holders of more than 50% of the outstanding shares of
the Trust (or of a series or a class, as applicable) are represented in person
or by proxy). Except for Investment Restriction (1), these investment
restrictions and policies are adhered to at the time of purchase or utilization
of assets; a subsequent change in circumstances will not be considered to result
in a violation of policy.
The Fund may not:
(1) Borrow money in an amount in excess of 33 1/3% of its total assets, and
then only as a temporary measure for
2
<PAGE> 110
extraordinary or emergency purposes, or pledge, mortgage or hypothecate an
amount of its assets (taken at market value) in excess of 15% of its total
assets, in each case taken at the lower of cost or market value.
(2) Underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security.
(3) Invest more than 25% of its total assets (taken at market value) in any
one industry; provided, however, that (a) there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities and (b) the Fund may invest up to 75% of its
assets in all finance companies as a group, all bank and bank holding
companies as a group and all utility companies as a group when in the opinion
of the Adviser yield differentials and money market conditions suggest and
when cash is available for such investment and instruments are available for
purchase which fulfill the Fund's objective in terms of quality and
marketability.
(4) Purchase or sell real estate (including limited partnership interests
but excluding securities of companies, such as real estate investment trusts,
which deal in real estate or interests therein and securities secured by real
estate), or mineral leases, commodities or commodity contracts in the ordinary
course of its business. The Fund reserves the freedom of action to hold and to
sell real estate or mineral leases, commodities or commodity contracts
acquired as a result of the ownership of securities.
(5) Make loans to other persons except by the purchase of obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements; provided that the Fund may lend its portfolio securities
representing not in excess of 30% of its total assets (taken at market value).
Not more than 10% of the Fund's total assets (taken at market value) may be
invested in repurchase agreements maturing in more than seven days. The Fund
may purchase all or a portion of an issue of debt securities distributed
privately to financial institutions. For these purposes the purchase of
short-term commercial paper or a portion or all of an issue of debt securities
which are part of an issue to the public shall not be considered the making of
a loan.
(6) Purchase the securities of any issuer if such purchase, at the time
thereof, would cause more than 5% of its total assets (taken at market value)
to be invested in the securities of such issuer, other than securities issued
or guaranteed by the United States, any state or political subdivision
thereof, or any political subdivision of any such state, or any agency or
instrumentality of the United States, any state or political subdivision
thereof, or any political subdivision of any such state.
(7) Purchase securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if
such purchase, at the time thereof, would cause the Fund to hold more than 10%
of any class of securities of such issuer. For this purpose all indebtedness
of an issuer maturing in less than one year shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class.
(8) Invest for the purpose of exercising control or management.
(9) Purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer
or Trustee of the Trust, or is a member, partner, officer or Director of the
Adviser, if after the purchase of the securities of such issuer by the Fund
one or more of such persons owns beneficially more than 1/2 of 1% of the
shares or securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all taken
at market value.
(10) Purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of securities.
(11) Make short sales of securities.
(12) Purchase securities issued by any other registered investment company
or investment trust except by purchase in the open market where no commission
or profit to a sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase, though not made
in the open market, is part of a plan of merger or consolidation; provided,
however, that the Fund will not purchase such securities if such purchase at
the time thereof would cause more than 10% of its total assets (taken at
market value) to be invested in the securities of such issuers; and, provided
further, that the Fund will not purchase securities issued by an open-end
investment company.
(13) Write, purchase or sell any put or call option.
(14) Issue any senior security (as that term is defined in the 1940 Act), if
such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder.
As a non-fundamental policy, the Fund will not knowingly invest in securities
which are subject to legal or contractual restrictions on resale (other than
repurchase agreements), unless the Board of Trustees has determined that such
securities are liquid based upon trading markets for the specific security, if,
as a result thereof, more than 10% of the Fund's total assets (taken at market
value) would be so invested.
OTHER OPERATING POLICIES
The Fund will not invest more than 5% of its total assets in companies which,
including their respective predecessors, have a record of less than three years'
continuous operation.
3
<PAGE> 111
In order to comply with certain state statutes, the Fund will not, as a matter
of operating policy, pledge, mortgage or hypothecate its portfolio securities if
the percentage of securities so pledged, mortgaged or hypothecated would exceed
33 1/3%.
These operating policies are not fundamental and may be changed without
shareholder approval.
4. MANAGEMENT OF THE FUND
The Board of Trustees of the Trust provides broad supervision over the affairs
of the Fund. The Adviser is responsible for the management of the Fund's assets,
and the officers of the Trust are responsible for its operations. The Trustees
and officers of the Trust are listed below, together with their principal
occupations during the past five years. Their titles may have varied during that
period.
TRUSTEES
A. KEITH BRODKIN*, Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor. Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery. Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman. Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director. Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III
Benchmark Advisors, Inc. (corporate financial consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. Address: 110 Broad Street, Boston,
Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President. 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
- ---------------
* "Interested persons" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act") of the Adviser, whose address is 500 Boylston Street,
Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustee's out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 75 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current years service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued, and estimated benefits
payable under, the retirement plan.
As of November 29, 1996, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to liabilities to the Trust or its shareholders, it is finally adjudicated
that they engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in their offices, or with
4
<PAGE> 112
respect to any matter, unless it is adjudicated that they did not act in good
faith in the reasonable belief that their actions were in the best interest of
the Trust. In the case of settlement, such indemnification will not be provided
unless it has been determined pursuant to the Declaration of Trust, that such
officers or Trustees have not engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of their duties.
INVESTMENT ADVISER
MFS, together with its predecessor organizations, has a history of money
management dating from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.)
which in turn is a wholly owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life").
The Adviser manages the assets of the Fund pursuant to an Investment Advisory
Agreement with the Fund dated as of September 1, 1993 (the "Advisory
Agreement"). The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives a
management fee, computed and paid monthly, in an amount equal to the sum of
0.55% of the Fund's average daily net assets. The Adviser agreed voluntarily to
reduce its fee with respect to the Fund to 0.45% of the Fund's average daily net
assets. This temporary fee reduction for the Fund may be rescinded at any time
by the Adviser, upon written notice to the Fund, as to fees accruing after the
date of such rescission.
For the Fund's fiscal years ended August 31, 1996 and August 31, 1995, and the
nine-month period ended August 31, 1994, the Advisor received management fees
under the Fund's Advisory Agreement of $1,191,151, $1,134,567 and $806,328
(before reductions of $215,813, $206,280 and $147,532), respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reductions and reimbursements in response
to any amendment or rescission of the various state requirements.
The Fund pays all of the Fund's expenses (other than those assumed by MFS or
MFD) including: Trustee fees discussed above; governmental fees; interest
charges; taxes; membership dues in the Investment Company Institute allocable to
that Fund; fees and expenses of independent auditors, of legal counsel, and of
any transfer agent, registrar or dividend disbursing agent of the Fund; expenses
of repurchasing and redeeming shares and servicing shareholder accounts;
expenses of preparing, printing and mailing share certificates, periodic
reports, notices and proxy statements to shareholders and to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of State Street Bank and Trust Company,
the Fund's Custodian, for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Fund's Distribution Agreement
with MFD requires MFD to pay for prospectuses that are to be used for sales
purposes. Expenses of the Trust which are not attributable to a specific series
are allocated among the series in a manner believed by management of the Trust
to be fair and equitable. For a list of the Fund's expenses, including the
compensation paid to the Trustees who are not officers of the Adviser for the
fiscal year ended August 31, 1996, see "Statement of Operations" in the Fund's
Annual Report to shareholders dated August 31, 1996 incorporated by reference
into this SAI. Payment by the Fund of brokerage commissions for brokerage and
research services of value to the Adviser in serving its clients is discussed
under the caption "Portfolio Transactions and Brokerage Commissions" below.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. The Adviser also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions and, in general, administering its affairs (with the exception of
the services, facilities and personnel provided by the Shareholder Servicing
Agent or the Custodian, see below).
The Advisory Agreement with the Fund will remain in effect until August 1, 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 Fund's shares (as defined in "Investment Restrictions") and, in either case,
by a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions") or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement provides that if MFS ceases to serve as the Adviser to
the Fund, the Fund will change its name so as to delete the term "MFS" and that
MFS may render services to others and may permit other fund clients to use the
term "MFS" in their names. The Advisory Agreement also provides that neither the
Adviser nor its personnel shall be liable for any error of judgment or mistake
of law or for any loss arising out of any investment or for any act or omission
in the execution and management of the Fund, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the Advisory
Agreement.
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CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of shares of each class and public offering price of shares of the
Fund. The Custodian does not determine the investment policies of the Fund or
decide which securities the Fund will buy or sell. The Fund may, however, invest
in securities of the Custodian and may deal with the Custodian as principal in
securities transactions. The Custodian also serves as the dividend and
distribution disbursing agent of the Fund. The Custodian has contracted with the
Adviser for the Adviser to perform certain accounting functions related to
options transactions for which the Adviser receives remuneration on a cost
basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agent Agreement with the Fund, dated as of September 10,
1986 (the "Agency Agreement"). The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B and Class C shares, respectively. In addition, the
Shareholder Servicing Agent will be reimbursed by the Fund for certain expenses
incurred by the Shareholder Servicing Agent on behalf of the Fund. The Custodian
has contracted with the Shareholder Servicing Agent to administer and perform
certain dividend and distribution disbursing functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement, dated as of
January 1, 1995 (the "Distribution Agreement"). Prior to January 1, 1995, MFS
Financial Services, Inc. ("FSI"), another wholly owned subsidiary of MFS, was
the Fund's distributor. Where the SAI refers to MFD in relation to the receipt
or payment of money with respect to a period or periods prior to January 1,
1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares is their net asset value
next computed after the sale.
CLASS B AND CLASS C SHARES: MFD acts as agent in selling Class B and Class C
shares of the Fund to dealers. The public offering price of Class B and Class C
shares is their net asset value next computed after the sale (see "Purchases" in
the Prospectus).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
During the fiscal years ended August 31, 1996 and 1995, and the nine-month
period ended August 31, 1994, the Contingent Deferred Sales Charge (the "CDSC")
imposed on redemption of Class B shares was $793,596, $769,924 and $535,000,
respectively. During the period from April 1, 1996 to August 31, 1996, the CDSC
imposed on shareholder redemptions of Class C shares was $2,440.
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
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or
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concession. From time to time, soliciting dealer fees are available to the
Adviser on the tender of the Fund's portfolio securities in so-called tender or
exchange offers. Such soliciting dealer fees are in effect recaptured for the
Fund by the Adviser. At present no other recapture arrangements are in effect.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Fund or to its other clients. Not
all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of purchasing or selling securities, and the
availability of purchasers or sellers of securities; furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of purchasers or sellers of securities and services in effecting
securities transactions and performing functions incidental thereto such as
clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin and Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Adviser as a consideration in the selection of brokers to execute portfolio
transactions. However, the Adviser is unable to quantify the amount of
commissions which will be paid as a result of such Research because a
substantial number of transactions will be effected through brokers which
provide Research but which were selected principally because of their execution
capabilities.
The management fee that the Fund pays to the Adviser will not be reduced as a
consequence of the Adviser's receipt of brokerage and research services. To the
extent the Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
Most of the transactions of the Fund are principal transactions and thus do not
involve the payment of brokerage commissions. For the Fund's fiscal years ended
August 31, 1996 and 1995, and the nine-month period ended August 31, 1994, no
brokerage commissions were paid by the Fund.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or MFS or any subsidiary of MFS. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, it is believed that the Fund's ability to
participate in volume transactions will produce better executions for the Fund.
6. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS
The Fund makes available programs designed to enable shareholders to add to
their investment or withdraw from it with a minimum of paper work, as described
below. The programs involve no extra charge to shareholders and may be changed
or discontinued at any time by a shareholder or the Fund.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular
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class of shares may be automatically invested in shares of the same class of one
of the other MFS Funds, if shares of the fund are available for sale. Such
investments will be subject to additional purchase minimums. Distributions will
be invested at net asset value (exclusive of any sales charge) and will not be
subject to any CDSC. Distributions will be invested at the close of business on
the payable date for the distribution. A shareholder considering the
Distribution Investment Program should obtain and read the prospectus of the
other fund and consider the differences in objectives and policies before making
any investment.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except certain limited circumstances. The
aggregate withdrawals of Class B and Class C shares in any year pursuant to a
SWP generally are limited to 10% of the value of the account at the time of the
establishment of the SWP. SWP payments are drawn from the proceeds of share
redemptions (which would be a return of principal and, if reflecting a gain,
would be taxable). Redemptions of Class B and Class C shares will be made in the
following order: (i) any "Free Amount"; (ii) to the extent necessary, any
"Reinvested Shares"; and (iii) to the extent necessary, the "Direct Purchase"
subject to the lowest CDSC (as such terms are defined in "Contingent Deferred
Sales Charge" in the Prospectus). The CDSC will be waived in the case of
redemptions of Class B 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 (e.g., Class A shares purchased by exchange from another MFS Fund that
imposes a CDSC). To the extent that redemptions for such periodic withdrawals
exceed dividend income reinvested in the account, such redemptions will reduce
and may eventually exhaust the number of shares in the shareholder's account.
All dividend and capital gain distributions for an account with a SWP will be
received in full and fractional shares of the Fund at the net asset value in
effect at the close of business on the record date for such distributions. To
initiate this service, shares having an aggregate value of at least $5,000
either must be held on deposit by, or certificates for such shares must be
deposited with, the Shareholder Servicing Agent. The shareholder may deposit
into the account additional shares of the Fund, change the payee or change the
amount of each payment. The Shareholder Servicing Agent may charge the account
for services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL: Additional investments of $50 or more in the Fund may be made at
any time either by mailing a check payable to the Fund directly to the
Shareholder Servicing Agent. The shareholder's account number and the name of
his investment dealer must be included with each investment.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds (if available for sale) under the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic monthly or quarterly exchanges of
funds from the shareholder's Fund account for investment in the same class of
shares of other MFS funds, selected by the shareholder. Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six different
funds effective on the seventh day of each month or of every third month,
depending on whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Exchanges will continue to be made from a
shareholder's account in the Fund as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of the Fund will be subject
to any applicable sales charge. Changes in amounts to be exchanged to each fund,
the funds to which exchanges are to be made and the timing of exchanges (monthly
or quarterly), or termination of a shareholder's participation in the Automatic
Exchange Plan will be made after instructions in writing or by telephone (an
"Exchange Change Request") are received by the Shareholder Servicing Agent in
proper form (i.e., if in writing
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signed by the record owner(s) exactly as shares are registered; if by telephone
proper account identification is given by the dealer or shareholder of record).
Each Exchange Change Request (other than termination of participation in the
program) must involve at least $50. Generally, if an Exchange Change Request is
received by telephone or in writing before the close of business on the last
business day of the month, the Exchange Change Request will be effective for the
following month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan.
The Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Holders of Class B or Class C shares of the Fund and
shareholders of the other MFS Funds (except MFS Money Market Fund, MFS
Government Money Market Fund and holders of Class A shares of the Fund in the
case where such shares are acquired through direct purchase or reinvested
dividends) who have redeemed their shares have a one-time right to reinvest the
redemption proceeds in the same class of shares of any of the MFS Funds (if such
shares of the fund are available for sale) at net asset value (without a sales
charge) and, if applicable, with credit for any CDSC paid. In the case of
proceeds reinvested in MFS Money Market Fund, MFS Government Money Market Fund
and Class A shares of the Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value pursuant to
the exchange privilege described below. Such a reinvestment must be made within
90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares, or within 12 months
of the initial purchase for certain Class A and Class C share purchases, a CSDC
will be imposed upon redemption. Although redemptions and repurchases of shares
are taxable events, a reinvestment within a certain period of time in the same
Fund may be considered a "wash sale" and may result in the inability to
recognize currently all or a portion of any loss realized on the original
redemption for federal income tax purposes. Please consult your tax adviser for
further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below and the
limitations described under "Exchanges" in the Prospectus, some or all of the
shares in an account for which payment has been received by the Fund (i.e., an
established account) may be exchanged for the shares of the same class of any
other MFS Fund (if available for sale) at net asset value. Exchanges will be
made after instructions in writing or by telephone (an "Exchange Request") are
received for an established account by the Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing signed by the
record owner(s) exactly as the shares are registered; if by telephone proper
account identification is given by the dealer or shareholder of record), and
each exchange must involve either shares having an aggregate value of at least
$1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Fund. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt account. No more than five exchanges may be made in any one
Exchange Request by telephone. If an Exchange Request is received by the
Shareholder Servicing Agent in writing or by telephone on any business day prior
to the close of regular trading on the Exchange, the exchange usually will occur
on that day if all of the requirements set forth above have been complied with
at that time. However, payment of the redemption proceeds by the Fund, and thus
the purchase of shares of the other MFS Fund, may be delayed for up to seven
days if the Fund determines that such a delay would be in the best interest of
all its shareholders. Investment dealers which have satisfied criteria
established by MFD may also communicate a shareholder's Exchange Request to MFD
by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other MFS Fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A shares of the Fund acquired through direct purchase and dividends
reinvested prior to June 1, 1992) have the right to exchange their shares for
shares of the MFS Funds, subject to the conditions, if any, set forth in their
respective prospectuses. In addition, unitholders of the MFS Fixed Fund (a bank
collective investment fund) have the right to exchange their units (except units
acquired through direct purchases) for shares of the Fund, subject to the
conditions, if any, imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may
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only benefit residents of such states. Investors should consult with their own
tax advisers to be sure this is an appropriate investment based on their
residency and each state's income tax laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS
Shares of the Fund are available for purchase by all types of tax-deferred
retirement plans. MFD makes available through investment dealers plans and/or
custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their non-employed
spouses who desire to make limited contributions to a tax-deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain nonprofit organizations); and
Certain other qualified pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by MFD, the
trustee or the custodian, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
7. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders. As long as
the Fund qualifies as a regulated investment company under the Code, it will not
be subject to any Massachusetts excise or income taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local income taxes, on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income and any distributions
from net short-term capital gains, are taxable to the shareholders as ordinary
income for federal income tax purposes whether the distributions are paid in
cash or in additional shares. Because the Fund expects to earn primarily
interest income, it is expected that no Fund dividends will qualify for the
dividends-received deduction for corporations. The Fund will notify shareholders
regarding the federal tax status of its distributions after the end of each
calendar year.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income or losses. Investment by the Fund in certain "passive
foreign investment companies" may be limited in order to avoid imposition of a
tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the Fund does not expect to be able
to pass through to shareholders foreign tax credits with respect to such foreign
taxes. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of foreign tax or an
exemption from foreign tax on such income; the Fund intends to qualify for
treaty reduced rates of tax where available. It is not possible, however, to
determine the effective rate of foreign tax in advance since the amount of the
Fund's assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Fund intends
to withhold tax payments at the rate of 30% on taxable dividends or other
payments made to Non-U.S. Persons that are subject to such withholding
regardless of whether a lower rate may be permitted under an applicable treaty.
Any amounts overwithheld may be recovered by such persons by filing a claim for
refund with the U.S. Internal Revenue Service within the time period appropriate
to such claims. Distributions received from the Fund by Non-U.S. Persons may
also be subject to tax under the laws of their own jurisdiction. The Fund is
also required in certain circumstances to apply backup withholding at a rate of
31% on taxable dividends paid to any shareholder (including a Non-U.S. Person)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding.
10
<PAGE> 118
Backup withholding will not, however, be applied to payments which have been
subject to 30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
8. NET INCOME AND DISTRIBUTIONS
As described in "Distributions" in the Prospectus, the net income attributable
to each class of shares of the Fund is determined each day during which the
Exchange is open for trading. (As of the date of this SAI, the Exchange is open
for trading every weekday except for the following holidays (or the days on
which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) (For
taxation information on distributions, see "Tax Status" above.)
For this purpose, the net income attributable to each class of shares of the
Fund (from the time of the immediately preceding determination thereof) shall
consist of (i) all interest income attributable to that class accrued on the
portfolio assets of the Fund, (ii) less all actual and accrued expenses
attributable to that class determined in accordance with generally accepted
accounting principles, and (iii) plus or minus net realized gains and losses and
net unrealized appreciation or depreciation on the assets of the Fund
attributable to that class. Interest income shall include discount earned
(including both original issue and market discount) on discount paper accrued
ratably to the date of maturity. Securities are valued at amortized cost, which
the Trustees have determined in good faith constitutes fair value for the
purposes of complying with the 1940 Act. This valuation method will continue to
be used until such time as the Trustees determine that it does not constitute
fair value for such purposes. The Fund will limit its portfolio investments to
those U.S. dollar-denominated instruments which the Board of Trustees determines
present minimal credit risks, and which are of high quality as determined by any
major rating service or, in the case of any instrument that is not so rated, of
comparable quality as determined by the Board of Trustees. The Fund has also
agreed to maintain a dollar weighted average maturity of 90 days or less and to
invest only in securities maturing in 13 months or less. The Board of Trustees
has established procedures designed to stabilize the net asset value per share
of each class of the Fund, as computed for the purposes of sales and
redemptions, at $1.00 per share. If the Trustees determine that a deviation from
the $1.00 per share price may exist which may result in a material dilution or
other unfair result to investors or existing shareholders, they will take
corrective action as they regard as necessary and appropriate, which action
could include the sale of instruments prior to maturity (to realize capital
gains or losses); shortening average portfolio maturity; withholding dividends;
or using market quotations for valuation purposes.
Since the net income is declared as a dividend each time the net income is
determined, the net asset value per share of each class (i.e., the value of the
net assets of the Fund attributable to that class divided by the number of
shares of the class outstanding) remains at $1.00 per share immediately after
each such determination and dividend declaration. Any increase in the value of a
shareholder's investment, representing the reinvestment of dividend income, is
reflected by an increase in the number of shares in his account.
It is expected that each class of shares of the Fund will have a positive net
income at the time of each determination thereof. If for any reason the net
income determined at any time is a negative amount, which could occur, for
instance, upon default by an issuer of a portfolio security, the Fund would
first offset the negative amount with respect to each shareholder account from
the dividends declared during the month with respect to each such account. If
and to the extent that such negative amount exceeds such declared dividends at
the end of the month (or during the month in the case of an account liquidated
in its entirety), the Fund could reduce the number of its outstanding shares by
treating each shareholder of the Fund as having contributed to its capital that
number of full and fractional shares of the Fund in the account of such
shareholder which represents his proportion of such excess. Each shareholder of
the Fund will be deemed to have agreed to such contribution in these
circumstances by its investment in the Fund. This procedure would permit the net
asset value per share of each class of the Fund to be maintained at a constant
$1.00 per share.
9. PERFORMANCE INFORMATION
The Fund will provide current annualized and effective annualized yield
quotations based on the daily dividends of each class of shares of the Fund.
These quotations may from time to time be used in advertisements, shareholder
reports or other communications to shareholders.
YIELD: Any current yield quotation of each class of the Fund which is used in
such a manner as to be subject to the provisions of Rule 482(d) under the
Securities Act of 1933, as amended, shall consist of an annualized historical
yield, carried at least to the nearest hundredth of one percent, based on a
specific seven calendar day period and shall be calculated by dividing the net
change in the value of an account having a balance of one share of that class at
the beginning of the period by the value of the account at the beginning of the
period and multiplying the quotient by 365/7. For this purpose the net change in
account value would reflect the value of additional shares purchased with
dividends declared on the original share and dividends declared on both the
original share and any such additional shares, but would not reflect any
realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any effective
11
<PAGE> 119
yield quotation of each class of the Fund so used shall be calculated by
compounding the current yield quotation for such period by multiplying such
quotation by 7/365, adding 1 to the product, raising the sum to a power equal to
365/7, and subtracting 1 from the result. These yield quotations should not be
considered as representative of the yield of each class of the Fund in the
future since the yield will vary based on the type, quality and maturities of
the securities held in its portfolio, fluctuations in short-term interest rates
and changes in the Fund's expenses.
The yield calculations assume no CDSC is paid. Yield quotations for each class
of shares is presented in Appendix B attached hereto under the heading
"Performance Quotations."
PERFORMANCE RESULTS -- The performance results presented in Appendix B attached
hereto under the heading "Performance Results" assume an initial investment in
Class B shares of $10,000, and cover the period from December 29, 1986 through
December 31, 1995. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results or
total rate of return quotation provided by the Fund should not be considered as
representative of the performance of the Fund in the future since the net asset
value of shares of the Fund will vary based not only on the type, quality and
maturities of the securities held in the Fund's portfolio, but also on changes
in the current value of such securities and on changes in the expenses of the
Fund. These factors and possible differences in the methods used to calculate
total rates of return should be considered when comparing the total rate of
return of the Fund to total rates of return published for other investment
companies or other investment vehicles. Total rate of return reflects the
performance of both principal and income. Current yield and account balance
information may be obtained by calling 1-800-MFS-TALK (637-8255).
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Saloman Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(TM)program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
12
<PAGE> 120
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS[Registered Trademark] 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[Registered Trademark] World Governments Fund is established
as America's first globally diversified fixed/income mutual fund.
-- 1984 -- MFS[Registered Trademark] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS[Registered Trademark] Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS[Registered Trademark] Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS[Registered Trademark] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
-- 1989 -- MFS[Registered Trademark] Regatta becomes America's first
non-qualified market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS[Registered Trademark] World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS[Registered Trademark] World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS[Registered Trademark] Union
Standard Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders of experts.
10. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase or
that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid; (i)
to any dealer who is the holder or dealer of record for investors who own Class
A shares having an aggregate net asset value less than $750,000, or such other
amounts as may be determined from time to time by MFD; or (ii) to any insurance
company which has entered into an agreement with the Fund and MFD that permits
such insurance company to purchase Class A shares from the Fund at their net
asset value in connection with annuity agreements issued in connection with the
insurance company's separate accounts. Dealers may from time to time be required
to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel or office expense equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1996, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
CLASSES OF SHARES BY FUND BY MFD BY DEALERS
- ----------------- ----------- ----------- -----------
<S> <C> <C> <C>
Class B Shares.......... $1,945,319 $1,497,799 $447,520
Class C Shares.......... $ 15,180 $ 6 $ 15,174
</TABLE>
GENERAL: The Distribution Plan 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
13
<PAGE> 121
Plan ("Distribution Plan Qualified Trustees"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially amended in
any case without a vote of the Trustees and a majority of the Distribution Plan
Qualified Trustees. The selection and nomination of Distribution Plan Qualified
Trustees shall be committed to the discretion of the non-interested Trustees
then in office. No Trustee who is not an "interest person" has any financial
interest in any Distribution Plan or in any related agreement.
11. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees of the Trust to issue an
unlimited number of full and fractional Shares of Beneficial Interest (without
par value) of one or more separate series and to divide or combine the shares of
any series into a greater or lesser number of shares without thereby changing
the proportionate beneficial interests in that series. The Trustees have
currently authorized shares of the Fund and twelve other series. The Declaration
of Trust, as amended, further authorizes the Trustees to classify or reclassify
any series of shares into one or more classes. Pursuant thereto, the Trustees
have authorized the issuance of three classes of shares of the Fund, Class A
shares, Class B shares and Class C shares. Each share of a class of the Fund
represents an equal proportionate interest in the assets of the Fund allocable
to that class. Upon liquidation of the Fund, shareholders of each class are
entitled to share pro rata in the net assets of the Fund allocable to such class
available for distribution to shareholders. The Trust reserves the right to
create and issue additional series or classes of shares, in which case the
shares of each class of a series would participate equally in the earnings,
dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as set forth in "Purchases-Conversion of Class B Shares" in the
Prospectus). The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated, the
Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
14
<PAGE> 122
12. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1996, the Statement of Assets and
Liabilities at August 31, 1996, the Statement of Operations for the year ended
August 31, 1996, the Statement of Changes in Net Assets for the two years ended
August 31, 1996 and 1995, the Notes to Financial Statements and the Independent
Auditors' Report, each of which is included in the Annual Report to shareholders
of the Fund, are incorporated by reference into this SAI and have been so
incorporated in reliance upon the report of Deloitte & Touche LLP, independent
auditors, as experts in accounting and auditing. A copy of the Annual Report
accompanies this SAI.
15
<PAGE> 123
APPENDIX A
<TABLE>
TRUSTEE COMPENSATION TABLE
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,275 $ 875 10 $263,815
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 4,400 1,879 14 148,624
Dr. Lawrence Cohn.................... 3,950 542 18 135,874
Sir David Gibbons.................... 3,950 1,460 13 135,874
Abby M. O'Neill...................... 3,500 670 10 129,499
Walter E. Robb, III.................. 4,400 2,087 15 148,624
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 4,400 609 20 148,624
Ward Smith........................... 4,400 820 13 148,624
- ----------------
<FN>
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 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).
</TABLE>
<TABLE>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
$2,948 $442 $ 737 $1,032 $1,474
3,326 499 832 1,164 1,663
3,705 556 926 1,297 1,852
4,083 612 1,021 1,429 2,042
4,462 669 1,115 1,562 2,231
4,840 726 1,210 1,694 2,420
- ------------
<FN>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
</TABLE>
A-1
<PAGE> 124
APPENDIX B
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS
<TABLE>
CLASS B SHARES
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1986(1)......................................... $10,000 $0 $ 0 $10,000
December 31, 1987............................................ 10,000 0 428 10,428
December 31, 1988............................................ 10,000 0 1,049 11,049
December 31, 1989............................................ 10,000 0 1,847 11,847
December 31, 1990............................................ 10,000 0 2,578 12,578
December 31, 1991............................................ 10,000 0 3,115 13,115
December 31, 1992............................................ 10,000 0 3,327 13,327
December 31, 1993............................................ 10,000 0 3,484 13,484
December 31, 1994............................................ 10,000 0 3,801 13,801
December 31, 1995............................................ 10,000 0 4,350 14,350
- -------------
<FN>
(1) Based on initial investment made on December 29, 1986, the initial public
offering date of Class B shares.
</TABLE>
Explanatory Notes:
The results take into account the annual distribution fee but not the CDSC. No
adjustment has been made for income taxes, if any, payable by shareholders.
PERFORMANCE QUOTATIONS
<TABLE>
All performance quotations are for the fiscal year ended August 31, 1996.
<CAPTION>
7-DAY 7-DAY
CURRENT EFFECTIVE
ANNUALIZED ANNUALIZED
YIELD YIELD
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Class A shares...................................................................... 4.60% 4.71%
Class B shares...................................................................... 3.55% 3.61%
Class C shares...................................................................... 3.65% 3.72%
</TABLE>
B-1
<PAGE> 125
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank & Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS[REGISTERED TRADEMARK]
CASH RESERVE
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[LOGO]
INVESTMENT MANAGEMENT
MCR-13-1/97/500 01/201/301
<PAGE> 126
<PAGE>
[LOGO: M F S(SM) ANNUAL REPORT
INVESTMENT MANAGEMENT FOR YEAR ENDED
We invented the mutual fund(SM)] AUGUST 31, 1996
MFS(R) CASH RESERVE FUND
[Graphic Omitted: U.S. Treasury Building]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Fund Facts ................................................................. 2
Fund Manager's Overview .................................................... 3
Fund Manager's Profile ..................................................... 4
Portfolio Concentration .................................................... 4
Portfolio of Investments ................................................... 5
Financial Statements ....................................................... 6
Notes to Financial Statements ..............................................12
Independent Auditor Report .................................................16
Trustees and Officers ......................................................17
HIGHLIGHTS
* AS A RESULT OF A DECLINE IN SHORT-TERM INTEREST RATES DURING THE FIRST
SIX MONTHS OF THE FUND'S FISCAL YEAR, THE ANNUALIZED COMPOUNDED YIELD ON
AN INVESTMENT IN CLASS A SHARES OF THE FUND FOR THE SEVEN-DAY PERIOD
ENDED AUGUST 31, 1996 DECREASED FROM 5.1% TO 4.7%, WHILE THE ANNUALIZED
COMPOUNDED YIELD ON CLASS B SHARES FELL FROM 3.9% TO 3.6%. (A PORTION OF
THE MANAGEMENT FEE IS WAIVED BY THE INVESTMENT ADVISER. WITHOUT THIS
WAIVER, WHICH MAY BE RESCINDED AT ANY TIME, YIELDS FOR CLASS A AND CLASS
B SHARES WOULD HAVE BEEN 4.6% AND 3.5%, RESPECTIVELY.)
* AT THE BEGINNING OF THE FUND'S FISCAL YEAR, OUR AVERAGE MATURITIES WERE
LENGTHENED TO DEFEND AGAINST SLUMPING YIELDS. HOWEVER, AS YIELDS BEGAN TO
RISE, WE SHORTENED MATURITIES TO TAKE ADVANTAGE OF HIGHER YIELDS.
* BECAUSE OF THE NARROW YIELD SPREADS BETWEEN GOVERNMENT AGENCY OBLIGATIONS AND
COMMERCIAL PAPER, APPROXIMATELY 30% OF THE FUND'S NET ASSETS ARE INVESTED IN
COMMERCIAL PAPER, WITH THE BALANCE INVESTED IN SECURITIES ISSUED OR GUARANTEED
BY THE U.S. TREASURY OR GOVERNMENT AGENCIES OR INSTRUMENTALITIES.
<PAGE>
LETTER FROM THE CHAIRMAN
- --------------------------- Dear Shareholders:
With over half of 1996 behind us, the U.S.
economy appears to have settled into a pattern
[Photo of A. Keith Brodkin] of moderate growth and inflation -- two factors
that we think can be important contributors to a
favorable long-term investment climate. During
- --------------------------- the first quarter of 1996, real (inflation-
adjusted) economic growth was 2.3% on an annualized basis, followed by a rate of
4.7% in the second quarter. Real growth in gross domestic product has surpassed
our expectations so far this year, and we now expect growth for all of 1996
could exceed 2.5%. Although the individual consumer appears to be carrying an
excessive debt load, the consumer sector itself, which represents two-thirds of
the economy, continues to be impressive as the automobile and housing markets
remain resilient. Consumer spending has also been positively impacted by
widespread job growth. However, the economies of Europe and Japan continue to be
in the doldrums, weakening U.S. export markets while subduing the capital
spending plans of American corporations.
In the bond market, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of economic growth and, particularly, of higher
inflation continue, we would expect the Fed to maintain its anti-inflationary
stance. In the beginning of the year, the bond market was trading in a narrow
range as investors shifted between concern for the lack of a budget resolution
in Washington and hope that sluggish economic reports and low inflation might
lead to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates
may move even higher over the coming months, but we believe the current rise
in bond yields is reaching a point where fixed-income markets are equitably
valued.
Finally, you may notice, this shareholders' report incorporates a number of
changes which we hope you will find informative and useful. Following the Fund
Manager's Overview, we have added new information on the Fund's holdings,
including a chart illustrating the portfolio's concentration in the
investments that meet its criteria. Near the back of the report telephone
numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 17, 1996
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK
AS HIGH A LEVEL OF CURRENT INCOME AS IS
CONSIDERED CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND LIQUIDITY.
COMMENCEMENT OF
INVESTMENT OPERATIONS: DECEMBER 29, 1986
SIZE: $295.7 MILLION AS OF AUGUST 31, 1996
<PAGE>
FUND MANAGER'S OVERVIEW
- ------------------------------- Dear Shareholders:
Short-term interest rates declined modestly
during the first six months of the Fund's
[Photo of] Geoffrey L. Kurinsky fiscal year, then rebounded over the next
six months. As a result, the annualized
compounded yield on an investment in Class A
- ------------------------------- shares of the Fund for the seven-day period
ended August 31, 1996 decreased from 5.1% to 4.7%, while the annualized
compounded yield on Class B shares fell from 3.9% to 3.6%.
During the past 12 months, the Federal Reserve Board voted to ease monetary
policy by lowering the federal funds' rate (the interest rate charged by banks
to other banks in need of overnight loans) twice. The Fed lowered the rate by
25 basis points (0.25%) on December 19, 1995 and by the same amount on January
31, 1996. As a result, yields on 90-day U.S. Treasury bills and commercial
paper fell approximately 65 basis points (0.65%) by February 1996. Since then,
with signs of a strengthening economy, rates have backed up approximately 30
basis points (0.30%) as of the end of August. Furthermore, with the economy's
signs of acceleration, we believe short-term interest rates could experience
additional moderate increases over the next few months.
At the beginning of the Fund's fiscal year, our average maturities were
lengthened to defend against slumping yields. However, as yields began to inch
higher due to evidence of economic strength, we shortened maturities to take
advantage of higher yields. The average maturity of the Fund was 50 days on
August 31, 1996, versus 41 days on August 31, 1995.
The portfolio continues to hold only the highest-quality corporate, bank,
and government securities in an effort to provide investors the maximum
possible security against credit risk. Because of the very narrow yield
spreads between government agency obligations and commercial paper,
approximately 30% of the Fund's net assets were invested in commercial paper
as of August 31, 1996, with the balance invested in securities issued or
guaranteed by the U.S. Treasury or agencies or instrumentalities of the U.S.
government. Investments in the Fund are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the Fund will be able to
maintain a stable net asset value. We believe this emphasis on quality should
allow the Fund to continue to help investors obtain current income while
seeking to preserve capital and liquidity.
Respectfully,
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Fund Manager
<PAGE>
FUND MANAGER'S PROFILE
GEOFFREY KURINSKY BEGAN HIS CAREER AT MFS IN 1987 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF MASSACHUSETTS AND BOSTON
UNIVERSITY'S GRADUATE SCHOOL OF MANAGEMENT, HE WAS NAMED ASSISTANT VICE
PRESIDENT IN 1988, VICE PRESIDENT IN 1989, AND SENIOR VICE PRESIDENT IN
1993. HE HAS MANAGED MFS CASH RESERVE FUND SINCE 1987.
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1996
LARGEST SECTORS
Commercial Paper ............................... 30%
U.S. Gov't and Agency Obligations .............. 45%
Other Assets ................................... 1.3%
Repurchase Agreements .......................... 23.7%
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
Commercial Paper - 30.0%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Disney (Walt) Co., due 12/20/96 $ 6,000 $ 5,903,567
du Pont (E.I.) de Nemours & Co., due
9/24/96 9,500 9,468,257
Duke Power Co., due 9/12/96 5,200 5,191,642
Ford Motor Credit Corp., due 2/19/97 5,700 5,555,149
General Motors Acceptance Corp., due
9/03/96 5,100 5,098,484
Hewlett Packard Co., due 9/23/96 5,000 4,983,714
Knight Ridder, Inc., due 10/28/96 5,000 4,958,200
PepsiCo, due 9/04/96 8,000 7,996,520
Raytheon Co., due 9/13/96 7,400 7,386,976
Sara Lee Corp., due 9/26/96 5,000 4,981,389
Toys "R" Us, Inc., due 9/27/96 8,000 7,969,551
Transamerica Corp., due 9/19/96 7,000 6,981,520
Warner-Lambert Co., due 11/07/96 8,200 8,119,574
Weyerhaeuser Co., due 9/03/96 4,000 3,998,807
- -----------------------------------------------------------------------------
Total Commercial Paper $ 88,593,350
- -----------------------------------------------------------------------------
U.S. Government and Agency Obligations - 45.0%
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 10/23/96
- 2/13/97 $40,645 $ 40,097,474
Federal Home Loan Mortgage Corp.,
due 9/03/96 - 11/06/96 33,950 33,809,430
Federal National Mortgage Assn.,
due 9/06/96 - 1/09/97 50,200 49,764,708
Student Loan Marketing Assn.,
due 9/25/96 9,400 9,366,975
- -----------------------------------------------------------------------------
Total U.S. Government and Agency Obligations $133,038,587
- -----------------------------------------------------------------------------
Repurchase Agreement - 23.7%
- -----------------------------------------------------------------------------
Goldman Sachs, dated 8/31/96, due
9/03/96, total to be received
$70,041,067 (secured by various
U.S. Treasury and federal agency
obligations in a jointly traded
account), at Amortized Cost $70,000 $ 70,000,000
- -----------------------------------------------------------------------------
Total Investments, at Amortized Cost $291,631,937
Other Assets, Less Liabilities - 1.3% 4,074,703
- -----------------------------------------------------------------------------
Net Assets - 100.0% $295,706,640
- -----------------------------------------------------------------------------
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
August 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at amortized cost and value $291,631,937
Cash 222,066
Receivable for Fund shares sold 4,436,450
Interest receivable 20,533
Other assets 1,841
------------
Total assets $296,312,827
------------
Liabilities:
Distributions payable $ 23,879
Payable for Fund shares reacquired 378,431
Payable to affiliates -
Management fee 6,526
Shareholder servicing agent fee 3,043
Distribution fee 131,745
Accrued expenses and other liabilities 62,563
------------
Total liabilities $ 606,187
------------
Net assets (represented by paid-in capital) $295,706,640
============
Shares of beneficial interest outstanding 295,706,640
============
Class A shares:
Net asset value, redemption price and offering price per share
(net assets of $37,872,178 / 37,872,178 shares of beneficial
interest outstanding) $1.00
=====
Class B shares:
Net asset value and offering price per share
(net assets of $251,192,440 / 251,192,440 shares of beneficial
interest outstanding) $1.00
=====
Class C shares:
Net asset value and offering price per share
(net assets of $6,642,022 / 6,642,022 shares of beneficial
interest outstanding) $1.00
=====
A contingent deferred sales charge may be imposed on redemptions of Class B
and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended August 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest $11,858,321
-----------
Expenses -
Management fee $ 1,191,151
Trustees' compensation 35,588
Shareholder servicing agent fee (Class A) 31,034
Shareholder servicing agent fee (Class B) 427,970
Shareholder servicing agent fee (Class C) 2,283
Distribution and service fee (Class B) 1,945,319
Distribution and service fee (Class C) 15,180
Custodian fee 93,779
Postage 74,434
Auditing fees 16,825
Printing 15,585
Legal fees 5,169
Miscellaneous 285,043
-----------
Total expenses $ 4,139,360
Reduction of expenses by investment adviser (215,813)
Fees paid indirectly (22,612)
-----------
Net expenses $ 3,900,935
-----------
Net investment income $ 7,957,386
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended August 31, 1996 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 7,957,386 $ 7,668,804
-------------- ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (952,277) $ (234,719)
From net investment income (Class B) (6,950,327) (7,434,085)
From net investment income (Class C) (54,782) --
-------------- ------------
Total distributions declared to
shareholders $ (7,957,386) $ (7,668,804)
-------------- ------------
Fund share (principal) transactions at net
asset value of $1.00 per share -
Net proceeds from sale of shares $1,510,970,601 $836,765,789
Net asset value of shares issued to
shareholders in reinvestment
of distributions 6,339,137 6,352,846
Cost of shares reacquired (1,398,974,685) (881,538,348)
-------------- ------------
Total increase (decrease) in net assets $ 118,335,053 $(38,419,713)
Net assets:
At beginning of period 177,371,587 215,791,300
-------------- ------------
At end of period $ 295,706,640 $177,371,587
============== ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine
Year Ended August 31, Months Ended Year Ended
--------------------- August 31, November 30,
1996 1995 1994 1993*
- --------------------------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------
Net investment income(S) $ 0.04 $ 0.05 $ 0.02 $ 0.01
Less distributions declared to shareholders from net investment income (0.04) (0.05) (0.02) (0.01)
------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======
Total return 4.75% 4.91% 2.89%+ 2.28%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.84% 0.90% 0.86%+ 0.92%+
Net investment income 4.62% 4.94% 3.11%+ 2.26%+
Net assets at
end of
period (000
omitted) $37,872 $10,852 $2,156 $ 49
+ Annualized.
* For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income per share and ratios would have been:
Net investment income $ 0.04 $ 0.05 $ 0.02 $ 0.01
Ratios (to average net assets):
Expenses 0.94% 1.00% 0.96%+ 1.02%+
Net investment income 4.52% 4.84% 3.01%+ 2.16%+
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nine
Year Ended August 31, Months Ended Year Ended November 30,
----------------------- August 31, ---------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Net investment income(S) $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Less distributions declared to shareholders
from net investment income (0.04) (0.04) (0.01) (0.01) (0.02)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 3.64% 3.81% 1.79%+ 1.16% 1.79%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.92% 1.93% 1.94%+ 2.00% 2.22%
Net investment income 3.58% 3.69% 1.88%+ 1.19% 1.83%
Net assets at end of period (000 omitted) $251,192 $166,519 $213,635 $155,274 $125,439
+ Annualized.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income per share and ratios would have been:
Net investment income $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Ratios (to average net assets):
Expenses 2.02% 2.03% 2.04%+ 2.10% 2.32%
Net investment income 3.48% 3.59% 1.78%+ 1.09% 1.73%
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended
Year Ended November 30, August 31,
---------------------------------------------------------------- ------------
1991 1990 1989 1988 1987** 1996***
- ----------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Net investment income(S) $ 0.04 $ 0.06 $ 0.07 $ 0.06 $ 0.04 $ 0.01
Less distributions declared
to shareholders from net
investment income (0.04) (0.06) (0.07) (0.06) (0.04) (0.01)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total return 4.56% 6.12% 7.34% 5.85% 4.42%+ 3.67%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.04% 2.23% 2.24% 2.06% 2.06%+ 1.79%+
Net investment income 4.53% 6.06% 7.10% 5.59% 5.59%+ 3.60%+
Net assets at end of period (000 omitted) $161,040 $203,314 $146,885 $139,518 $83,845 $6,642
+ Annualized.
** For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
*** For the period from the commencement of offering of Class C shares, April 1, 1996 to August 31, 1996.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment adviser did not impose a portion of its management fee for the periods indicated. If this fee had been incurred
by the Fund, the net investment income per share and ratios would have been:
Net investment income $ 0.04 -- -- -- -- $ 0.01
Ratios (to average net assets):
Expenses 2.13% -- -- -- -- 1.89%+
Net investment income 4.44% -- -- -- -- 3.50%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Cash Reserve Fund (the Fund) is a diversified series of MFS Series Trust I
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Valuations - Money market instruments are valued at amortized cost,
which the Trustees have determined in good faith constitutes fair value. The
Fund's use of amortized cost is subject to the Fund's compliance with certain
conditions as specified under Rule 2a-7 of the Investment Company Act of 1940.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the securities transferred to ensure
that the value, including accrued interest, of the securities under each
repurchase agreement is greater than amounts owed to the Fund under each such
repurchase agreement. The Fund, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of
net investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Distributions to shareholders are recorded on the ex-dividend date.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the
average daily net assets of each class, without distinction between share
classes. Dividends are declared separately for each class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.55%
of average daily net assets. The investment adviser did not impose a portion
of its fee, which is reflected as a reduction of expenses in the Statement of
Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all its independent Trustees and Mr. Bailey. Included
in Trustees' compensation is a net periodic pension expense of $3,313 for the
year ended August 31, 1996.
Distributor - The Trustees have adopted separate distribution plans for Class
A, Class B and Class C shares pursuant to Rule 12b-1 of the Investment Company
Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer who enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. Payments of up to
0.25% of the per annum service fee will commence under the distribution plan
when the value of the net assets of the Fund attributable to Class A shares
first equals or exceeds $40 million. Payment of the 0.10% per annum
distribution fee will commence on such date as the Trustees of the Trust may
determine.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers who enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares and retains the distribution
fee attributable to Class B shares. The service fee is intended to be
additional consideration for services rendered by the dealer with respect to
Class B and Class C shares. MFD retains the service fee for accounts not
attributable to a securities dealer, which amounted to $38,810 and $6 for
Class B and Class C shares, respectively, for the year ended August 31, 1996.
Fees incurred under the distribution plans during the year ended August 31,
1996 were 1.00% of average daily net assets attributable to Class B and Class
C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
12 months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended August 31, 1996 were $793,596 and $2,440 for Class B and
Class C shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22% and up to 0.15% attributable
to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of money market investments, exclusive of securities
subject to repurchase agreements, aggregated $3,636,576,943 and
$3,606,462,619, respectively.
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares at net asset value of $1.00 per share,
were as follows:
Class A Shares
Year Ended Year Ended
August 31, 1996 August 31, 1995
- -----------------------------------------------------------------------------
Shares sold 245,119,340 21,839,588
Shares issued to shareholders in
reinvestment of distributions 783,890 211,125
Shares reacquired (218,883,250) (13,354,949)
------------ -----------
Net increase 27,019,980 8,695,764
============ ===========
Class B Shares
Year Ended Year Ended
August 31, 1996 August 31, 1995
- -----------------------------------------------------------------------------
Shares sold 1,241,524,357 814,926,201
Shares issued to shareholders in
reinvestment of distributions 5,508,091 6,141,721
Shares reacquired (1,162,359,397) (868,183,399)
-------------- ------------
Net increase (decrease) 84,673,051 (47,115,477)
============ ===========
Class C Shares
Year Ended
August 31, 1996*
- -----------------------------------------------------------------------------
Shares sold 24,326,904
Shares issued to shareholders in
reinvestment of distributions 47,156
Shares reacquired (17,732,038)
-----------
Net increase 6,642,022
===========
*For the period from the commencement of offering of Class C shares, April 1,
1996 to August 31, 1996.
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August
31, 1996 was $2,736.
<PAGE>
INDEPENDENT AUDITOR REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Cash Reserve Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Cash Reserve Fund (one of the
series constituting MFS Series Trust I) as of August 31, 1996, the related
statement of operations for the year then ended, the statement of changes in
net assets for the years ended August 31, 1996 and 1995, and the financial
highlights for the years ended August 31, 1996 and 1995, the nine months ended
August 31, 1994 and for each of the years in the seven-year period ended
November 30, 1993. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at August 31, 1996 by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Cash Reserve
Fund at August 31, 1996, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
October 4, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) CASH RESERVE FUND
<TABLE>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor; CUSTODIAN
Former Chairman and Director (until 1991), State Street Bank & Trust Company
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, AUDITOR
Cambridge Trust Company Deloitte & Touche LLP
Marshall N. Cohan - Private Investor INVESTOR INFORMATION
For MFS stock and bond market outlooks,
Lawrence H. Cohn, M.D. - Chief of Cardiac call toll free: 1-800-637-4458 anytime from
Surgery, Brigham and Women's Hospital; a touch-tone telephone.
Professor of Surgery, Harvard Medical School For information on MFS mutual funds,
call your financial adviser or, for an
The Hon. Sir J. David Gibbons, KBE - Chief information kit, call toll free:
Executive Officer, Edmund Gibbons Ltd.; 1-800-637-2929 any business day from
Chairman, Bank of N.T. Butterfield & Son Ltd. 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. INVESTOR SERVICE
(investment advisers) MFS Service Center, Inc.
P.O. Box 2281
Walter E. Robb, III - President and Treasurer, Boston, MA 02107-9906
Benchmark Advisors, Inc. (corporate financial
consultants); President, Benchmark Consulting Group, For general information, call toll free:
Inc. (office services); Trustee, Landmark Funds (mutual 1-800-225-2606 any business day from
funds) 8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive For service to speech- or hearing-impaired,
Vice President, Director and Secretary, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped
Jeffrey L. Shames* - President and Director, with a Telecommunications Device for the Deaf.)
Massachusetts Financial Services Company
For share prices, account balances, and
J. Dale Sherratt - President, exchanges, call toll free: 1-800-MFS-TALK
Insight Resources, Inc. (1-800-637-8255) anytime from a touch-tone telephone.
(acquisition planning specialists)
WEB SITE
Ward Smith - Former Chairman (until 1994), http://www.mfs.com
NACCO Industries; Director, Sundstrand
Corporation
------------------------------------------------------
INVESTMENT ADVISER
Massachusetts Financial Services Company TOP RATED SERVICE
500 Boylston Street For the second year in a row, MFS earned
Boston, MA 02116-3741 [DALBAR a #1 ranking in DALBAR, Inc.'s
LOGO] Broker/Dealer Survey, Main Office
DISTRIBUTOR Operations Service Quality category.
MFS Fund Distributors, Inc. The firm achieved a 3.49 overall
500 Boylston Street score - on a scale of 1 to 4 - in the 1995 survey. A
Boston, MA 02116-3741 total of 71 firms responded, offering input on the
quality of service they receive from 36 mutual fund
FUND MANAGER companies nationwide. The survey contained questions
Geoffrey L. Kurinsky* about service quality in 17 categories, including
"knowledge of phone service contacts," "accuracy of
TREASURER transaction processing," and "overall ease of doing
W. Thomas London* business with the firm." The 1996 survey results were
not available at the time of this printing.
ASSISTANT TREASURER
James O. Yost* -------------------------------------------------------
SECRETARY
Stephen E. Cavan*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) CASH [DALBAR LOGO: #1 BULK RATE
RESERVE FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[LOGO: M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)]
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MCR-2 10/96 27M 01/201/301
<PAGE> 127
MFS WORLD ASSET ALLOCATION FUND
SUPPLEMENT TO THE JANUARY 1, 1997 PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS P
-------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.60%
Rule 12b-1 Fees........................................................................ None
Other Expenses(1)(2)................................................................... 0.45%
----
Total Operating Expenses............................................................... 1.05%
</TABLE>
- ---------------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended August
31, 1996. The shareholder servicing agent fee component of "Other Expenses"
is a predetermined percentage based upon the Fund's net assets attributable
to each class.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in the Fund, assuming (a) a 5% annual return and (b)
redemption at the end of each of the time periods indicated (unless otherwise
noted):
<TABLE>
<CAPTION>
PERIOD CLASS P
------ -------
<S> <C>
1 year........................................ $11
3 years....................................... 33
</TABLE>
-1-
<PAGE> 128
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. A more complete description of the Fund's management fee is set
forth under the caption "Management of the Fund" in the Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUND
Four classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares, Class C shares and Class P shares. Class P
shares are available for purchase only by the MFS Retirement Plans and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.50% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares 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 P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C and Class P
shares do not convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A, Class
B and Class C shares because expenses attributable to Class A, Class B and Class
C shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1997.
-2-
<PAGE> 129
PROSPECTUS
JANUARY 1, 1997
MFS(R) WORLD ASSET CLASS A SHARES OF BENEFICIAL INTEREST
ALLOCATION FUND(SM) CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
MFS WORLD ASSET ALLOCATION FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
The investment objective of the MFS World Asset Allocation Fund (the "Fund") is
to seek total return over the long term through investments in equity and fixed
income securities, low volatility of share price (i.e., net asset value per
share) and reduced risk (compared to an aggressive equity/fixed income fund).
The Fund is a non-diversified series of MFS Series Trust I (the "Trust"), an
open-end investment company. See "Investment Objective and Policies." The
minimum initial investment is generally $1,000 per account (see "Purchases").
The Fund's investment adviser and distributor are Massachusetts Financial
Services Company ("MFS" or the "Adviser") and MFS Fund Distributors, Inc.
("MFD"), respectively, both of which are located at 500 Boylston Street, Boston,
Massachusetts 02116.
THE FUND MAY INVEST UP TO 70% OF ITS NET ASSETS (AND EXPECTS TO INVEST NOT MORE
THAN 50% OF ITS NET ASSETS) IN LOWER RATED BONDS, COMMONLY KNOWN AS "JUNK
BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS, THAN THOSE FOUND IN
HIGHER RATED SECURITIES. THESE BONDS MAY BE ISSUED BY DOMESTIC AND FOREIGN
CORPORATE ISSUERS, AS WELL AS BY FOREIGN GOVERNMENTS AND THEIR POLITICAL
SUBDIVISIONS AND BY ISSUERS OF MUNICIPAL OBLIGATIONS. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING. SEE "INVESTMENT OBJECTIVE AND POLICIES --
EMERGING MARKET SECURITIES", "INVESTMENT OBJECTIVE AND POLICIES -- MUNICIPAL
OBLIGATIONS" AND "RISK FACTORS -- LOWER RATED FIXED INCOME SECURITIES."
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information dated January 1, 1997, as amended
or supplemented from time to time (the "SAI"), which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 34 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI, materials that are incorporated by reference into the
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 130
Page
----
1. Expense Summary............................................. 3
2. The Fund.................................................... 4
3. Condensed Financial Information............................. 5
4. Investment Objective and Policies........................... 7
5. Risk Factors................................................ 15
6. Management of the Fund...................................... 18
7. Information Concerning Shares of the Fund................... 20
Purchases................................................ 20
Exchanges................................................ 24
Redemptions and Repurchases.............................. 25
Distribution Plan........................................ 28
Distributions............................................ 29
Tax Status............................................... 30
Net Asset Value.......................................... 30
Description of Shares, Voting Rights and Liabilities..... 31
Performance Information.................................. 31
Expenses................................................. 32
8. Shareholder Services........................................ 32
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
2
<PAGE> 131
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price).... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption
proceeds, as applicable)........................... See Below (1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fees...................................... 0.60% 0.60% 0.60%
Rule 12b-1 Fees (after expense reduction)............ 0.45%(2) 1.00%(3) 1.00%(3)
Other Expenses(4).................................... 0.45% 0.50% 0.43%
Total Operating Expenses (after expense reduction)... 1.50%(5) 2.10%(5) 2.03%(5)
- ---------------
<FN>
(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 "Information Concerning Shares of the Fund--Purchases" below.
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.50% per annum of the average daily net assets attributable to the Class A
shares. Distribution fees under the Plan, equal to 0.05% per annum of the
average daily net assets attributable to Class A shares, are currently being
waived in order to maintain "Total Operating Expenses" for Class A shares at
1.50% per annum (see footnote (4) below). Distribution expenses paid under
the Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See "Information
Concerning Shares of the Fund -- Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan, with
respect to Class B or Class C shares together with any CDSC payable upon
redemption of Class B shares, may cause long-term shareholders to pay more
than the maximum sales charge that would have been permissible if imposed
entirely as an initial sales charge. See "Information Concerning Shares of
the Fund -- Distribution Plan" below.
(4) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(5) MFS has agreed to bear, for an indefinite period, expenses of Class A shares
of the Fund such that the aggregate expenses of the Fund's Class A shares do
not exceed 1.50% of the Fund's average daily net assets attributable to
Class A shares on an annualized basis. This arrangement may be terminated or
revised by MFS at any time. See "Information Concerning Shares of the
Fund--Expenses" below. Absent this expense arrangement, "Total Operating
Expenses" for the Fund's Class A shares would have been 1.55%.
</TABLE>
3
<PAGE> 132
EXAMPLE OF EXPENSES
<TABLE>
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<CAPTION>
PERIOD CLASS A CLASS B(2) CLASS C(1)
------ ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1 year........................ $ 62 $ 61 $ 21(2) $ 31 $ 21(2)
3 years....................... 93 96 66 64 64
5 years....................... 125 133 113 109 109
10 years....................... 218 228(3) 228(3) 236 236
- ---------------
<FN>
(1) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a 1% CDSC.
(2) Assumes no redemption.
(3) Class B shares convert to Class A shares approximately eight years after
purchase; therefore, years nine and ten reflect Class A expenses.
</TABLE>
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The Fund is a non-diversified series of the Trust, an open-end management
investment company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts in 1986. The Trust presently consists of thirteen
series, four of which are offered for sale pursuant to separate prospectuses and
nine of which are offered through a combined single prospectus and each of which
represents a portfolio with separate investment objectives and policies. Three
classes of shares of the Fund currently are offered for sale to the general
public. Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a CDSC upon redemption
of 1.00% during the first year in the case of purchases of $1 million or more
and certain purchases by retirement plans) and are subject to an annual
distribution fee and service fee up to a maximum of 0.50% per annum. Class B
shares are offered at net asset value without an initial sales charge but are
subject to a CDSC upon redemption (declining from 4.00% during the first year to
0% after six years) and an annual distribution fee and service fee up to a
maximum of 1.00% per annum; Class B shares will convert to Class A shares
approximately eight years after purchase. Class C shares are offered at net
asset value without an initial sales charge but are subject to a CDSC upon
redemption of 1.00% during the first year and an annual distribution fee and
service fee up to a maximum of 1.00% per annum. Class C shares do not convert to
any other class of shares of the Fund. In addition, the Fund offers an
additional class of shares, Class I shares, exclusively to certain institutional
investors. Class I shares are made available by means of a separate Prospectus
Supplement provided to institutional investors eligible to purchase Class I
shares and are offered at net asset value without an initial sales charge or
CDSC upon redemption and without an annual distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is responsible for the management of the Fund's assets and the
officers of the Trust are responsible for the Fund's operations. The Adviser
manages the portfolio from day to day in accordance with the Fund's investment
objective and policies. A majority of the Trustees of the Trust are not
affiliated with the Adviser. The Fund also offers to buy back (redeem) its
shares from its shareholders at any time at net asset value, less any applicable
CDSC.
4
<PAGE> 133
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to Shareholders which are incorporated by reference into
the SAI, in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
CLASS A, B AND C SHARES
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------------
1996 1995 1994* 1996 1995 1994*
------- ------- ------- -------- ------- -------
CLASS A CLASS B
------- -------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period......... $ 16.63 $ 15.33 $ 15.00 $ 16.58 $ 15.31 $ 15.00
------- ------- ------- -------- ------- -------
Income from investment operations# --
Net investment incomesec................... $ 0.43 $ 0.55 $ 0.04 $ 0.32 $ 0.43 $ 0.02
------- ------- ------- -------- ------- -------
Net realized and unrealized gain on
investments and foreign currency
transactions............................. 1.85 1.17 0.29 1.85 1.17 0.29
------- ------- ------- -------- ------- -------
Total from investment operations...... $ 2.28 $ 1.72 $ 0.33 $ 2.17 $ 1.60 $ 0.31
------- ------- ------- -------- ------- -------
Less distributions declared to shareholders --
From net investment income................. $ (0.49) $ (0.37) $ -- $ (0.38) $ (0.28) $ --
From net realized gain on investments and
foreign currency transactions............ (0.74) (0.05) -- (0.74) (0.05) --
------- ------- ------- -------- ------- -------
Total distributions declared to shareholders.. $ (1.23) $ (0.42) $ -- $ (1.12) $ (0.33) $ --
------- ------- ------- -------- ------- -------
Net asset value -- end of period............... $ 17.68 $ 16.63 $ 15.33 $ 17.63 $ 16.58 $ 15.31
======= ======= ======= ======== ======= =======
Total return++................................. 14.23% 11.48% 2.20%++ 13.58% 10.65% 2.07%++
Ratios (to average net assets)/Supplemental
data[section]:
Expenses##................................. 1.48% 1.47% 1.50%+ 2.10% 2.24% 2.57%+
Net investment income...................... 2.45% 3.49% 2.43%+ 1.83% 2.75% 1.39%+
Portfolio turnover............................. 202% 118% 1% 202% 118% 1%
Average commission rate###..................... $0.0219 -- -- $ 0.0219 -- --
Net assets at end of period (000 omitted)...... $86,457 $58,663 $25,254 $124,399 $83,601 $26,495
- ---------------
<FN>
* For the period from the commencement of investment operations, July 22, 1994 to
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or
after September 1, 1995.
++ Total returns for Class A shares do not include the applicable sales charge. If the
charge had been included, the results would have been lower.
[section] The investment adviser and/or the distributor voluntarily waived a portion of their
management fee and/or distribution fee, respectively, for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income............. $0.42 $0.52 $0.02 -- -- $0.01
Ratios (to average net assets):
Expenses##.................... 1.53% 1.67% 2.62%+ -- -- 3.21%+
Net investment income......... 2.40% 3.29% 1.31%+ -- -- 0.75%+
</TABLE>
5
<PAGE> 134
FINANCIAL HIGHLIGHTS
<TABLE>
CLASS C SHARES -- (CONTINUED)
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------
1996 1995 1994*
------- ------- -------
CLASS C
-------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -- beginning of period............................... $ 16.58 $ 15.31 $15.00
------- ------- ------
Income from investment operations# --
Net investment income[section]................................... $ 0.33 $ 0.46 $ 0.03
Net realized and unrealized gain on investments and foreign
currency transactions.......................................... 1.85 1.16 0.28
------- ------- ------
Total from investment operations............................ $ 2.18 $ 1.62 $ 0.31
------- ------- ------
Less distributions declared to shareholders --
From net investment income....................................... $ (0.40) $ (0.30) $ --
From net realized gain on investments and foreign currency
transactions................................................... (0.74) (0.05) --
------- ------- ------
Total distributions declared to shareholders................ $ (1.14) $ (0.35) $ --
------- ------- ------
Net asset value -- end of period..................................... $ 17.62 $ 16.58 $15.31
======= ======= ======
Total return......................................................... 13.62% 10.72% 2.07%++
Ratios (to average net assets)/Supplemental data[section]:
Expenses##....................................................... 2.03% 2.18% 2.50%+
Net investment income............................................ 1.89% 2.91% 1.68%+
Portfolio turnover................................................... 202% 118% 1%
Average commission rate###........................................... $0.0219 -- --
Net assets at end of period (000 omitted)............................ $33,283 $19,325 $3,435
- ---------------
<FN>
* For the period from the commencement of investment operations, July 22, 1994 to August
31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning on or
after September 1, 1995.
[section] The investment adviser and the distributor voluntarily waived a portion of their
management fee and distribution fee, respectively, for certain of the periods
indicated. If these fees had been incurred by the Fund, the net investment income per
share and the ratios would have been:
<S> <C> <C> <C>
Net investment income........................................ -- -- $0.02
Ratios (to average net assets):
Expenses................................................. -- -- 3.18%+
Net investment income.................................... -- -- 1.00%+
</TABLE>
6
<PAGE> 135
4. INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE -- The Fund's investment objective is to seek total return
over the long term through investments in equity and fixed income securities,
low volatility of share price (i.e., net asset value per share) and reduced risk
(compared to an aggressive equity/fixed income fund). Any investment involves
risk and there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES -- The Fund seeks to achieve its objective by allocating
portfolio assets among various asset classes of equity and fixed income
securities where the opportunities for total return are expected to be most
attractive. On average, over time, the Fund intends to invest approximately 65%
of its total assets in equity securities; however, at any particular point in
time, equity securities may constitute more or less than 65% of the Fund's total
assets. Under normal circumstances, the Fund intends to invest at least 30% of
its total assets in equity securities and allocate its assets among at least
three asset classes, except when the Adviser believes that investing for
temporary defensive purposes is appropriate as noted below.
Equity securities include: common and preferred stocks; securities such as
bonds, warrants or rights that are convertible into stock; and depositary
receipts for those securities. Fixed income securities include: bonds,
debentures and other debt instruments issued by a variety of issuers, including
corporations and other business entities, the United States and foreign
governments and their agencies, authorities, instrumentalities and political
subdivisions and supranational entities; mortgage-backed and other asset-backed
securities; receipts evidencing separately traded interest and principal
component parts of obligations; and repurchase agreements involving any of the
foregoing types of securities.
The Adviser will allocate assets among some or all of the following five asset
classes of securities:
(i) U.S. Equity Securities -- equity securities of U.S. issuers including
securities of emerging growth companies;
(ii) Foreign Equity Securities -- equity securities of foreign issuers
including securities of issuers in emerging markets (as described below);
(iii) U.S. Investment Grade Fixed Income Securities -- fixed income
securities of U.S. issuers (including securities issued or guaranteed by the
U.S. government or its agencies, authorities or instrumentalities,
short-term instruments and municipal obligations) rated Baa or better by
Moody's Investors Service, Inc. ("Moody's"), or BBB or better by Standard
and Poor's Ratings Services ("S&P"), Fitch Investors Service, Inc. ("Fitch")
or by Duff & Phelps Credit Rating Co. ("Duff & Phelps") or comparable
unrated securities;
(iv) U.S. High Yield Fixed Income Securities -- high yield fixed income
securities of U.S. issuers, including municipal obligations, rated Ba or
below by Moody's or BB or below by S&P, Fitch, Duff & Phelps or comparable
unrated securities; and
(v) Foreign Fixed Income Securities -- fixed income securities of foreign
issuers, including securities of issuers in emerging markets and securities
in any of the rating categories (and comparable unrated securities)
including securities in the lower rating categories (as defined below).
As of the date of this Prospectus, the allocation of assets among the asset
classes was in the following approximate proportions of the Fund's portfolio:
U.S. Equity Securities -- 18%, Foreign Equity Securities -- 45%, U.S. Investment
Grade Fixed Income Securities -- 0%, U.S. High Yield Fixed Income Securities --
10%, Foreign Fixed Income Securities -- 10%, and short-term obligations and
Cash -- 17%. Such allocation will change from time to time, as described below.
The Adviser will allocate the assets of the Fund among some or all of the
various asset classes described above where the opportunities for total return
are expected to be the most attractive, consistent with the objective of seeking
low share price volatility and reduced risk. The judgment of the Adviser
concerning the allocation of the Fund's assets will be based on the Adviser's
experience in qualitative and fundamental analysis and disciplined quantitative
techniques. The Adviser will make changes in the allocation of assets of the
Fund when its research and analysis indicate the likely occurrence of changes in
financial markets or economic conditions affecting the various asset classes
that may change the expected total return from the various asset classes. To the
extent Fund assets are allocated among most or all of the asset classes, this
allocation will reduce
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<PAGE> 136
the impact of the poorer performing classes at any point in time. By following
this asset allocation strategy, the Fund's performance in part will be dependent
on the Adviser's skill in allocating assets.
Although the percentage of the Fund's assets invested in foreign securities will
vary, the Fund will be invested in at least three different countries, one of
which may be the United States, except when the Adviser believes that investing
for defensive purposes is appropriate as noted below.
The risks of each asset class vary. For example, the values of equity securities
change in response to general market and economic conditions and the activities
and changing circumstances of individual issuers and the values of fixed income
securities change in response to changes in economic conditions, interest rates
and the creditworthiness of individual issuers. A significant portion of the
Fund's assets may be allocated to equity and fixed income investments in foreign
securities which involve the risks set forth under "Risk Factors" below. The
Fund may also invest in high yield fixed income securities. See "Risk Factors"
below.
DEFENSIVE INVESTING: When the Adviser believes that investing for temporary
defensive purposes is appropriate, such as during periods of unusual or
unfavorable market or economic conditions, or in order to meet anticipated
redemption requests, up to 100% of the Fund's assets may be temporarily invested
in cash (including foreign currency) or cash equivalents including, but not
limited to, obligations of banks (including certificates of deposit, bankers'
acceptances and repurchase agreements) with assets of $1 billion or more,
commercial paper, short-term notes, obligations issued or guaranteed by the U.S.
or any foreign government or any of their agencies, authorities or
instrumentalities and repurchase agreements.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of small and
medium-size U.S. and foreign companies that are early in their life cycle but
which have the potential to become major enterprises (emerging growth
companies). Such companies generally have annual gross revenues ranging from $10
million to $2 billion, would be expected to show earnings growth over time that
is well above the growth rate of the overall economy and the rate of inflation,
and would have the products, management, and market opportunities which are
usually necessary to become more widely recognized as growth companies. The Fund
may also invest in more established companies whose rates of earnings growth are
expected to accelerate because of special factors, such as rejuvenated
management, new products, changes in consumer demand, or basic changes in the
economic environment or which otherwise represent opportunities for long-term
growth. See "Risk Factors -- Emerging Growth Companies" below. The Fund may also
invest to a limited extent in restricted securities of companies which the
Adviser believes have significant growth potential. These securities may be
considered speculative and may not be readily marketable. See "Restricted
Securities" below.
EMERGING MARKET SECURITIES: Consistent with the Fund's objective and policies,
the Fund may invest in securities of issuers whose principal activities are
located in emerging market countries. Emerging market countries include any
country determined by the Adviser 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 Markets" below.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Panama, the
Philippines, Poland, Uruguay and Venezuela. Brady Bonds have been issued only
recently,
8
<PAGE> 137
and for that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar) and are actively traded in over-the-counter secondary
markets. U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate bonds or floating-rate bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk"). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
U.S. GOVERNMENT SECURITIES: The Fund may invest in securities that are issued or
guaranteed as to principal and interest by the U.S. Government, its agencies,
authorities or instrumentalities ("U.S. Government Securities") and in
obligations that are fully collateralized or otherwise fully secured by U.S.
Government Securities as described below. U.S. Government Securities include (1)
U.S. Treasury obligations, which differ only in their interest rates, maturities
and times of issuance; U.S. Treasury bills (maturity of one year or less); U.S.
Treasury notes (maturities of one to 10 years); and U.S. Treasury bonds
(generally maturities of greater than 10 years), all of which are backed by the
full faith and credit of the U.S. Government; and (2) obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities; some
of which are backed by the full faith and credit of the U.S. Treasury, e.g.,
direct pass-through certificates of the Government National Mortgage Association
("GNMA"); some of which are supported by the right of the issuer to borrow from
the U.S. Government, e.g, obligations of Federal Home Loan Banks; some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations, e.g., obligations of the Federal National Mortgage Association
("FNMA"). No assurance can be given that the U.S. Government will provide
financial support to these entities because it is not obligated by law, in
certain instances, to do so. U.S. Government Securities do not generally involve
the credit risks associated with other types of fixed income securities.
However, like other fixed income securities, the values of U.S. Government
Securities change as interest rates fluctuate.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card or automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
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<PAGE> 138
"WHEN-ISSUED" OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited in the amount of securities for which it may have commitments to
purchase on such basis, it is expected that under normal circumstances, the Fund
will not commit more than 30% of its assets to such purchases. The Fund does not
pay for the securities until they are received or start earning interest on them
until the contractual settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased on such basis, the
Fund will hold cash, short-term money market instruments or U.S. Government
Securities in a segregated account to pay for the commitment. Although the Fund
does not intend to make such purchases for speculative purposes, purchases of
securities on such basis may involve more risk than other types of purchases.
For additional information concerning these securities, see the SAI.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may invest a portion
of its assets in "loan participations and other direct indebtedness." By
purchasing a loan participation, the Fund acquires some or all of the interest
of a bank or other lending institution in a loan to a corporate borrower. Many
such loans are secured, and most impose restrictive covenants which must be met
by the borrower. These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans may be in default at the time of purchase. The Fund may
also purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods and services. These claims may
also be purchased at a time when the company is in default. Certain of the loan
participations acquired by the Fund may involve revolving credit facilities or
other standby financing commitments which obligate the Fund to pay additional
cash on a certain date or on demand.
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and only limited opportunities
may exist to resell such instruments. As a result, the Fund may be unable to
sell such investments at an opportune time or may have to resell them at less
than fair market value. For a further discussion of loan participations and the
risks related to transactions therein, see the SAI.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, precious metals, interest rates, commodities,
indices or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity (i.e.,
principal value) 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.
MUNICIPAL OBLIGATIONS: The Fund may invest in municipal obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities when the Adviser determines that they offer the highest income
available. Such municipal obligations may be rated Ba or below by Moody's or BB
or below by S&P or Fitch (or may be comparable unrated securities). For the risk
considerations involved, see "Risk Factors -- Lower Rated Fixed Income
Securities" below.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are passed through to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity as a
result of unscheduled principal prepayments. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or a part of a premium if any
has been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage prepayments
generally increase with falling
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<PAGE> 139
interest rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of a mortgage pass-through
security generally will decline; however, when interest rates are declining, the
value of mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the GNMA); or guaranteed by agencies or instrumentalities of the U.S. Government
(such as the FNMA) or the Federal Home Loan Mortgage Corporation ("FHLMC"), and
not guaranteed by the U.S. Government. Mortgage pass-through securities may also
be issued by nongovernmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may be
supported by various forms of insurance or guarantees.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations,
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by GNMA, FNMA or FHLMC, but also may be collateralized by
whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). The Fund may also invest a
portion of its assets in multiclass pass-through securities which are interests
in a trust composed of Mortgage Assets. CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates, resulting in a loss of all or part of the premium if any has been paid.
Certain classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. PAC Bonds generally
require payments of a specified amount of principal on each payment date. PAC
Bonds are always parallel pay CMOs with the required principal payment on such
securities having the highest priority after interest has been paid to all
classes. For a further description of CMOs, parallel pay CMOs and PAC Bonds and
the risks related to transactions therein, see the SAI.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities usually structured with two classes that receive different
proportions of the interest and principal distributions from an underlying pool
of mortgage assets. For a further description of SMBS and the risks related to
transactions therein, see the SAI.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order to
earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional
11
<PAGE> 140
buyers" under Rule 144A under the 1933 Act ("Rule 144A securities"). The Trust's
Board of Trustees determines, based upon a continuing review of the trading
markets for a specific Rule 144A security, whether such security is liquid and
thus not subject to the Fund's limitation on investing not more than 15% of its
net assets in illiquid investments. The Board of Trustees has adopted guidelines
and delegated to MFS the daily function of determining and monitoring the
liquidity of Rule 144A securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations. The Board will
carefully monitor the Fund's investments in Rule 144A securities, focusing on
such important factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of decreasing the
level of liquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities held in the
Fund's portfolio. Subject to the Fund's 15% limitation on investments in
illiquid investments, the Fund may also invest in restricted securities that may
not be sold under Rule 144A, which presents certain risks. As a result, the Fund
might not be able to sell these securities when the Adviser wishes to do so, or
might have to sell them at less than fair value. In addition, market quotations
are less readily available. Therefore, judgment may at times play a greater role
in valuing these securities than in the case of unrestricted securities.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans will usually be made to member firms (and subsidiaries thereof) of
the New York Stock Exchange and to member banks of the Federal Reserve System,
and would be required to be secured continuously by collateral in cash, U.S.
Treasury securities or an irrevocable letter of credit maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
If the Adviser determines to make securities loans, it is intended that the
value of the securities loaned would not exceed 30% of the value of the total
assets of the Fund.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Fund may enter into mortgage "dollar
roll" transactions with selected banks and broker-dealers pursuant to which the
Fund sells mortgage-backed securities for delivery in the future (generally
within 30 days) and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The Fund
will only enter into covered rolls. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. In the event that the party with whom the Fund
contracts to replace substantially similar securities on a future date fails to
deliver such securities, the Fund may not be able to obtain such securities at
the price specified in such contract and thus may not benefit from the price
differential between the current sales price and the repurchase price.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options on
securities ("Options") and purchase put and call Options. The Fund will write
such Options for the purpose of increasing its return and/or to protect the
value of its portfolio. In particular, where the Fund writes an Option which
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the Option, which will increase its gross income and will
offset in part the reduced value of a portfolio security in connection with
which the Option may have been written or the increased cost of portfolio
securities to be acquired. In contrast, however, if the price of the security
underlying the Option moves adversely to the Fund's position, the Option may be
exercised and the Fund will be required to purchase or sell the security at a
disadvantageous price, resulting in losses which may only be partially offset by
the amount of the premium. The Fund may also write combinations of put and call
Options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
The Fund may purchase put or call Options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that the expected changes occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the Options purchased. The risk assumed by the Fund in connection with
such transactions is limited to the amount of the premium and related
transaction costs associated with the Option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the Options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options a yield curve option is
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<PAGE> 141
based on the difference between the yields of designated securities rather than
the actual prices of the individual securities. Yield curve options written by
the Fund will be "covered" but could involve additional risks, as discussed in
the SAI.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if any
of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers, including
foreign dealers, and will treat the assets used to cover these options as
illiquid for purposes of the SEC illiquidity ceiling.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put options
and purchase call and put options on domestic and foreign stock indices
("Options on Stock Indices"). The Fund may write such options for the purpose of
increasing its current income and/or to protect its portfolio against declines
in the value of securities it owns or increases in the value of securities to be
acquired. When the Fund writes an option on a stock index, and the value of the
index moves adversely to the holder's position, the option will not be
exercised, and the Fund will either close out the option at a profit or allow it
to expire unexercised. The Fund will thereby retain the amount of the premium,
less related transaction costs, which will increase its gross income and offset
part of the reduced value of portfolio securities or the increased cost of
securities to be acquired. Such transactions, however, will constitute only
partial hedges against adverse price fluctuations, since any such fluctuations
will be offset only to the extent of the premium received by the Fund for the
writing of the option, less related transaction costs. In addition, if the value
of an underlying index moves adversely to the Fund's option position, the option
may be exercised, and the Fund will experience a loss which may only be
partially offset by the amount of the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). Such transactions will be entered into for hedging
purposes, in order to protect the Fund's current or intended investments from
the effects of changes in interest or exchange rates or declines in a securities
market, as well as for non-hedging purposes to the extent permitted by
applicable law. The Fund will incur brokerage fees when it purchases and sells
Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Adviser believes that use
of such contracts will benefit the Fund, if its investment judgment about the
general direction of interest or exchange rates or a securities market is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract and the Fund may realize a loss. The Fund will
not enter into any Futures Contract if immediately thereafter the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of portfolio securities or against increases in
the cost of
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<PAGE> 142
securities to be acquired. Purchases of Options on Futures Contracts may present
less risk in hedging the portfolio of the Fund than the purchase or sale of the
underlying Futures Contracts, since the potential loss is limited to the amount
of the premium paid for the option, plus related transaction costs. The writing
of such options, however, does not present less risk than the trading of Futures
Contracts, and will constitute only a partial hedge, up to the amount of the
premium received, less related transaction costs. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction. The Fund may also
purchase and write Options on Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase and sale of a fixed quantity of a foreign currency at
a future date ("Forward Contracts"). The Fund may enter into Forward Contracts
for hedging purposes as well as for non-hedging purposes, which may be
considered speculative. By entering into transactions in Forward Contracts,
however, the Fund may be required to forego the benefits of advantageous changes
in exchange rates and, in the case of Forward Contracts entered into for
non-hedging purposes, the Fund may sustain losses which will reduce its gross
income. The Fund may also enter into a Forward Contract on one currency in order
to hedge against risk of loss arising from fluctuations in the value of a second
currency (referred to as a "cross hedge") if, in the judgment of the Adviser, a
reasonable degree of correlation can be expected between movements in the values
of the two currencies. Forward Contracts are traded over-the-counter, and not on
organized commodities or securities exchanges. As a result, such contracts
operate in a manner distinct from exchange-traded instruments, and their use
involves certain risks beyond those associated with transactions in Futures
Contracts or options traded on exchanges. The Fund has established procedures
consistent with statements of the SEC and its Staff regarding the use of Forward
Contracts by registered investment companies, which requires use of segregated
assets or "cover" in connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to different
types of investments, the Fund may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by the Fund with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield.
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<PAGE> 143
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI regarding the risks involved in these activities.
PORTFOLIO TRADING: Although the Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held or whether the sale would result in a gain or loss.
Therefore, the rate of portfolio turnover is not a limiting factor when a change
in the portfolio is otherwise appropriate. For the fiscal year ended August 31,
1996, the Fund had a portfolio turnover rate in excess of 100%. Transaction
costs incurred by the Fund and the realized capital gains and losses of the Fund
may be greater than that of a fund with a lower portfolio turnover rate.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD") and such other policies as the Trustees
may determine, the Adviser may consider sales of shares of the Fund and of the
other investment company clients of MFD as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. From time to time,
the Adviser may direct certain portfolio transactions to broker-dealer firms
which, in turn, have agreed to pay a portion of the Fund's operating expenses
(e.g., fees charged by the Custodian of the Fund's assets). For a further
discussion of portfolio trading, see "Portfolio Transactions and Brokerage
Commissions" in the SAI.
------------------------------
The policies described above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective. A change in the
Fund's investment objective may result in the Fund having an investment
objective different from the objective which the shareholder considered
appropriate at the time of investment in the Fund.
The SAI includes a discussion of investment policies and a listing of specific
investment restrictions which govern the Fund's investment policies. The
specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise. See "Investment Restrictions"
in the SAI. The Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
5. RISK FACTORS
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). U.S. Government
securities which are generally considered free of credit risk and are assured as
to payment of principal and interest if held to maturity are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
companies. Investing in emerging growth companies involves greater risk than is
customarily associated with investing in more established companies. Emerging
growth companies often have limited product lines, markets or financial
resources, and they may be dependent on management comprised of only a few
people. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk
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<PAGE> 144
than would established growth stocks. The Fund will seek to reduce risk by
investing its assets in a number of markets and issuers, performing credit
analyses of potential investments and monitoring current developments and trends
in both the economy and financial markets.
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different or less stringent accounting standards and thinner
trading markets. Foreign securities markets may also be less liquid, more
volatile and less subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other factors including
expropriation, confiscatory taxation and potential difficulties in enforcing
contractual obligations and could be subject to extended settlement periods.
EMERGING MARKETS: In addition to the general risks of investing in foreign
securities, investments in emerging markets involve special risks. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. Emerging markets may have different
clearance and settlement procedures, and in certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to the
Fund due to subsequent declines in values of the portfolio securities, a
decrease in the level of liquidity in the Fund's portfolio or, if the Fund has
entered into a contract to sell the security, possible liability to the
purchaser. Certain markets may require payment for securities before delivery
and in such markets the Fund bears the risk that the securities will not be
delivered and that the Fund's payments will not be returned. Securities prices
in emerging markets can be significantly more volatile than in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less established markets and economies. In particular, countries
with emerging markets may have relatively unstable governments, present the risk
of nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation on assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be predominantly based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates. Local securities markets
may trade a small number of securities and may be unable to respond effectively
to increases in trading volume, potentially making prompt liquidation of
substantial holdings difficult or impossible at times. Securities of issuers
located in countries with emerging markets may have limited marketability and
may be subject to more abrupt or erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADR's trade on
United States securities exchanges, the Adviser does not
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<PAGE> 145
treat them as foreign securities. However, they are subject to many of the risks
of foreign securities such as changes in exchange rates and more limited
information about foreign issuers.
FOREIGN CURRENCIES: To the extent the Fund invests in securities not denominated
in U.S. dollars, the value of the Fund's foreign investments, and the value of
dividends and interest earned by the Fund on such investments, may be
significantly affected by changes in currency exchange rates. Some foreign
currency values may be volatile, and there is the possibility of governmental
controls on currency exchange or governmental intervention in currency markets
which could adversely affect the Fund. Although the Adviser may attempt to
manage currency exchange rate risks, there is no assurance that the Adviser will
do so at an appropriate time or that the Adviser will be able to predict
exchange rates accurately. For example, if the Adviser hedges the Fund's
exposure to a foreign currency, and that currency's value rises, the Fund will
lose the opportunity to participate in the currency's appreciation. The Fund may
hold foreign currency received in connection with investments in foreign
securities, Forward Contracts and Options on Foreign Currencies when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rates. While the holding of foreign currencies will permit the Fund to
take advantage of favorable movements in the applicable exchange rate, it also
exposes the Fund to risk of loss if such rates move in a direction adverse to
the Fund's position. Such losses could also adversely affect the Fund's hedging
strategies. See "Investment Objective, Policies and Restrictions" in the SAI for
further discussion of the holding of foreign currency, as well as the associated
risks.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline.
LOWER RATED FIXED INCOME SECURITIES: As noted above, the Fund may invest in
fixed income securities in the lower rating categories of recognized rating
agencies (that is, ratings of Ba or lower by Moody's or BB or lower by S&P,
Fitch or Duff & Phelps) (and comparable unrated securities) (commonly known as
"junk bonds"). For a description of these and other rating categories, see
Appendix B. No minimum rating standard is required for a purchase by the Fund.
These securities are considered speculative and, while generally providing
greater income than investments in higher rated securities, will involve greater
risk of principal and income (including the possibility of default or bankruptcy
of the issuers of such securities) and may involve greater volatility of price
(especially during periods of economic uncertainty or change) than securities in
the higher rating categories and, because yields vary over time, no specific
level of income can ever be assured. These lower rated, high yielding fixed
income securities generally tend to be affected by economic changes (and the
outlook for economic growth), short-term corporate and industry developments and
the market's perception of their credit quality (especially during times of
adverse publicity) to a greater extent than higher rated securities, which react
primarily to fluctuations in the general level of interest rates (although these
lower rated securities are also affected by changes in interest rates as
described above under "Risk Factors -- Fixed Income Securities"). In the past,
economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on the Fund's lower
rated, high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, the Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The prices for these
securities may be affected by legislative and regulatory developments. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities to meet
redemption requests or to respond to changes in the market.
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<PAGE> 146
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality.
INVESTMENT TECHNIQUES: Although the Fund will enter into transactions in
Options, Futures Contracts, Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies in part for hedging purposes, such transactions
nevertheless involve certain risks. For example, a lack of correlation between
the instrument underlying an option or Futures Contract and the assets being
hedged, or unexpected adverse price movements, could render the Fund's hedging
strategy unsuccessful and could result in losses. The Fund also may enter into
transactions in Options, Futures Contracts, Options on Futures Contracts and
Forward Contracts for other than hedging purposes, to the extent permitted by
applicable law, which involves greater risk. In particular, such transactions
may result in losses for the Fund which are not offset by gains on other
portfolio positions, thereby reducing gross income. In addition, foreign
currency markets may be extremely volatile from time to time. In addition, there
can be no assurance that a liquid secondary market will exist for any contract
purchased or sold, and the Fund may be required to maintain a position until
exercise or expiration, which could result in losses.
Transactions in Options may be entered into by the Fund on United States
exchanges regulated by the SEC, in the over-the-counter market and on foreign
exchanges, while Forward Contracts may be entered into only in the
over-the-counter market. Futures Contracts and Options on Futures Contracts may
be entered into on United States exchanges regulated by the Commodity Futures
Trading Commission (the "CFTC") and on foreign exchanges. In addition, the
securities underlying options and Futures Contracts traded by the Fund will
include U.S. Government Securities as well as foreign securities.
The trading of options, Futures Contracts and Forward Contracts also entails the
risk that, if the Adviser's judgment as to the general direction of interest or
exchange rates is incorrect, the Fund's overall performance may be poorer than
if it had not entered into any such trades. For example, if the Fund has hedged
against the possibility of an increase in interest rates, and rates instead
decline, the Fund will lose part or all of the benefit of the increased value of
the securities being hedged, and may be required to meet ongoing daily variation
margin payments.
6. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated June 2, 1994 (the "Advisory Agreement"). The Adviser
provides the Fund with overall investment advisory and administrative services,
as well as general office facilities. A committee (the "Allocation Committee")
of investment professionals employed by the Adviser determines the allocation of
assets among the various asset classes. The members of the Allocation Committee
are as follows: (i) A. Keith Brodkin, the Chairman and a Director of the Adviser
and the Chairman, President and a Trustee of the Trust (Mr. Brodkin has been
employed by the Adviser (or its predecessor) since 1970); (ii) Jeffrey L.
Shames, President of the Adviser (Mr. Shames has been employed by the Adviser
since 1983); (iii) Leslie J. Nanberg, a Senior Vice President of the Adviser who
has been employed by the Adviser since 1980; (iv) James T. Swanson, a Senior
Vice President of the Adviser who has been employed as a portfolio manager by
the Adviser since 1985 and (v) John W. Ballen, Chief Equity Officer of the
Adviser who has been employed as a portfolio manager by the Adviser since 1984.
The assets in the asset classes are then managed by the following individuals:
(i) U.S. Equity Securities -- John Brennan, Jr., a Senior Vice President of the
Adviser who has been employed as a portfolio manager by the Adviser since 1985
and John W. Ballen; (ii) Foreign Equity Securities -- David R. Mannheim, a Vice
President of the Adviser who has been employed as a portfolio manager by the
Adviser since 1988; (iii) U.S. Investment Grade Fixed Income Securities --
Geoffery L. Kurinsky, a Senior Vice President of the Adviser who has been
employed as a portfolio manager by the Adviser since 1987; (iv) U.S. High Yield
Fixed Income Securities -- Joan S. Batchelder, a Senior Vice President of the
Adviser who has been employed as a portfolio manager by the Adviser since 1978;
and (v) Foreign Fixed Income Securities -- Leslie J. Nanberg. Mr. Swanson
supervises quantitative support and provides overall oversight of the Fund's
investments. Each individual listed above is responsible, however, for managing
the assets in his/her particular asset class. Subject to such policies as the
Trustees may determine, the Adviser makes investment decisions for the Fund. For
its services and facilities, the Adviser receives a management fee computed and
paid monthly at the annual rate of 0.60% of the
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<PAGE> 147
Fund's average daily net assets for the Fund's then-current fiscal year. For the
Fund's fiscal year ended August 31, 1996, MFS received fees under the Advisory
Agreement of $1,218,613 (0.60% of the Fund's average daily net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS(@) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS Special Value Trust, MFS/Sun Life
Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven variable
accounts, each of which is a registered investment company established by Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in
connection with the sale of various fixed/variable annuity contracts. MFS and
its wholly owned subsidiary, MFS Institutional Advisors, Inc., also provide
investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the United States, Massachusetts Investors
Trust. Net assets under the management of the MFS organization were
approximately $52.3 billion on behalf of approximately 2.2 million investor
accounts as of November 29, 1996. As of such date, the MFS organization managed
approximately $20.3 billion of assets invested in fixed income securities,
approximately $28.1 billion of assets in equity securities and approximately
$4.1 billion of assets in securities of foreign issuers and non-U.S. dollar
denominated securities of U.S. issuers. 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, John D. McNeil and Donald A. Stewart. Mr.
Brodkin is the Chairman, Mr. Shames is the President and Mr. Scott is the
Secretary and a Senior Executive Vice President of MFS. Messrs. McNeil and
Stewart are the Chairman and President, respectively, of Sun Life. Sun Life, a
mutual life insurance company, is one of the largest international life
insurance companies and has been operating in the United States since 1895,
establishing a headquarters office here in 1973. The executive officers of MFS
report to the Chairman of Sun Life.
A. Keith Brodkin, the Chairman and a Director of MFS, is also the Chairman,
President and a Trustee of the Trust. W. Thomas London, Stephen E. Cavan, James
O. Yost, and James R. Bordewick, Jr. all of whom are officers of MFS, are also
officers of the Trust.
MFS has established a strategic alliance with Foreign & Colonial Management Ltd.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und 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 Foreign & Colonial 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 Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial 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 the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor for each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and other services for the Fund.
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7. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, B and C shares of the Fund may be purchased at the public offering
price through any dealer and other financial institutions ("dealers") having a
selling agreement with MFD. Dealers may also charge their customers fees
relating to investment in the Fund.
This Prospectus offers Class A, B and C shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
<TABLE>
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
SALES CHARGE* AS PERCENTAGE OF: DEALER
------------------------------- ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.............................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000................. 4.00 4.17 3.20
$250,000 but less than $500,000................. 2.95 3.04 2.25
$500,000 but less than $1,000,000............... 2.20 2.25 1.70
$1,000,000 or more.............................. None** None** See Below**
- -----------------------------------------------------------------------------------------------------------------
<FN>
* Because of rounding in the calculation of offering price, actual sales charges
may be more or less than those calculated using the percentages above.
** A CDSC will apply to such purchases, as discussed below.
</TABLE>
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
if prior to July 1, 1996: (a) the plan had established an account with the
Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had
at least 25 employees or (ii) the aggregate purchases by the retirement
plan of Class A shares of the MFS Funds would be in an aggregate amount of
at least $250,000 within a reasonable period of time, as determined by MFD
in its sole discretion.
(iii) on investments in Class A shares by certain retirement plan 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
20
<PAGE> 149
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 PURCHASE THAT THE PLAN HAS A
MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO
OBLIGATION INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES
UNDER THIS CATEGORY.
<TABLE>
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<CAPTION>
COMMISSION PAID
BY MFD
TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------- --------------------------
<S> <C>
1.00% ............................... On the first $2,000,000, plus
0.80% ............................... Over $2,000,000 to $3,000,000, plus
0.50% ............................... Over $3,000,000 to $50,000,000, plus
0.25% ............................... Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemption and Repurchases -- Contingent Deferred Sales Charge" for further
discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to
ERISA, where:
(i) the retirement plan and/or sponsoring organization does not subscribe to
the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to the
satisfaction of, and certifies to the Shareholder Servicing Agent that the
retirement plan has, at the time of certification or will have pursuant to
a purchase order placed with the certification, a market value of $500,000
or more invested in shares of any class or classes of the MFS Funds and
aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
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.
21
<PAGE> 150
<TABLE>
CLASS B SHARES: Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC upon redemption as follows:
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
-------------- --------------
<S> <C>
First............................................. 4%
Second............................................ 4%
Third............................................. 3%
Fourth............................................ 3%
Fifth............................................. 2%
Sixth............................................. 1%
Seventh and following............................. 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Distribution Plan. As discussed
above, such retirement plans are eligible to purchase Class A shares of the
Funds 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 the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution Plan applicable
to Class B shares. See "Distribution Plan" below. However, for purposes of
conversion to Class A shares, all
22
<PAGE> 151
shares in a shareholder's account that were purchased through the reinvestment
of dividends and distributions paid in respect of Class B shares (and which have
not converted to Class A shares as provided in the following sentence) will be
held in a separate sub-account. Each time any Class B shares in the
shareholder's account (other than those in the sub-account) convert to Class A
shares, a portion of the Class B shares then in the sub-account will also
convert to Class A shares. The portion will be determined by the ratio that the
shareholder's Class B shares not acquired through reinvestment of dividends and
distributions that are converting to Class A shares bear to the shareholder's
total Class B shares not acquired through reinvestment. The conversion of Class
B shares to Class A shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that such conversion
will not constitute a taxable event for federal tax purposes. There can be no
assurance that such ruling or opinion will be available, and the conversion of
Class B shares to Class A shares will not occur if such ruling or opinion is not
available. In such event, Class B shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares of the Fund.
The maximum investment in Class C shares that may be made is up to $1,000,000
per transaction.
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividend and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividend or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" below for
further discussion of the CDSC.
MFD will pay dealers 1.00% of the purchase price of Class C shares purchased
through dealers and, as compensation therefor, MFD will retain the 1.00% per
annum distribution and service fee pad under the Fund's Distribution Plan by the
Fund to MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), if the retirement plan and/or the sponsoring
organization subscribe to the MFS FUNDamental 401(k) Plan or another similar
recordkeeping program made available by the Shareholder Servicing Agent.
WAIVERS OF CDSC: In certain circumstances, the CDSC imposed upon redemption of
Class C shares is waived. These circumstances are described in Appendix A to
this Prospectus.
GENERAL: The following information applies to purchases of all classes of the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than IRA's)
involving the submission of investments by means of group remittal statements
are subject to a $50 minimum on initial and additional investments per account.
The minimum initial investment for IRAs is $250 per account and the minimum
additional investment is $50 per account. Accounts being established for
participation in the Automatic Exchange Plan are subject to a $50 minimum on
initial and additional investments per account. There are also other limited
exceptions to these minimums for certain tax-deferred retirement programs. Any
minimums may be changed at any time at the discretion of MFD. The Fund reserves
the right to cease offering its shares for sale at any time.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserve the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the
23
<PAGE> 152
individual or organization makes three or more exchange requests out of the Fund
per calendar year and (ii) any one of such exchange requests represents shares
equal in value to 1/2 of 1% or more of the Fund's net assets at the time of the
request. Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
As noted above, the Fund and MFD each reserve the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Family of Funds may have different and/or more or
less restrictive policies with respect to market timers than the Fund. These
policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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 the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
24
<PAGE> 153
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to the
imposition of an initial sales charge or a CDSC for exchanges from an MFS money
market fund to another MFS Fund which is not an MFS money market fund. These
rules are described under the caption "Exchanges" in the Prospectuses of those
MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: A shareholder should read the prospectuses of the other MFS Funds into
which an exchange is made and consider the differences in objectives, policies
and restrictions before making any exchange. Exchanges will be made only after
instructions in writing or by telephone (an "Exchange Request") are received for
an established account by the Shareholder Servicing Agent in proper form (i.e.,
if in writing -- signed by the record owner(s) exactly as the shares are
registered; if by telephone -- proper account identification is given by the
dealer or shareholder of record) and each exchange must involve either shares
having an aggregate value of at least $1,000 ($50 in 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 usually occur on that day if all the requirements set
forth above have been complied with at that time and subject to the right to
reject purchase orders. No more than five exchanges may be made in any one
Exchange Request by telephone. Additional information concerning this exchange
privilege and prospectuses for any of the other MFS Funds may be obtained from
dealers or the Shareholder Servicing Agent. For federal and (generally) state
income tax purposes, an exchange is treated as a sale of the shares exchanged
and, therefore, an exchange could result in a gain or loss to the shareholder
making the exchange. Exchanges by telephone are automatically available to most
non-retirement plan accounts and certain retirement plan accounts. For further
information regarding exchanges by telephone, see "Redemptions by Telephone."
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timers.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is
25
<PAGE> 154
deemed to have tendered for redemption a sufficient number of full and
fractional shares in his account to cover the amount withdrawn. The proceeds of
a redemption or repurchase will normally be available within seven days, except
for shares purchased or received in exchange for shares purchased by check
(including certified checks or cashier's checks). Payment of redemption proceeds
may be delayed for up to 15 days from the purchase date in an effort to assure
that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature 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 C shares and Class B shares purchased on or after January 1, 1993
will be aggregated on a calendar month basis -- all transactions made during a
calendar month, regardless of when during the month they have occurred, will age
one year at the close of business on the last day of such month in the following
calendar year and each subsequent year. For Class B shares of the Fund purchased
prior to January 1, 1993, transactions will be aggregated on a calendar year
basis -- all transactions made
26
<PAGE> 155
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 redemption equal to the then-current value
of Reinvested Shares is not subject to the CDSC, but (iii) any amount of the
redemption in excess of the aggregate of the then-current value of Reinvested
Shares and the Free Amount is subject to a CDSC. The CDSC will first be applied
against the amount of Direct Purchases which will result in any such charge
being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of all
classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions, either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See "Purchases --
General -- Minimum Investment." Shareholders will be notified that the value of
their account is less than the minimum investment requirement and allowed 60
days to make an additional investment before the redemption is processed.
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DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan 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 Plan"), after having concluded that there is a reasonable
likelihood that the Distribution Plans would benefit the Fund and its
shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A shares, Class B
shares or Class C shares, as appropriate) (the "Designated Class") annually in
order that MFD may pay expenses on behalf of the Fund relating to the servicing
of shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. Each Distribution Plan provides that the Fund may pay MFD a
distribution fee based on the average daily net assets attributable to the
Designated Class as partial consideration for distribution services performed
and expenses incurred in the performance of MFD's obligations under its
distribution agreement with the Fund. See "Management of the Fund --
Distributor" in the SAI. The amount of the distribution fee paid by the Fund
with respect to each class differs under the Distribution Plan, as does the use
by MFD of such distribution fees. Such amounts and uses are described below in
the discussion of the provisions of the Distribution Plan relating to each class
of shares. While the amount of compensation received by MFD in the form of
distribution fees during any year may be more or less than the expense incurred
by MFD under its distribution agreement with the Fund, the Fund is not liable to
MFD for any losses MFD may incur in performing services under its distribution
agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See "Purchases
- -- Class A Shares" above. In addition to the initial sales charge, the dealer
also generally receives the ongoing 0.25% per annum service fee, as discussed
above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.25% of the Fund's average daily net assets attributable to
Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses
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incurred by it under its distribution agreement with the Fund, including
commissions to dealers and payments to wholesalers employed by MFD (e.g., MFD
pays commission to dealers with respect to purchases of $1 million or more and
purchases by certain retirement plans of Class A shares which are sold at net
asset value but which are subject to a 1% CDSC for one year after purchase). See
"Purchases -- Class A Shares" above. 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 on an annual basis to 0.25% per annum of the Fund's
average daily net assets attributable to Class A shares (other than Class A
shares that have converted from Class B shares) owned by investors for whom that
securities dealer is the holder or dealer of record. In addition, to the extent
that the aggregate service and distribution fees paid under the Class A
Distribution Plan do not exceed 0.50% per annum of the average daily net assets
of the Fund attributable to Class A shares, the Fund is permitted to pay such
distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. 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 Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.45%,
1.00% and 1.00% per annum, respectively. The maximum 0.50% per annum
distribution/service fee with respect to Class A shares described above will be
paid by the Fund only to the extent that annualized total operating expenses for
Class A shares of the Fund do not exceed 1.50% of average daily net assets for
Class A shares. To the extent that such distribution/service fee payments would
cause such annualized total operating expenses for Class A shares to exceed
1.50%, the amount of such distribution/service fee payments in excess of 1.50%
per annum will be waived by MFD. Based on estimated expenses for the Fund's
current fiscal year, MFD anticipates waiving the Fund's Class A
distribution/service fee equal to 0.05% per annum of the average daily net
assets attributable to Class A shares, resulting in a Class A
distribution/service fee equal to 0.45% per annum.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. The Fund may make one or
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more distributions during the calendar year to its shareholders from any
long-term capital gains and also may make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. See "Tax Status" and "Shareholder Services -- Distribution Options" below.
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
its net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay any federal income or excise taxes,
although foreign-source income received by the Fund may be subject to foreign
withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares.
A portion of the dividends received from the Fund (but none of the Fund's
capital gains distributions) may qualify for the dividends received deduction
for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction), the portion that may qualify for the corporate dividends received
deduction, and the amount, if any, of federal income tax withheld. In certain
circumstances, the Fund may also elect to "pass through" to shareholders foreign
income taxes paid by the Fund. Under those circumstances, the Fund will notify
shareholders of their pro rata portion of the foreign income taxes paid by the
Fund; shareholders may be eligible for foreign tax credits or deductions with
respect to those taxes, but will be required to treat the amount of the taxes as
an amount distributed to them and thus includable in their gross income for
federal income tax purposes.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and certain other payments that are subject to such withholding and
that are made to persons who are neither citizens nor residents of the U.S.,
regardless of whether a lower rate may be permitted under an applicable treaty.
The Fund is also required in certain circumstances to apply backup withholding
at a rate of 31% on taxable dividends and redemption proceeds paid to any
shareholder (including a shareholder who is neither a citizen nor a resident of
the U.S.) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not be, however, applied to payments that have been subject to
30% withholding. Prospective investors should read the Fund's Account
Application for additional information regarding backup withholding of federal
income tax and should consult their own tax advisers as to the tax consequences
to them of an investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market values or
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otherwise at their fair values, as described in the SAI. All investments and
assets are expressed in U.S. dollars based upon current currency exchange rates.
The net asset value per share of each class of shares is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of thirteen series of the Trust, has three classes of shares which
it offers to the general public, entitled Class A, Class B and Class C Shares of
Beneficial Interest (without par value). The Fund also has a class of shares
which it offers exclusively to certain institutional investors entitled Class I
Shares. The Trust has reserved the right to create and issue additional classes
and series of shares, in which case each class of shares of a series would
participate equally in the earnings, dividends and assets attributable to that
class of that particular series. Shareholders are entitled to one vote for each
share held and shares of each series would be entitled to vote separately to
approve investment advisory agreements or changes in investment restrictions,
but shares of all series would vote together in the election of Trustees or
selection of accountants. Additionally, each class of shares of a series will
vote separately on any material increases in the fees under the Distribution
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters.
Shares have no pre-emptive or conversion rights (except as set forth above in
"Purchases -- Conversion of Class B Shares"). Shares are fully paid and
nonassessable. Should the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances. The Trust does not intend to hold annual shareholder meetings.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed (e.g., fidelity bonding and errors and omissions insurance)
and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund will provide yield, current distribution rate and
total rate of return quotations for each class of shares and may also quote fund
rankings in the relevant fund category from various sources, such as Lipper
Analytical Services, Inc., Morningstar, Inc. and Wiesenberger Investment
Companies Service. Yield quotations are based on the annualized net investment
income per class share over a 30-day period stated as a percent of the maximum
public offering price on the last day of that period. Yield calculations for
Class B and Class C shares assume no CDSC is paid. The current distribution rate
for each class is generally based upon the total amount of dividends per share
paid by the Fund to shareholders of that class during the past twelve months and
is computed by dividing the amount of such dividends by the maximum public
offering price of that class at the end of such period. Current distribution
rate calculations for Class B and Class C shares assume no CDSC is paid. The
current distribution rate differs from the yield calculation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing, short-term capital gains,
and return of invested capital, and is calculated over a different period of
time. Total rate of return quotations will reflect the average annual percentage
change over stated periods in the value of an investment in each class of shares
of the Fund made at the maximum public offering price of shares of that class
and with all distributions reinvested and which will give effect to the
imposition of any applicable CDSC assessed upon redemptions of the Fund's Class
B and Class C shares. Such total rate of return quotations may be accompanied by
quotations which do not reflect the reduction in value of the initial investment
due to the sales charge or the deduction of a CDSC, and which will thus be
higher.
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All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time and current distribution rate reflects only
the rate of distributions paid by the Fund over a stated (period of) time, while
total rate of return reflects all components of investment return over a stated
period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. For
a discussion of the manner in which the Fund will calculate its yield, current
distribution rate and total rate of return, see the SAI. For further information
about the Fund's performance for the fiscal year ended August 31, 1996, please
see the Fund's Annual Report. A copy of the Annual Report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectus, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions, insurance premiums; fees and expenses of Investors Bank &
Trust Company, the Trust's Custodian, for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and accounts;
expenses of calculating the net asset value of shares of the Fund; and expenses
of shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses are borne by the Fund except that the Distribution Agreement with
MFD requires MFD to pay for prospectuses that are to be used for sales purposes.
Expenses of the Trust which are not attributable to a specific series of the
Trust are allocated among the series in a manner believed by management of the
Trust to be fair and equitable.
MFS has agreed to pay for an indefinite period, the expenses of the Fund such
that the aggregate operating expenses of the Fund's Class A, Class B and Class C
shares do not exceed, on an annualized basis, 1.50%, 2.57% and 2.50%,
respectively, of its average daily net assets with respect to each such class;
provided, however, that this obligation may be terminated or revised at any time
by MFS without the consent of the Trust or the Fund by notice in writing from
MFS to the Trust on behalf of the Fund.
8. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and distributions for that year, including
whether any portion represents a return of capital (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends in cash; capital gain distributions reinvested in additional
shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than
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$10 will automatically be reinvested in additional shares of the Fund. If a
shareholder has elected to receive dividends and/or capital gain distributions
in cash, and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, or the shareholder does not respond to
mailings from the Shareholder Servicing Agent with regard to uncashed
distribution checks, such shareholder's distribution option will automatically
be converted to having all dividends and other distributions reinvested in
additional shares. Any request to change a distribution option must be received
by the Shareholder Servicing Agent by the record date for a dividend or
distribution in order to be effective for that dividend or distribution. No
interest will accrue on amounts represented by uncashed distribution or
redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund:
LETTER OF INTENT: If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $100,000 or more of Class A shares
of the Fund alone or in combination with shares of Class B or Class C of the
Fund or any of the classes of other MFS Funds or the MFS Fixed Fund (a bank
collective investment fund) within a 13-month period (or a 36-month period for
purchases of $1 million or more), the shareholder may obtain such shares at the
same reduced sales charge as though the total quantity were invested in one lump
sum, subject to escrow agreements and the appointment of an attorney for
redemptions from the escrow amount if the intended purchases are not completed,
by completing the Letter of Intent section of the Account Application.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value (and without any applicable CDSC) in
shares of the same class of another MFS Fund, if shares of such Fund are
available for sale.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder (except a $3 Million Shareholder)
may direct the Shareholder Servicing Agent to send him (or anyone he designates)
regular periodic payments, based upon the value of his account. Each payment
under a Systematic Withdrawal Plan (a "SWP") must be at least $100, except in
certain limited circumstances. The aggregate withdrawals of Class B and Class C
shares in any year pursuant to a SWP will not be subject to a CDSC and are
generally limited to 10% of the value of the account at the time of the
establishment of the SWP. The CDSC will not be waived in the case of SWP
redemptions of Class A shares which are subject to a CDSC.
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (and in the case of Class C shares, for shares of MFS Money
Market
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Fund) under the Automatic Exchange Plan, a dollar cost averaging program. The
Automatic Exchange Plan provides for automatic monthly or quarterly exchanges of
funds from the shareholder's account in an MFS Fund for investment in the same
class of shares of other MFS Funds selected by the shareholder provided that
such shares are available for sale. Under the Automatic Exchange Plan, exchanges
of at least $50 each may be made to up to six different funds. A shareholder
should consider the objectives and policies of a fund and review its prospectus
before electing to exchange money into such fund through the Automatic Exchange
Plan. No transaction fee is imposed in connection with exchange transactions
under the Automatic Exchange Plan. However, exchanges of shares of MFS Money
Market Fund, MFS Government Money Market Fund or Class A shares of MFS Cash
Reserve Fund will be subject to any applicable sales charge. For federal and
(generally) state income tax purposes, an exchange is treated as a sale of the
shares exchanged and, therefore, could result in a capital gain or loss to the
shareholder making the exchange. See the SAI for further information concerning
the Automatic Exchange Plan. Investors should consult their tax advisers for
information regarding the potential capital gain and loss consequences of
transactions under the Automatic Exchange Plan.
Because a dollar cost averaging program involves periodic purchases of shares
regardless of fluctuating share offering prices, a shareholder should consider
his financial ability to continue his purchases through periods of low price
levels. Maintaining a dollar cost averaging program concurrently with a
withdrawal program could be disadvantageous because of the sales charges
included in share purchases in the case of Class A shares, and because of the
assessment of the CDSC for certain share redemptions in the case of Class A
shares.
TAX-DEFERRED RETIREMENT PLANS -- Except as noted under "Purchases -- Class C
shares," shares of the Fund may be purchased by all types of tax-deferred
retirement plans, including IRAs, SEP-IRA plans, 401(k) plans, 403(b) plans and
other corporate pension and profit-sharing plans. Investors should consult with
their tax adviser before establishing any of the tax-deferred retirement plans
described above.
------------------------
The Fund's SAI, dated January 1, 1997 contains more detailed information about
the Fund, including, but not limited to, information related to: (i) the Fund's
investment objective and policies, including the purchase and sale of Options,
Futures Contracts, Options on Futures Contracts, Forward Contracts and Options
on Foreign Currencies; (ii) the Trustees, officers and investment adviser; (iii)
portfolio trading; (iv) the Fund's shares, including rights and liabilities of
shareholders; (v) tax status of dividends and distributions; (vi) the
Distribution Plan; and (vii) various services and privileges provided by the
Fund for the benefit of its shareholders, including additional information with
respect to the exchange privilege.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the contingent
deferred sales charge ("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 shares and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. SHARES ACQUIRED BY:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("Sun Life") or any of their subsidiary
companies;
- Trustees and retired trustees of any investment company for which MFS
Fund Distributors, Inc. ("MFD") serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers and other financial
institutions ("dealers") which have a sales agreement with MFD;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI")
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
A-1
<PAGE> 164
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by MFS Service Center, Inc. ( the "Shareholder Servicing
Agent"); and
- Distributions from a 401(a) or ESP Plan that has invested its assets in
one or more of the MFS Funds for more than 10 years from the later to
occur of: (i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan
first invests its assets in one or more of the MFS Funds.
- The sales charges will be waived in the case of a redemption of all of
the 401(a) or ESP Plan's shares in all MFS Funds (i.e., all the assets of
the 401(a) or ESP Plan invested in the MFS Funds are withdrawn), unless
immediately prior to the redemption, the aggregate amount invested by the
401(a) or ESP Plan in shares of the MFS Funds (excluding the reinvestment
of distributions) during the prior four years equals 50% or more of the
total value of the 401(a) or ESP Plan's assets in the MFS Funds, in which
case the sales charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
A-2
<PAGE> 165
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from
another open-end management investment company not distributed or managed
by MFD or its affiliates if: (i) the investment is made through a dealer
and appropriate documentation is submitted to MFD; (ii) the redeemed
shares were subject to an initial sales charge or deferred sales charge
(whether or not actually imposed); (iii) the redemption occurred no more
than 90 days prior to the purchase of Class A shares; and (iv) the MFS
Fund, MFD or its affiliates have not agreed with such company or its
affiliates, formally or informally, to waive sales charges on Class A
shares or provide any other incentive with respect to such redemption and
sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
A-3
<PAGE> 166
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under
the following circumstances:
IRAS, 401(a) PLANS, ESP PLANS AND SRO PLANS
- Distributions made on or after the IRA owner or the 401(a), ESP or SRO
Plan participant, as applicable, has attained the age of 70 1/2 years
old, but only with respect to the minimum distribution under applicable
Internal Revenue Code ("Code") rules.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS ("SAR-SEP PLANS")
- Distributions made on or after the SAR-SEP Plan participant has attained
the age of 70 1/2 years old, but only with respect to the minimum
distribution under applicable Code rules; and
- Death or disability of a SAR-SEP Plan participant.
A-4
<PAGE> 167
APPENDIX B
DESCRIPTION OF BOND RATINGS
The ratings of Moody's, S&P, Fitch and Duff & Phelps represent their opinions as
to the quality of various bonds. IT SHOULD BE EMPHASIZED, HOWEVER, THAT RATINGS
ARE NOT ABSOLUTE STANDARDS OF QUALITY. CONSEQUENTLY, BONDS WITH THE SAME
MATURITY, COUPON AND RATING MAY HAVE DIFFERENT YIELDS WHILE BONDS OF THE SAME
MATURITY AND COUPON WITH DIFFERENT RATINGS MAY HAVE THE SAME YIELD.
MOODY'S INVESTORS SERVICE, INC.
AAA: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
B-1
<PAGE> 168
STANDARD & POOR'S RATINGS SERVICES
AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC AND C: Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating.
C: The rating 'C' is typically applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
B-2
<PAGE> 169
FITCH INVESTORS SERVICE, INC.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F-1 +'.
A: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protect. Default in payment of interest and/or principal
seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
PLUS (+) MINUS (-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful completion of a
project or the occurrence of a specific event.
SUSPENDED A rating is suspended when Fitch deems the amount of information
available from the issuer to be inadequate for rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is called or
refinanced, and, at Fitch's discretion, when an issuer fails to furnish proper
and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an occurrence
that is likely to result in a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for potential downgrade, or "Evolving", where ratings may be
lowered, FitchAlert is relatively short-term, and should be resolved within 12
months.
B-3
<PAGE> 170
DUFF & PHELPS CREDIT RATING CO.
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'D-1 +'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
PLUS (+) OR MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the 'AAA' category.
NR: Indicates that Duff & Phelps does not rate the specific issue.
DUFF & PHELPS SHORT-TERM RATINGS
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operation factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent and
supported by good fundamental protection factors. Risk factors are minor.
D-1 -: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service. Operating factors and market access
may be subject to a high degree of variation.
D-5: Issuer failed to meet scheduled principal and/or interest payments.
B-4
<PAGE> 171
[MFS LOGO]
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116
(617) 954-4500 MFS[Registered Trademark] WORLD
ASSET ALLOCATION FUND[ServiceMark]
Distributor
MFS Fund Distributors, Inc. Prospectus
500 Boylston Street January 1, 1997
Boston, MA 02116
(617) 954-5000
Custodian and Dividend Disbursing Agent
Investors Bank and Trust Company
89 South Street
Boston, MA 02110
Shareholder Servicing Agent
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Toll free: (800) 225-2606
Mailing Address:
P.O. Box 2281
Boston, MA 02107-9906
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
[MFS LOGO]
MFS[REGISTERED TRADEMARK] WORLD ASSET
ALLOCATION FUND
500 Boylston Street
Boston, MA 02116
MAA-1-1/97/13M 88/288/388
<PAGE> 172
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
<TABLE>
<S> <C>
MFS(R) WORLD ASSET STATEMENT OF
ALLOCATION FUNDSM ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1997
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Fund................................................................ 13
Trustees.............................................................................. 13
Officers.............................................................................. 14
Investment Adviser.................................................................... 14
Custodian............................................................................. 15
Shareholder Servicing Agent........................................................... 15
Distributor........................................................................... 16
4. Portfolio Transactions and Brokerage Commissions...................................... 16
5. Shareholder Services.................................................................. 17
Investment and Withdrawal Programs.................................................... 17
Exchange Privilege.................................................................... 20
Tax-Deferred Retirement Plans......................................................... 21
6. Tax Status............................................................................ 21
7. Determination of Net Asset Value and Performance...................................... 22
8. Distribution Plan..................................................................... 25
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 26
APPENDIX A -- Trustee Compensation Table.............................................. A-1
APPENDIX B -- Performance Information................................................. B-1
</TABLE>
MFS WORLD ASSET ALLOCATION FUND
A Series of MFS Series Trust I
500 Boylston Street, Boston, Massachusetts 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus, dated
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> 173
1. DEFINITIONS
<TABLE>
<S> <C>
"Fund" -- MFS World Asset Allocation
Fund, is a series of MFS
Series Trust I (the
"Trust"), a Massachusetts
business trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1997, as
amended or supplemented from
time to time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek total return
over the long term through investments in equity and fixed income securities.
The Fund will also seek to have low volatility of share price (i.e., net asset
value per share) and reduced risk (compared to an aggressive equity/fixed income
fund). There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES. The Fund seeks to achieve its investment objective by
allocating portfolio assets among various classes of securities. The Prospectus
contains a discussion of the various types of securities in which the Fund may
invest and certain risks involved in such investments.
FOREIGN SECURITIES: The Fund may invest in foreign securities as discussed in
the Prospectus. Investments in foreign issues involve considerations and
possible risks not typically associated with investments in securities issued by
domestic companies or with debt securities issued by foreign governments. There
may be less publicly available information about a foreign company than about a
domestic company, and many foreign companies are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
to which U.S. companies are subject. Foreign securities markets, while growing
in volume, have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Fixed brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. There is also less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depositary which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositaries. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depositary of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment
2
<PAGE> 174
of principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of Federal Housing Authority-insured or Veterans
Administration-guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates which represent
interest in conventional mortgages (i.e., not federally insured or guaranteed)
from FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables, Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the GNMA, FNMA or FHLMC, but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multiclass pass-through securities which are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or a part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on
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the Mortgage Assets may be allocated among the several classes of a series of a
CMO in innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes of
the series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest only or "IO"
class) while the other class will receive all of the principal (the principal
only or "PO" class). The yield to maturity on an IO is extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a material
adverse effect on such security's yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or subsidiaries
thereof), of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans would be required to be secured continuously by collateral in cash,
U.S. Treasury securities or an irrevocable letter of credit maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will usually
not exceed five days). During the existence of a loan, the Fund would continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation based on investment of
cash collateral or a fee. The Fund would not, however, have the right to vote
any securities having voting rights during the existence of the loan, but would
call the loan in anticipation of an important vote to be taken among holders of
the securities or of the giving or withholding of their consent on a material
matter affecting the investment. As with other extensions of credit there are
risks of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms deemed by the Adviser to be of good standing, and when, in the
judgment of the Adviser, the consideration which could be earned currently from
securities loans of this type justifies the attendant risk. If the Adviser
determines to make securities loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Fund's total assets.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS: As described in the Prospectus, the Fund
may enter into mortgage "dollar roll" transactions pursuant to which it sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
WHEN-ISSUED OR FORWARD DELIVERY SECURITIES: When the Fund commits to purchase a
security on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the Securities and
Exchange Commission ("SEC") concerning such purchases. Since that policy
currently recommends that an amount of the Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, short-term money market instruments or high
quality debt securities sufficient to cover any commitments or to limit any
potential risk. However, although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
the SEC policy, purchases of securities on such basis may involve more risk than
other types of purchases. For example, the Fund may have to sell assets which
have been set aside in order to meet redemptions. Also, if the Fund determines
it necessary to sell the "when-issued" or "forward delivery" securities before
delivery, it may incur a loss because of market fluctuations since the time the
commitment to purchase such securities was made.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS: The Fund may purchase loan
participations and other direct claims against a borrower. In purchasing a loan
participation, the Fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many such loans are
secured, although some may be unsecured. Such loans may be in default at the
time of purchase. Loans that are fully secured offer the Fund more protection
than an unsecured loan in the event of non-payment of scheduled interest or
principal. However, there is no assurance that the liquidation of collateral
from a secured loan would satisfy the corporate borrower's obligation, or that
the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which the
Fund would assume all of the rights of the lending institution in a loan, or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. The Fund may also purchase trade or other claims
against companies, which generally represent money owed by the company to a
supplier of goods or services. These claims may also be purchased at a time when
the company is in default.
Certain of the loan participations acquired by the Fund may involve revolving
credit facilities or other standby financing commitments which obligate the Fund
to pay additional cash on a certain date or on demand. These commitments may
have the effect of requiring the Fund to increase its investment in a company at
a time when the Fund might not otherwise decide to do so (including at a time
when the company's financial condition makes it unlikely that such amounts will
be repaid). To the extent that the Fund is committed to advance additional
funds, it will at all times hold and maintain in a segregated account cash or
other high grade debt obligations in an amount sufficient to meet such
commitments.
The Fund's ability to receive payments of principal, interest and other amounts
due in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loan participations and other direct
investments which the Fund will purchase, the Adviser will rely upon its (and
not that of the original lending institution's) own credit analysis of the
borrower. As the Fund may be required to rely upon another lending institution
to collect and pass on to the Fund amounts payable with respect to the loan and
to enforce the Fund's rights under the loan, an insolvency, bankruptcy or
reorganization of the lending institution may delay or prevent the Fund from
receiving such amounts. In such cases, the Fund will evaluate as well the
credit-worthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification of
the Fund's portfolio investments. The highly leveraged nature of many such loans
may make such loans especially vulnerable to adverse changes in economic or
market conditions. Investments in such loans may involve additional risks to the
Fund. For example, if a loan is foreclosed, the Fund could become part owner of
any collateral, and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable that under
emerging legal theories of lender liability, the Fund could be held liable as a
co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund. In addition, loan participations and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, the Fund may be unable to sell such investments
at an opportune time or may have to resell them at less than fair market value.
To the extent that the Adviser determines that any such investments are
illiquid, the
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Fund will include them in the investment limitations described below.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (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 maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
government agencies.
OPTIONS ON SECURITIES: The Fund may write (sell) covered call and put options on
securities ("Options") and purchase call and put Options. The Fund may write
Options for the purpose of increasing its return and for hedging purposes. In
particular, if the Fund writes an Option which expires unexercised or is closed
out by the Fund at a profit, the Fund retains the premium paid for the Option
less related transaction costs, which increases its gross income and offsets in
part the reduced value of the portfolio security in connection with which the
Option is written, or the increased cost of portfolio securities to be acquired.
In contrast, however, if the price of the security underlying the Option moves
adversely to the Fund's position, the Option may be exercised and the Fund will
then be required to purchase or sell the security at a disadvantageous price,
which might only partially be offset by the amount of the premium.
The Fund may write Options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call Option against that
security. The exercise price of the call Option the Fund determines to write
depends upon the expected price movement of the underlying security. The
exercise price of a call Option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the Option is written.
The writing of covered put Options is similar in terms of risk/return
characteristics to buy-and-write transactions. Put Options may be used by the
Fund in the same market environments in which call Options are used in
equivalent buy-and-write transactions.
The Fund may also write combinations of put and call Options on the same
security, a practice known as a "straddle." By writing a straddle, the Fund
undertakes a simultaneous obligation to sell or purchase the same security in
the event that one of the Options is exercised. If the price of the security
subsequently rises sufficiently above the exercise price to cover the amount of
the premium and transaction costs, the call will likely be exercised and the
Fund will be required to sell the underlying security at a below market price.
This loss may be offset, however, in whole or in part, by the premiums received
on the writing of the two Options. Conversely, if the price of the security
declines by a sufficient amount, the put will likely be exercised. The writing
of straddles will likely be effective, therefore, only where the price of a
security remains stable and neither the call nor the put is exercised. In an
instance where one of the Options is exercised, the loss on the purchase or sale
of the underlying security may exceed the amount of the premiums received.
By writing a call Option on a portfolio security, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the Option. By writing a put Option, the
Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price above its then current market value, resulting in
a loss unless the security subsequently appreciates in value. The writing of
Options will not be undertaken by the Fund solely for hedging purposes, and may
involve certain risks which are not present in the case of hedging transactions.
Moreover, even where Options are written for hedging purposes, such transactions
will constitute only a partial hedge against declines in the value of portfolio
securities or against increases in the value of securities to be acquired, up to
the amount of the premium.
The Fund may also purchase put and call Options. Put Options are purchased to
hedge against a decline in the value of securities held in the Fund's portfolio.
If such a decline occurs, the put Options will permit the Fund to sell the
securities underlying such Options at the exercise price, or to close out the
Options at a profit. The Fund will purchase call Options to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. If such an increase occurs, the call Option will permit the Fund to
purchase the securities underlying such Option at the exercise price or to close
out the Option at a profit. The premium paid for a call or put Option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the Option, and, unless the price of
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the underlying security rises or declines sufficiently, the Option may expire
worthless to the Fund. In addition, in the event that the price of the security
in connection with which an Option was purchased moves in a direction favorable
to the Fund, the benefits realized by the Fund as a result of such favorable
movement will be reduced by the amount of the premium paid for the Option and
related transaction costs.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts the Fund has in place with such
primary dealers will provide that the Fund has the absolute right to repurchase
an option it writes at any time at a price which represents the fair market
value, as determined in good faith through negotiation between the parties, but
which in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-the-money. The Fund will treat all or a portion
of the formula as illiquid for purposes of the SEC illiquidity ceiling. The Fund
may also write over-the-counter options with non-primary dealers and will treat
the assets used to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
YIELD CURVE OPTIONS: The Fund may also enter into options on the yield "spread,"
or yield differential between two securities; transactions referred to as "yield
curve" options. In contrast to other types of options, a yield curve option is
based on the difference between the yields of designated securities, rather than
the prices of the individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by the Fund
will be "covered." A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counter party with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling. See "Options
on Securities" above for a discussion of the policies the Adviser intends to
follow to limit the Fund's investment in these securities.
OPTIONS ON STOCK INDICES: As noted in the Prospectus, the Fund may write (sell)
covered call and put options and purchase call and put options on stock indices
("Options on Stock Indices"). The Fund may cover call Options on Stock Indices
by owning securities whose price changes, in the opinion of the Adviser, are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio. Where the Fund covers a call option on a stock index through
ownership of securities, such securities may not match the composition of the
index and, in that event, the Fund will not be fully covered and could be
subject to risk of loss in the event of adverse changes in the value of the
index. The Fund may also cover call options on stock indices by holding a call
on the same index and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash or cash equivalents
in a segregated account with its custodian. The Fund may cover put options on
stock indices by maintaining cash or cash equivalents with a value equal to the
exercise price in a segregated account with its custodian, or else by holding a
put on the same security and in the same principal amount as the put written
where the exercise price of the put held (a) is equal to or greater than the
exercise price of the put written or (b) is less than the exercise price of the
put written if the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
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Put and call options on stock indices may also be covered in such other manner
as may be in accordance with the rules of the exchange on which, or the
counterparty with which, the option is traded and applicable laws and
regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investment. By writing a put option, the Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indexes will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of the call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). This investment technique may be used to hedge (i.e., to
protect) against anticipated future changes in interest or exchange rates or
declines in a securities market which otherwise might adversely affect the value
of the Fund's portfolio securities or adversely affect the prices of long-term
bonds or other securities which the Fund intends to purchase at a later date.
The Fund may also enter into Futures Contracts for non-hedging purposes, to the
extent permitted by applicable law.
A "sale" of a Futures Contract means a contractual obligation to deliver the
securities or foreign currency called for by the contract at a fixed price at a
specified time in the future. A "purchase" of a Futures Contract means a
contractual obligation to acquire the securities or foreign currency at a fixed
price at a specified time in the future or, in the case of a Futures Contract or
an index of securities, to make or receive a cash settlement.
While Futures Contracts often provide for the delivery of securities or
currencies, such deliveries are very seldom made. Generally, a Futures Contract
is terminated by entering into an offsetting transaction. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts. At the time such a
purchase or sale is made, the Fund must allocate cash or securities as a margin
deposit ("initial deposit"). It is expected that the initial deposit will vary
but may be as low as 5% or less of the value of the contract. The Futures
Contract is valued daily thereafter and the payment of "variation margin" may be
required to be paid or received, so that each day the Fund may provide or
receive cash that reflects the decline or increase in the value of the contract.
The purpose of the purchase or sale of a Futures Contract, in the case of a
portfolio holding long-term debt securities, is to attempt to protect the Fund
from fluctuations in interest rates without actually buying or selling long-term
debt securities. For example, if the Fund owned long-term bonds and interest
rates were expected to increase, the Fund might enter into Futures Contracts for
the sale of debt securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of the Fund's
Futures Contracts should increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase or by buying bonds with long maturities and selling bonds
with short maturities when interest rates are expected to decline. However,
since the futures market is more liquid than the cash market, the use of Futures
Contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, Futures
Contracts may be purchased to hedge against anticipated purchases of long-term
bonds at higher prices. Since the fluctuations in the value of Futures Contracts
should be similar to that of long-term bonds, the Fund could take advantage of
the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, the Futures Contracts could
be liquidated and the Fund could buy long-term bonds on the cash market.
Purchases of Futures Contracts would be particularly appropriate when the cash
flow from the sale of new shares of the Fund could have the effect of diluting
dividend earnings. To the extent the Fund enters into
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Futures Contracts for this purpose, the assets in the segregated asset account
maintained to cover the Fund's obligations with respect to such Futures
Contracts will consist of cash, cash equivalents or short-term money market
instruments from the portfolio of the Fund in an amount equal to the difference
between the fluctuating market value of such Futures Contracts and the aggregate
value of the initial and variation margin payments made by the Fund with respect
to such Futures Contracts, thereby assuring that the transactions are
unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The Fund may enter into stock index futures contracts in order to protect
the Fund's current or intended stock investments from broad fluctuations in
stock prices and for non-hedging purposes to the extent permitted by applicable
law. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or in part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or in whole, offset increases in the cost of
securities that the Fund intends to purchase. As such acquisitions are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon the termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a related
purchase of securities. Futures Contracts on other securities indexes may be
used in a similar manner in order to protect the portfolio from broad
fluctuations in securities prices and for non-hedging purposes to the extent
permitted by applicable law.
OPTIONS ON FUTURES CONTRACTS: The Fund may write and purchase options to buy or
sell Futures Contracts ("Options on Futures Contracts"). The writing of a call
Option on a Futures Contract may constitute a partial hedge against declining
prices of the security or currency underlying the Futures Contract. If the
futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put Option on a Futures
Contract may constitute a partial hedge against increasing prices of the
security or currency underlying the Futures Contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium, less related transaction costs, which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing Options on Futures Contracts may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes as an
alternative to purchasing or selling the underlying Futures Contracts. For
example, where a decrease in the value of portfolio securities is anticipated as
a result of a projected market-wide decline, a rise in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the Fund may, in lieu of selling Futures Contracts, purchase
put options thereon. In the event that such decrease in portfolio value occurs,
it may be offset, in whole or part, by a profit on the option. Conversely, where
it is projected that the value of securities to be acquired by the Fund will
increase prior to acquisition, due to a market advance, or a decline in interest
rates or a rise in the dollar value of foreign currencies in which securities to
be acquired are denominated, the Fund may purchase call Options on Futures
Contracts, rather than purchasing the underlying Futures Contracts. As in the
case of Options, the writing of Options on Futures Contracts may require the
Fund to forgo all or a portion of the benefits of favorable movements in the
price of portfolio securities, and the purchase of Options on Futures Contracts
may require the Fund to forego all or a portion of such benefits up to the
amount of the premium paid and related transaction costs. The Fund may also
enter into Options on Futures Contracts for non-hedging purposes, to the extent
permitted by applicable law.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a specific currency at a future date at a
price set at the time of the contract (a "Forward Contract"). The Fund may enter
into Forward Contracts for hedging purposes as well as for non-hedging purposes.
The Fund may also enter into Forward Contracts for "cross hedging" as noted in
the Prospectus. Transactions in Forward Contracts entered into for hedging
purposes will include forward purchases or sales of foreign currencies for the
purpose of protecting the dollar value of securities denominated in a foreign
currency or protecting the dollar equivalent of interest or dividends to be paid
on such securities. By entering into such transactions, however, the Fund may be
required to forgo the benefits of advantageous changes in exchange rates. The
Fund may also enter into transactions in Forward Contracts for other than
hedging purposes which presents greater profit potential but also involves
increased risk. For example, if the Adviser believes that the value of a
particular foreign currency will increase or decrease relative to the value of
the U.S. dollar, the Fund may purchase or sell such currency, respectively,
through a Forward Contract. If the expected changes in the value of the currency
occur, the Fund will realize profits which will increase its gross income. Where
exchange
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rates do not move in the direction or to the extent anticipated, however, the
Fund may sustain losses which will reduce its gross income. Such transactions,
therefore, could be considered speculative.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write put and call
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency did decline, the Fund would have the right to sell such currency for a
fixed amount in dollars and would thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options would be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forgo a portion or all of the benefits of
advantageous changes in such rates.
The Fund may write Options on Foreign Currencies for the same types of hedging
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it may, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurred, the option would most likely not be
exercised, and the diminution in value of portfolio securities would be offset
by the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
SWAPS AND RELATED TRANSACTIONS: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as securities prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names. The Fund is not
limited to any particular form or variety of swap agreement if MFS determines it
is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
Custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the counter-
party's creditworthiness declined, the value of the swap agreement would be
likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
instruments correlate with price movements in the relevant portion of the Fund's
portfolio. If the values of portfolio securities being hedged do not move in the
same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging
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strategy which would not be offset by gains on its portfolio. It is also
possible that there may be a negative correlation between the instrument
underlying an option, Future Contract or Forward Contract traded and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the Fund's
overall return could be less than if the hedging transaction had not been
undertaken. In the case of futures and options based on an index of securities
or individual fixed income securities, the portfolio will not duplicate the
components of the index, and in the case of futures and options on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such contract. As a result, the correlation
probably will not be exact. Consequently, the Fund bears the risk that the price
of the portfolio securities being hedged will not move in the same amount or
direction as the underlying index or obligation.
The correlation between prices of securities and prices of options, Futures
Contracts or Forward Contracts may be distorted due to differences in the nature
of the markets, such as differences in margin requirements, the liquidity of
such markets and the participation of speculators in the option, Futures
Contract and Forward Contract markets. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction. The trading of Options on Futures Contracts
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option. The risk of
imperfect correlation, however, generally tends to diminish as the maturity or
termination date of the option, Futures Contract or Forward Contract approaches.
It should be noted that the Fund may purchase and sell Options, Futures
Contracts, Options on Futures Contracts and Forward Contracts not only for
hedging purposes, but also for non-hedging purposes, to the extent permitted by
applicable law, including for the purpose of increasing its return. As a result,
the Fund will incur the risk that losses on such transactions will not be offset
by corresponding increases in the value of portfolio securities or decreases in
the cost of securities to be acquired.
POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or expiration,
a position in an exchange-traded Option, Futures Contract, Option on a Futures
Contract or Option on a Foreign Currency can only be terminated by entering into
a closing purchase or sale transaction, which requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. If no such market exists, it may not be possible to close out a position,
and the Fund could be required to purchase or sell the underlying instrument or
meet ongoing variation margin requirements. The inability to close out options
or futures positions also could have an adverse effect on the Fund's ability
effectively to hedge its portfolio.
The liquidity of a secondary market in an option or Futures Contract may be
adversely affected by "daily price fluctuation limits," established by the
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day and prohibit trading beyond such limits once they
have been reached. Such limits could prevent the Fund from liquidating open
positions, which could render its hedging strategy unsuccessful and result in
trading losses. The exchanges on which options and Futures Contracts are traded
have also established a number of limitations governing the maximum number of
positions which may be traded by a trader, whether acting alone or in concert
with others. Further, the purchase and sale of exchange-traded options and
Futures Contracts is subject to the risk of trading halts, suspensions, exchange
or clearing corporation equipment failures, government intervention, insolvency
of a brokerage firm, intervening broker or clearing corporation or other
disruptions of normal trading activity, which could make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
RISKS OF OPTIONS ON FUTURES CONTRACTS -- In order to profit from the purchase of
an Option on a Futures Contract, it may be necessary to exercise the option and
liquidate the underlying Futures Contract, subject to all of the risks of
futures trading. The writer of an Option on a Futures Contract is subject to the
risks of futures trading, including the requirement of initial and variation
margin deposits.
ADDITIONAL RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS
NOT CONDUCTED ON UNITED STATES EXCHANGES -- The available information on which
the Fund will make trading decisions concerning transactions related to foreign
currencies or foreign securities may not be as complete as the comparable data
on which the Fund makes investment and trading decisions in connection with
other transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, and the markets for foreign securities as well as
markets in foreign countries may be operating during non-business hours in the
United States, events could occur in such markets which would not be reflected
until the following day, thereby rendering it more difficult for the Fund to
respond in a timely manner.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position, unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. This
could make it difficult or impossible to enter into a desired transaction or
liquidate open positions, and could therefore result in trading losses. Further,
over-the-counter transactions are not subject to the performance guarantee of an
exchange clearing house and the Fund will therefore be subject to the risk of
default by, or the bankruptcy of, a financial institution or other counterparty.
Transactions on exchanges located in foreign countries may not be conducted in
the same manner as those entered into on United States exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures.
As a result, many of the risks of over-the-counter trading may be present in
connection with such transactions. Moreover, the SEC or Commodities Futures
Trading Commission ("CFTC")
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has jurisdiction over the trading in the United States of many types of
over-the-counter and foreign instruments, and such agencies could adopt
regulations or interpretations which would make it difficult or impossible for
the Fund to enter into the trading strategies identified herein or to liquidate
existing positions.
As a result of its investments in foreign securities, the Fund may receive
interest or dividend payments, or the proceeds of the sale or redemption of such
securities, in foreign currencies. The Fund may also be required to receive
delivery of the foreign currencies underlying options on foreign currencies or
Forward Contracts it has entered into. This could occur, for example, if an
option written by the Fund is exercised or the Fund is unable to close out a
Forward Contract it has entered into. In addition, the Fund may elect to take
delivery of such currencies. Under such circumstances, the Fund may promptly
convert the foreign currencies into dollars at the then current exchange rate.
Alternatively, the Fund may hold such currencies for an indefinite period of
time if the Adviser believes that the exchange rate at the time of delivery is
unfavorable or if, for any other reason, the Adviser anticipates favorable
movements in such rates.
While the holding of currencies will permit the Fund to take advantage of
favorable movements in the applicable exchange rate, it also exposes the Fund to
risk of loss if such rates move in a direction adverse to the Fund's position.
Such losses could also adversely affect the Fund's hedging strategies. Certain
tax requirements may limit the extent to which the Fund will be able to hold
currencies.
In addition, where the Fund enters into Forward Contracts as a "cross hedge"
(i.e., the purchase or sale of a Forward Contract on one currency to hedge
against risk of loss arising from changes in value of a second currency), the
Fund incurs the risk of imperfect correlation between changes in the values of
the two currencies, which could result in losses.
RESTRICTIONS ON THE USE OF OPTIONS AND FUTURES: In order to assure that the Fund
will not be deemed to be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the CFTC require that the Fund enter into
transactions in Futures Contracts and options on Futures Contracts only (i) for
bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional policy that it will not enter into a Futures
Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. Moreover, the Fund will not purchase put and call
options if, as a result, more than 5% of its total assets would be invested in
such options.
When the Fund purchases a Futures Contract, an amount of cash and cash
equivalents will be deposited in a segregated account with the Fund's custodian
so that the amount so segregated will at all times equal the value of the
Futures Contract, thereby insuring that the leveraging effect of such Futures is
minimized.
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS. The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust (or a class or series, as applicable), or
(ii) 67% or more of the outstanding shares of the Trust (or a class or series,
as applicable) present at a meeting if holders of more than 50% of the
outstanding shares of the Trust (or a class or series, as applicable) are
represented at such meeting in person or by proxy):
The Fund may not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed, and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding currencies, any type of option,
any type of futures contract, and Forward Contracts) in the ordinary course of
its business. The Fund reserves the freedom of action to hold and to sell real
estate, mineral leases, commodities or commodity contracts (including
currencies, any type of option, any type of futures contract, and Forward
Contracts) acquired as a result of the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. (For
purposes of this restriction, collateral arrangements with respect to any type
of option, any type of swap agreement, Forward Contracts and any type of
futures contract and collateral arrangements with respect in initial and
variation margin are not deemed to be the issuance of a senior security);
(5) make loans to other persons. For these purposes the purchase of
short-term commercial paper, the purchase of a portion or all of an issue of
debt securities, the lending of portfolio securities, and the investment of
the Fund's assets in repurchase agreements shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result 25% or more of its gross assets would
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be invested in securities of issuers whose principal business activities are
in the same industry (except for obligations issued or guaranteed by the U.S.
Government or its agencies, authorities or instrumentalities and repurchase
agreements collateralized by such obligations).
Except with respect to Investment Restriction (1) above, these investment
restrictions and the investment restrictions below are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
In addition, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of
unlisted securities, where no market exists) if more than 15% of the Fund's
net assets (taken at market value) would be invested in such securities.
Repurchase agreements maturing in more than seven days will be deemed to be
illiquid for purposes of this limitation. Securities that are not registered
under the 1933 Act and sold in reliance on Rule 144A thereunder, but are
determined to be liquid by the Trust's Board of Trustees (or its delegee),
will not be subject to this 15% limitation;
(2) invest more than 5% of the value of the Fund's net assets, valued at the
lower of cost or market, in warrants. Included within such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value;
(3) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation.
(4) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Trust,
or is an officer or a director of the investment adviser of the Fund, if one
or more of such persons also owns beneficially more than 0.5% of the
securities of such issuer, and such persons owning more than 0.5% of such
securities together own beneficially more than 5% of such securities;
(5) purchase any securities or evidences of interest therein on margin,
except that the Fund may obtain such short-term credit as may be necessary for
the clearance of any transaction and except that the Fund may make margin
deposits in connection with any type of option, any type of futures contract,
any type of swap agreement and Forward Contracts;
(6) sell any security which the Fund does not own unless by virtue of its
ownership of other securities the Fund has at the time of sale a right to
obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(7) invest more than 5% of its gross assets in companies which, including
predecessors, controlling persons, sponsoring entities, general partners and
guarantors, have a record of less than three years' continuous operation or
relevant business experience;
(8) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of option, any type of futures contracts, any type of swap
agreement, Forward Contracts and payments of initial and variation margin in
connection therewith, are not considered a pledge of assets;
(9) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent (a) the purchase, ownership, holding or
sale of (i) warrants where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or combinations thereof with
respect to securities, indexes of securities, foreign currency, any type of
swap agreement or any type of futures contracts or (b) the purchase,
ownership, holding or sale of contracts for the future delivery of securities
or currencies; or
(10) purchase securities while borrowings pursuant to fundamental investment
restriction 1 exceed 5% of a Fund's total assets; however, the Fund may
complete the purchase of securities already contracted for.
3. MANAGEMENT OF THE FUND
The Board of Trustees provides broad supervision over the affairs of the Fund.
The Adviser is responsible for the investment management of the Fund's assets,
and the officers of the Trust are responsible for the Fund's operations. The
Trustees and officers are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during
that period.)
TRUSTEES
A. KEITH BRODKIN* Chairman and President
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN
Private Investor. Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D.
Brigham and Women's Hospital, Chief of Cardiac Surgery; Harvard Medical School,
Professor of Surgery. Address: 75 Francis Street, Boston, Massachusetts
THE HON. SIR J. DAVID GIBBONS, KBE
Edmund Gibbons Limited, Chief Executive Officer; The Bank of N.T. Butterfield &
Son Ltd., Chairman. Address: 21 Reid Street, Hamilton, Bermuda
ABBY M. O'NEILL
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director. Address: 30 Rockefeller Plaza, Room 5600, New York, New York
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WALTER E. ROBB, III
Benchmark Advisors, Inc. (Corporate Financial Consultants), President and
Treasurer; Benchmark Consulting Group, Inc. (office services), President;
Landmark Funds (mutual fund), Trustee. Address: 110 Broad Street, Boston,
Massachusetts
ARNOLD D. SCOTT*
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES*
Massachusetts Financial Services Company, President and Director
J. DALE SHERRATT
Insight Resources, Inc. (acquisition planning specialists), President. 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 and 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 Investment Company Act of 1940 (the
"1940 Act") of the Adviser, whose address is 500 Boylston Street, Boston,
Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain MFS affiliates
or with certain other funds of which MFS or a subsidiary of MFS is the
investment adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs.
Shames and Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold
similar positions with certain other MFS affiliates. Mr. Bailey is a Director of
Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
The Fund pays the compensation of non-interested Trustees and Mr. Bailey (who
currently receive a fee of $1,250 per year plus $225 per meeting and $225 per
committee meeting attended, together with such Trustees out-of-pocket expenses)
and has adopted a retirement plan for non-interested Trustees and Mr. Bailey.
Under this plan, a Trustee will retire upon reaching age 75 and if the Trustee
has completed at least five years of service, he would be entitled to annual
payments during his lifetime of up to 50% of such Trustee's average annual
compensation (based on the three years prior to his retirement) depending on his
length of service. A Trustee may also retire prior to age 75 and receive reduced
payments if he has completed at least five years of service. Under the plan, a
Trustee (or his beneficiaries) will also receive benefits for a period of time
in the event the Trustee is disabled or dies. These benefits will also be based
on the Trustee's average annual compensation and length of service. There is no
retirement plan provided by the Trust for Messrs. Brodkin, Scott and Shames. The
Fund will accrue its allocable share of compensation expenses each year to cover
current year's service and amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid to the Trustees and benefits accrued and estimated benefits
payable, under the retirement plan.
As of November 29, 1996, the Trustees and officers, as a group, owned less than
1% of the Trust's shares outstanding on that date.
As of November 29, 1996, Merrill Lynch Pierce Fenner & Smith Inc., Attn: Fund
Administration, 4800 Deer Lake Drive E., 3rd Floor, Jacksonville, FL 32246 was
the record owner of 5.28% of the outstanding Class A shares of the Fund and
11.21% of the outstanding Class B shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Trust or its shareholders, it is determined that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
INVESTMENT ADVISER
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS is a subsidiary of Sun Life of Canada (U.S.), which is a
wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
INVESTMENT ADVISORY AGREEMENT
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
June 2, 1994 (the "Advisory Agreement"). The Adviser provides the Fund with
overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For these services and
facilities, the Adviser receives a management fee computed and paid monthly at
the annual rate of 0.60% of the Fund's average daily net assets for the Fund's
then-current fiscal year. The Adviser has voluntarily agreed to pay expenses of
each class of the Fund that exceed 1.50%, 2.57% and 2.50% of the Fund's average
daily net assets attributable to Class A, Class B and Class C shares,
respectively, on an annualized basis. This temporary expense reduction may be
rescinded at
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any time by the Adviser without notice to shareholders as to expenses accruing
after the date of such rescission.
For the fiscal years ended August 31, 1996 and 1995 and the period from
commencement of investment operations on July 22, 1994, to August 31, 1994, MFS
received fees under the Fund's Advisory Agreement of $1,218,613, $748,715 and
$28,252, respectively.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Fund pays all the Fund's expenses (other than those assumed by MFS or MFD),
including: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares; expenses of preparing, printing and mailing share certificates,
shareholder reports, notices, proxy statements and reports to governmental
officers and commissions; brokerage and other expenses connected with the
execution, recording and settlement of portfolio security transactions;
insurance premiums; fees and expenses of Investors Bank & Trust Company, the
Fund's Custodian, for all services to the Fund, including safekeeping of funds
and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; and expenses of
shareholder meetings. Expenses relating to the issuance, registration and
qualification of shares of the Fund and the preparation, printing and mailing of
prospectuses for such purposes are borne by the Fund except that the Fund's
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series are allocated among the series in a manner believed by
management of the Trust to be fair and equitable.
MFS pays the compensation of the Trust's officers and of any Trustee who is an
officer of MFS. MFS also furnishes at its own expense all necessary
administrative services, including office space, equipment, clerical personnel,
investment advisory facilities, and all executive and supervisory personnel
necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 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
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote of
a majority of the Fund's shares (as defined in "Investment Restrictions"), or by
either party on not more than 60 days' nor less than 30 days' written notice.
The Advisory Agreement also provides that neither the Adviser nor its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.
CUSTODIAN
Investors Bank & Trust Company (the "Custodian") is the custodian of the Fund's
assets. The Custodian's responsibilities include safekeeping and controlling the
Fund's cash and securities, handling the receipt and delivery of securities,
determining income and collecting interest and dividends on the Fund's
investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Trustees have reviewed and approved subcustodial arrangements
with The Chase Manhattan Bank for securities of the Fund held outside the United
States. The Custodian also acts as the dividend disbursing agent of the Fund.
The Custodian has contracted with the Adviser for the Adviser to perform certain
accounting functions related to options transactions for which the Adviser
receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to a
Shareholder Servicing Agreement, dated September 10, 1986, as amended (the
"Agency Agreement"). The Shareholder Servicing Agent's responsibilities under
the Agency Agreement include administering and performing transfer agent
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22% and up to 0.15% attributable to Class A, Class B and
Class C shares, respectively. In addition, the Shareholder Servicing Agent will
be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. The Custodian has contracted with the
Shareholder Servicing Agent to perform certain dividend and distribution
disbursing functions for the Fund.
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DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as distributor for the continuous
offering of shares of the Fund pursuant to a Distribution Agreement dated
January 1, 1995, as amended and restated (the "Distribution Agreement"). Prior
to January 1, 1995, MFS Financial Services, Inc. ("FSI"), another wholly owned
subsidiary of MFS, was the Fund's distributor. Where this SAI refers to MFD in
relation to the receipt or payment of money with respect to a period or periods
prior to January 1, 1995, such reference shall be deemed to include FSI, as the
predecessor in interest to MFD.
CLASS A SHARES: MFD acts as agent in selling Class A shares of the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
Fund is calculated by dividing net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Shareholder Services -- Right of Accumulation),
by any person, including members of a family unit (e.g., husband, wife and minor
children) and bona fide trustees, and also applies to purchases made under the
Right of Accumulation or a Letter of Intent (see "Investment and Withdrawal
Programs" in this SAI). A group might qualify to obtain quantity sales charge
discounts (see "Investment and Withdrawal Programs" in this SAI).
Class A shares of the Fund may be sold at their net asset value to certain
persons or in certain instances as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 4% and MFD retains approximately 3/4 of 1% of the public
offering price. In addition, MFD, on behalf of the Fund, pays commissions to
dealers who initiate and are responsible for purchases of $1 million or more as
described in the Prospectus.
CLASS B, CLASS C AND CLASS I SHARES: As the distributor of the Fund, MFD acts as
agent in selling Class B, Class C and Class I shares of the Fund to dealers. The
public offering price of Class B, Class C and Class I shares is their net asset
value next computed after the sale (see "Purchases" in the Prospectus and the
Prospectus Supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the fiscal year ended August 31, 1996, MFD received sales charges of
$114,694 and Dealers received sales charges of $580,754 (as their concession on
gross sales charges of $695,448) for selling Class A shares of the Fund; the
Fund received $22,794,246 representing the aggregate net asset value of such
shares. For the same time period, the CDSC imposed on redemptions of Class A,
Class B and Class C shares of the Fund was $40, $142,038 and $887, respectively.
For the fiscal year ended August 31, 1995, MFD received sales charges of
$118,898 and dealers received sales charges of $861,026 (as their concession on
gross sales charges of $979,924) for selling Class A shares of the Fund; the
Fund received $27,599,407 representing the aggregate net asset value of such
shares. For the same time periods, the Contingent Deferred Sales Charge ("CDSC")
imposed on redemption of Class A and B shares was $1,592 and $108,698,
respectively. For the period from commencement of investment operations on July
22, 1994 to August 31, 1994, MFD received sales charges of $5,785 and dealers
received sales charges of $810,371 (as their concession on gross sales charges
of $816,156) for selling Class A shares of the Fund; the Fund received
$19,292,845 representing the aggregate net asset value of such shares. For the
same time period, the CDSC imposed on redemption of Class A and B shares was $0
and $4,302, respectively.
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
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person
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<PAGE> 188
may serve other clients of the Adviser, or any subsidiary of the Adviser in a
similar capacity. Changes in the Fund's investments are reviewed by the Board of
Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
United States and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser normally seeks
to deal directly with the primary market makers or on major exchanges unless, in
its opinion, better prices are available elsewhere. Subject to the requirement
of seeking execution at the best available price, securities transactions may,
as authorized by the Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments are
in effect.
Consistent with the foregoing primary consideration, the Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund and of the other investment company
clients of MFD as a factor in the selection of broker-dealers to execute the
Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause the Fund to pay a broker-dealer
which provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount other broker-dealers would have charged for the transaction if the
Adviser determines in good faith that the greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
their respective overall responsibilities to the Fund or to their other clients.
Not all of such services are useful or of value in advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers on behalf of the Fund. The Fund's
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson, Lufkin & Jenrette as consideration for
the annual renewal of certain publications provided by Lipper Analytical
Securities Corporation (which provides information useful to the Trustees in
reviewing the relationship between the Fund and the Adviser).
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the Adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
For the fiscal year ended August 31, 1996, the Fund paid brokerage commissions
of $674,353 on total transactions of $235,400,799. For the fiscal year ended
August 31, 1995, the Fund paid brokerage commissions of $503,757 on total
transactions of $32,218,310. For the period from commencement of investment
operations on July 22, 1994 to August 31, 1994, the Fund paid brokerage
commissions of $75,554 on total transactions of $22,116,186.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and in certain
cases, in the Fund's Prospectus. The programs involve
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no extra charge to shareholders (other than a sales charge in the case of
certain Class A share purchases) and may be changed or discontinued at any time
by a shareholder or the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or the MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period in the case of
purchases of $1 million or more), the shareholder may obtain Class A shares of
the Fund at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of the
Fund's Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by MFD and the conditions
mentioned below, each purchase will be made at a public offering price
applicable to a single transaction of the dollar amount specified in the Letter
of Intent application. The shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month or 36-month period, as applicable), the
shareholder will be notified and the escrowed shares will be released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity discounts
on the purchase of Class A shares when his new investment, together with the
current offering price value of all holdings of all classes of shares of that
shareholder in the MFS Funds or the MFS Fixed Fund (a bank collective investment
fund) reaches a discount level. See "Purchases" in the Prospectus for the sales
charges on quantity discounts. For example, if a shareholder owns shares valued
at $75,000 and purchases an additional $25,000 of Class A shares of the Fund,
the sales charge for the $25,000 purchase would be at the rate of 4% (the rate
applicable to single transactions of $100,000). A shareholder must provide the
Shareholder Servicing Agent (or his investment dealer must provide MFD) with
information to verify that the quantity sales charge discount is applicable at
the time the investment is made.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan (a
"SWP") must be at least $100, except in certain limited circumstances. The
aggregate withdrawals of Class B 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 "Free Amount"; (ii) to the extent
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necessary, any "Reinvested Shares"; and (iii) to the extent necessary, the
"Direct Purchase" subject to the lowest CDSC (as such terms are defined in
"Contingent Deferred Sales Charge" in the Prospectus). The CDSC will be waived
in the case of redemptions of Class B 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
reinvested in additional full and fractional shares of the Fund at the net asset
value in effect at the close of business on the record date for such
distributions. To initiate this service, shares having an aggregate value of at
least $5,000 either must be held on deposit by, or certificates for such shares
must be deposited with, the Shareholder Servicing Agent. With respect to Class A
shares, maintaining a withdrawal plan concurrently with an investment program
would be disadvantageous because of the sales charges included in share
purchases and because of the assessment of the CDSC for certain share
redemptions. The shareholder may deposit into the account additional shares of
the Fund, change the payee or change the dollar amount of each payment. The
Shareholder Servicing Agent may charge the account for services rendered and
expenses incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL: Additional investments of $50 or more may be made at any time by
mailing a check payable to the Fund directly to the Shareholder Servicing Agent.
The shareholder's account number and the name of his investment dealer must be
included with each investment.
GROUP PURCHASES: A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not a Letter of
Intent), obtain quantity sales charge discounts on the purchase of Class A
shares if the group or association (1) gives its endorsement or authorization to
the investment program so it may be used by the investment dealer to facilitate
solicitation of the membership, thus effecting economies of sales effort; (2)
has been in existence for at least six months and has a legitimate purpose other
than to purchase mutual fund shares at a discount; (3) is not a group of
individuals whose sole organizational nexus is as credit cardholders of a
company, policyholders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser, or other similar groups; and
(4) agrees to provide certification of membership of those members investing
money in the MFS Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least $5,000
in any MFS Fund may exchange their shares for the same class of shares of other
MFS Funds (if available for sale) under the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder.
Under the Automatic Exchange Plan, exchanges of at least $50 each may be made to
up to six different funds effective on the seventh day of each month or every
third month, depending whether monthly or quarterly transfers are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
exchange will occur after receipt and processing by the Shareholder Servicing
Agent of an application in good order. Transfers will continue to be made from a
shareholder's account in any MFS Fund, as long as the balance of the account is
sufficient to complete the exchanges. Additional payments made to a
shareholder's account will extend the period that exchanges will continue to be
made under the Automatic Exchange Plan. However, if additional payments are
added to an account subject to the Automatic Exchange Plan shortly before an
exchange is scheduled, such funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to each fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For
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additional information regarding the Automatic Exchange Plan, including
treatment of any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value pursuant to
the exchange privilege described below. Such a reinvestment must be made within
90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or within 12 months
of the initial purchase in the case of Class C shares and certain Class A
shares, a CDSC will be imposed upon redemption. Although redemptions and
repurchases of shares are taxable events, a reinvestment within a certain period
of time in the same fund may be considered a "wash sale" and may result in the
inability to recognize currently all or a portion of a loss realized on the
original redemption for federal income tax purposes. Please see your tax adviser
for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e., an established account) may be exchanged
for shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the class of shares) at net
asset value. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by telephone --
proper account identification is given by the dealer or shareholder of record),
and each exchange must involve either shares having an aggregate value of at
least $1,000 ($50 in the case of retirement plan participants whose sponsoring
organizations subscribe to the MFS FUNDamental 401(k) Plan or another similar
401(k) recordkeeping system made available by the Shareholder Servicing Agent)
or all the shares in the account. Each exchange involves the redemption of the
shares of the Fund to be exchanged and the purchase at net asset value (i.e.,
without a sales charge) of shares of the same class of the other MFS Funds. Any
gain or loss on the redemption of the shares exchanged is reportable on the
shareholder's federal income tax return, unless both the shares received and the
shares surrendered in the exchange are held in a tax-deferred retirement plan or
other tax-exempt accounts. No more than five exchanges may be made in any one
Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange, the exchange usually will occur on that day if all the
requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by the Fund, and thus the purchase of shares
of the other MFS Funds, may be delayed for up to seven days if the Fund
determines that such a delay would be in the best interest of all its
shareholders. Investment dealers which have satisfied criteria established by
MFD may also communicate a shareholder's Exchange Request to the Shareholder
Servicing Agent by facsimile subject to the requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except holders of MFS Money Market Fund, MFS Government Money Market
Fund and Class A shares of MFS Cash Reserve Fund acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund (a bank collective investment fund) have the right to exchange their
units (except units acquired through direct purchases) for shares of the Fund,
subject to the conditions, if any, imposed upon such unitholders by the MFS
Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
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TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
spouses who desire to make limited contributions to a tax deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain qualified corporate pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
An investor should consult with his tax adviser before establishing any of the
tax-deferred retirement plans described above.
Class C shares are not currently available for purchase by any retirement plan
qualified under Internal Revenue Code section 401(a) or 403(b) if the retirement
plan and/or the sponsoring organization subscribe to the MFS FUNDamental 401(k)
Plan or another similar 401(a) or 403(b) recordkeeping program made available by
MFS Service Center, Inc.
6. TAX STATUS
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund will have to pay federal income taxes, and any state or
local taxes, on the dividends and capital gain distributions they receive from
the Fund. Dividends from ordinary income and any distributions from net
short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distribution is paid in cash or
reinvested in additional shares. A portion of the Fund's ordinary income
dividends 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 or result in certain basis
adjustments. Distributions of net capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses), whether paid in
cash or reinvested in additional shares, are taxable to shareholders as
long-term capital gains for federal income tax purposes without regard to the
length of time the shareholders have held their shares. Any Fund dividend that
is declared in October, November or December of any calendar year, that is
payable to shareholders of record in such a month, and that is paid the
following January will be treated as if received by the shareholders on December
31 of the year in which the dividend is declared. The Fund will notify
shareholders regarding the federal tax status of its distributions after the end
of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months and otherwise as a short-term capital gain or loss. However, any
loss realized upon a disposition of shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a redemption of shares may also be disallowed under rules relating
to wash sales. Gain may be increased (or loss reduced) upon a redemption of
Class A shares of the Fund within 90 days after their purchase followed by any
purchase (including purchases by exchange or by reinvestment) without payment of
an additional sales charge of Class A shares of the Fund or of another MFS Fund
(or any other shares of an MFS Fund generally sold subject to a sales charge).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may, under certain
circumstances, make an economic return of capital taxable to shareholders. Any
investment in zero
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coupon securities, deferred interest bonds, payment-in-kind bonds, certain
stripped securities, and certain securities purchased at a market discount will
cause the Fund to recognize income prior to the receipt of cash payments with
respect to those securities. In order to distribute this income and avoid a tax
on the Fund, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss to the Fund.
An investment in residual interests of a CMO that has elected to be treated as a
real estate mortgage investment conduit, or "REMIC," can create complex tax
problems, especially if the Fund has state or local governments or other
tax-exempt organizations as shareholders.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40%
short-term capital gain or loss. Certain positions held by the Fund that
substantially diminish its risk of loss with respect to other positions in its
portfolio may constitute "straddles," and may be subject to special tax rules
that would cause deferral of Fund losses, adjustments in the holding periods of
Fund securities, and conversion of short-term into long-term capital losses.
Certain tax elections exist for straddles that may alter the effects of these
rules. The Fund will limit its activities in options, Futures Contracts, Forward
Contracts and swaps and related transactions to the extent necessary to meet the
requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains and losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for nonhedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates of tax where available. It is not possible, however, to
determine the Fund's effective rate of foreign tax in advance since the amounts
of the Fund's assets to be invested within various countries are not known.
If the Fund holds more than 50% of its assets in foreign securities at the close
of its taxable year, the Fund may elect to "pass through" to the Fund's
shareholders foreign income taxes paid. If the Fund so elects, shareholders will
be required to treat their pro rata portion of the foreign income taxes paid by
the Fund as part of the amounts distributed to them by the Fund and thus
includible in their gross income for federal income tax purposes. Shareholders
who itemize deductions would then be allowed to claim a deduction or credit (but
not both) on their federal income tax returns for such amounts, subject to
certain limitations. Shareholders who do not itemize deductions would (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 Fund does not qualify or elect to "pass through"
to the Fund's shareholders foreign income taxes paid by it, shareholders will
not be able to claim any deduction or credit for any part of the foreign taxes
paid by the Fund.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. federal income tax withholding at a rate of 30%. The
Fund intends to withhold U.S. federal income tax at the rate of 30% on taxable
dividends and other payments to Non-U.S. Persons that are subject to
withholding, regardless of whether a lower rate may be permitted under an
applicable treaty. Any amounts overwithheld may be recovered by such persons by
filing a claim for refund with the U.S. Internal Revenue Service within the time
period applicable to such claims. Distributions received from the Fund by
Non-U.S. Persons also may be subject to tax under the laws of their own
jurisdictions. The Fund is also required in certain circumstances to apply
backup withholding of 31% on taxable dividends and redemption proceeds paid to
any shareholder (including a Non-U.S. Person) who does not furnish to the Fund
certain information and certifications, or who is otherwise subject to backup
withholding. Backup withholding will not, however, be applied to payments that
have been subject to 30% withholding.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
As long as the Fund qualifies as a regulated investment company under the Code,
the Fund will not be required to pay Massachusetts income or excise taxes.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.) This determi-
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nation is made once each day as of the close of regular trading on the Exchange
by deducting the amount of the liabilities attributable to the class from the
value of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Bonds and other fixed income
securities (other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect the fair
value of such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use of
the pricing services has been approved by the Fund's Board of Trustees. All
other securities, futures contracts and options in the Fund's portfolio (other
than short-term obligations) for which the principal market is one or more
securities or commodities exchanges (whether domestic or foreign) will be valued
at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available, be
valued at current bid prices, unless such securities are reported on the NASDAQ
system, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations
with a remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Other short-term obligations in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio investments for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD, the Fund's
principal underwriter, prior to the close of that business day.
The Trustees annually review the appropriateness of the time of day as of which
the net asset value is computed.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 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 maximum sales charge (currently
4.75%) and/or (iii) total rates of return which represent aggregate performance
over a period or year-by-year performance, and which may or may not reflect the
effect of the maximum or other sales charge or CDSC.
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix B attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class A shares of the Fund and cover the period
from July 22, 1994 to December 31, 1995. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield or total rate of return quotation
provided by the Fund, should not be considered as representative of the
performance of the Fund in the future since the net asset value and public
offering price of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods used
to calculate yields and total rates of return should be considered when
comparing the yield and total rate of return of the Fund to yields and total
rates of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8355).
YIELD: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the period by
the maximum offering price per share of such class on the last day of that
period. The resulting figure is then annualized. Net investment income per share
of a class is determined by dividing (i) the dividends and interest earned by
the Fund allocated to the class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the
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case of Class A shares and no payment of any CDSC in the case of Class B and
Class C shares.
The yield calculations assume no CDSC is paid. Yield quotations for each class
of shares are presented in Appendix B attached hereto under the heading
"Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which will be paid to
the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past twelve months by the maximum public offering price of that class at the end
of such period. Under certain circumstances, such as when there has been a
change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends paid during
the past twelve months. The current distribution rate differs from the yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income for option writing,
short-term capital gains and return of invested capital, and is calculated over
a different period of time. The Fund's current distribution rate calculation for
Class A shares assumes a maximum sales charge of 4.75%. Current distribution
rate quotations for each class of shares are presented in Appendix B attached
hereto under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts, and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. The Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks; and similar or related matters.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from
surveys, regarding individual and family financial planning. Such views
may include information regarding: retirement planning; tax management
strategies; estate planning; general investment techniques (e.g., asset
allocation and disciplined saving and investing); business succession; ideas
and information provided through the MFS Heritage Planning[Servicemark]
program, an intergenerational financial planning assistance program; issues
with respect to insurance (e.g., disability and life insurance and Medicare
supplemental insurance); and issues regarding financial and health care
management for elderly.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS[Registered Trademark] 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.
24
<PAGE> 196
-- 1981 -- MFS[Registered Trademark] World Governments Fund is established as
America's first globally diversified fixed income mutual fund.
-- 1984 -- MFS[Registered Trademark] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS[Registered Trademark] Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS[Registered Trademark] Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS[Registered Trademark] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
-- 1989 -- MFS[Registered Trademark] Regatta becomes America's first
non-qualified market value adjusted fixed/variable annuity.
-- 1990 -- MFS[Registered Trademark] World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS[Registered Trademark] World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS[Registered Trademark] Union
Standard Trust, the first Trust to invest in companies deemed to be
union-friendly by an Advisory Board of senior labor officials, senior
managers of companies with significant labor contracts, academics and
other national labor leaders of experts.
8. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that each Distribution Plan would benefit the Fund and
each respective class of shareholders. The provisions of the Distribution Plan
are severable with respect to each class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the Fund's expense ratio to the
extent that the Fund's fixed costs are spread over a larger net asset base.
Also, an increase in net assets may lessen the adverse effect that could result
were the Fund required to liquidate portfolio securities to meet redemptions.
There is, however, no assurance that the net assets of the Fund will increase or
that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to Class A shares, no service fees will be paid to
any insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund at
their net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
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 Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1996, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 328,471 $ 7,610 $320,861
Class B Shares $1,046,481 $790,478 $256,003
Class C Shares $ 255,138 $ 2,269 $252,869
</TABLE>
GENERAL: The Distribution Plan 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"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of the Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions") or may not be materially
25
<PAGE> 197
amended in any case without a vote of the Trustees and a majority of the
Distribution Plan Qualified Trustees. The selection and nomination of
Distribution Plan Qualified Trustees shall be committed to the discretion of the
non-interested Trustees then in office. No Trustee who is not an "interested
person" has any financial interest in the Distribution Plan or in any related
agreement.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and seven other series. The Declaration of Trust further
authorizes the Trustees to classify or reclassify any series of shares into one
or more classes. Pursuant thereto, the Trustees have authorized the issuance of
four classes of shares of the Fund (Class A, Class B, Class C and Class I
shares). Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
the Fund, the shareholders of each class of the Fund are entitled to share pro
rata in the net assets of the Fund allocable to such class available for
distribution to shareholders. The Trust reserves the right to create and issue
additional series or classes of shares, in which case the shares of each series
or class would participate equally in the earnings, dividends and assets of the
particular series or class.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have the right to remove one or more Trustees in accordance with the provisions
of Section 16(c) of the 1940 Act. No material amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Trust. Shares have no pre-emptive or conversion rights
(except as set forth in "Purchases -- Conversion of Class B Shares" in the
Prospectus). Shares are fully paid and non-assessable. The Trust may enter into
a merger or consolidation, or sell all or substantially all of its assets (or
all or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's outstanding
shares voting as a single class, or of the affected series of the Trust, as the
case may be, except that if the Trustees of the Trust recommend such merger,
consolidation or sale, the approval by vote of the holders of a majority of the
Trust's or the affected series' outstanding shares (as defined in "Investment
Restrictions") will be sufficient. The Trust or any series of the Trust may also
be terminated (i) upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares, or (ii) by
the Trustees by written notice to the shareholders of the Trust or the affected
series. If not so terminated the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust". Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts, obligations or affairs of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property for any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust and its shareholders and the Trustees, officers,
employees and agents of the Trust covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Fund's audited Financial Statements, consisting of the Portfolio of
Investments at August 31, 1996, the Statement of Assets and Liabilities at
August 31, 1996, the Statement of Operations for the year ended August 31, 1996,
the Statement of Changes in Net Assets for the two years ended August 31, 1996
and 1995, and Notes to Financial Statements and the Report of Independent
Auditors, each of which is included in the Annual Report to shareholders of the
Fund, are incorporated by reference into this SAI in reliance upon the report of
Ernst & Young LLP, independent auditors, given upon their authority as experts
in accounting and auditing. A copy of the Annual Report accompanies this SAI.
26
<PAGE> 198
APPENDIX A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT ESTIMATED TOTAL TRUSTEE FEES
TRUSTEE FEES ACCRUED AS PART OF CREDITED YEARS FROM FUND AND
TRUSTEE FROM FUND(1) FUND EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard B. Bailey.................... $3,275 $372 7 $263,815
A. Keith Brodkin..................... 0 0 N/A 0
Marshall N. Cohan.................... 4,400 417 7 148,624
Lawrence H. Cohn..................... 3,950 372 17 135,874
The Hon. Sir J. David Gibbons........ 3,950 372 7 135,874
Abby M. O'Neill...................... 3,500 350 8 129,499
Walter E. Robb, III.................. 4,400 417 7 148,624
Arnold D. Scott...................... 0 0 N/A 0
Jeffrey L. Shames.................... 0 0 N/A 0
J. Dale Sherratt..................... 4,400 609 20 148,624
Ward Smith........................... 4,400 417 11 148,624
</TABLE>
(1) For fiscal year ended August 31, 1996.
(2) Based on normal retirement age of 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).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7 10 OR MORE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2,948 $442 $ 737 $1,032 $1,474
3,326 499 832 1,164 1,663
3,705 556 926 1,297 1,852
4,083 612 1,021 1,429 2,042
4,462 669 1,115 1,562 2,231
4,840 726 1,210 1,694 2,420
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
A-1
<PAGE> 199
APPENDIX B
PERFORMANCE RESULTS AND QUOTATIONS
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS
CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF
INITIAL CAPITAL VALUE OF
$10,000 GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994(1)................................ $ 9,384 $ 29 $103 $ 9,516
December 31, 1995................................... 10,622 189 745 11,556
</TABLE>
(1) Based on initial investment made on July 22, 1994, the initial public
offering date of Class A shares.
EXPLANATORY NOTES:
The results in the table assume that income dividends and capital gain
distributions were invested in additional shares. The results also assume that
the initial investment in Class A shares was reduced by the current maximum
applicable sales charge. No adjustment has been made for income taxes, if any,
payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are for the fiscal year ended August 31, 1996.
<TABLE>
<CAPTION>
ACTUAL
AVERAGE ANNUAL 30-DAY 30-DAY
TOTAL RETURNS* YIELD YIELD CURRENT
---------------------- (INCLUDING (WITHOUT DISTRIBUTION
1 YEAR LIFE OF FUND ANY WAIVERS) ANY WAIVERS) RATE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A shares with sales charge...................... 8.80% 10.70%(1) 0.98% 0.82% 2.66%
Class A shares without sales charge................... 14.23% 13.28%(1) 0.98% 0.82% 2.66%
Class B shares with CDSC.............................. 9.58% 11.26%(1) N/A 0.43% 2.15%
Class B shares without CDSC........................... 13.58% 12.51%(1) N/A 0.43% 2.15%
Class C shares with CDSC.............................. 12.62% 12.57%(1) N/A 0.62% 2.24%
Class C shares without CDSC........................... 13.62% 12.57%(1) N/A 0.62% 2.24%
</TABLE>
* The total rate of return for Class A shares would have been lower if a fee
waiver were not in effect.
(1) From the initial public offering date of Class A, Class B and Class C shares
on July 22, 1994 (the Fund's commencement of investment operations).
B-1
<PAGE> 200
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
617-954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
89 South Street
Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS[Registered Trademark] WORLD ASSET
ALLOCATION FUND[Servicemark]
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MAA-13-1/97/500 88/288/388
<PAGE> 201
<PAGE> 1
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND[SERVICE TRADEMARK]
ANNUAL REPORT
FOR YEAR ENDED
AUGUST 31, 1996
MFS[REGISTERED TRADEMARK] WORLD ASSET ALLOCATION FUND[SERVICE TRADEMARK]
[GRAPHIC OMITTED: AIRPLANE]
<PAGE> 2
TABLE OF CONTENTS
Letter from the Chairman.............................................. 1
U.S. Stock Market..................................................... 3
International Stock Markets........................................... 3
U.S. Government Bond Market........................................... 4
International Bond Markets............................................ 5
Fund Managers' Profiles............................................... 6
Performance Summary................................................... 7
Portfolio of Investments.............................................. 10
Financial Statements.................................................. 18
Notes to Financial Statements......................................... 23
Independent Auditors' Report.......................................... 33
It's Easy to Contact Us............................................... 34
A Word About MFS Products and Services................................ 35
The MFS Family of Funds[Registered Trademark]......................... 36
Trustees and Officers................................................. 37
- -------------------------------------------------------------------------------
HIGHLIGHTS
* CLASS A SHARES OF THE FUND PROVIDED A TOTAL RETURN OF 14.23%, CLASS B
SHARES 13.58%, AND CLASS C SHARES 13.62% FOR THE 12 MONTHS ENDED AUGUST
31, 1996. ALL OF THESE RETURNS ARE AT NET ASSET VALUE.
* BOND AND STOCK MARKETS AROUND THE WORLD POSTED GAINS OVER THE PAST YEAR
DESPITE VERY DISSIMILAR ECONOMIC CONDITIONS IN KEY REGIONS. JAPAN BEGAN TO
EMERGE FROM ECONOMIC RECESSION, EUROPE REMAINED MIRED IN RECESSION-LIKE
CONDITIONS, AND THE UNITED STATES CONTINUED ON ITS PATH OF GRADUAL
EXPANSION.
* THE FUND HAS FOLLOWED A DISTINCT POLICY OF FAVORING MARKETS OUTSIDE THE
UNITED STATES, WITH MOST OF OUR RECENT PURCHASES AND ADDITIONS IN
COMPANIES WHICH WE BELIEVE WILL SHOW STEADY EARNINGS GROWTH REGARDLESS
OF THE STATE OF THE GLOBAL ECONOMY.
* IN CONTRAST TO THE ROBUST GROWTH AND FEARS OF INFLATION IN THE UNITED
STATES, THE RALLY IN THE MAJOR FOREIGN MARKETS HAS BEEN SUSTAINED BY
SLOWER GROWTH, BENIGN INFLATION, FISCAL AUSTERITY PROGRAMS, AND EASING
MONETARY POLICY.
- --------------------------------------------------------------------------------
<PAGE> 3
LETTER FROM THE CHAIRMAN
Dear Shareholders:
[Photo of A. In an environment of ever-changing market conditions
Keith Brokin] and changes among relative value rankings in
different asset types, Class A shares of the Fund
provided a total return of 14.23%, Class B shares
13.58%, and Class C shares 13.62% for the 12 months
ended August 31, 1996. All of these returns assume
the reinvestment of distributions but exclude the
effects of any sales charges, and they compare to the
one-year returns for the following unmanaged indices: 18.72% for the Standard &
Poor's 500 Composite Index, a popular index of common stock performance; 8.19%
for the Morgan Stanley Capital International EAFE (Europe, Australia, Far East)
Index, an index of international stocks; 4.11% for the Lehman Brothers Aggregate
Bond Index, an index of government and corporate bonds including U.S. Treasury,
government agency, corporate bond, and mortgage-backed securities; and 8.67% for
the J.P. Morgan Non-Dollar Government Bond Index, an international bond index.
We believe the Fund's relative favorable performance has been achieved with less
risk (lower volatility) than would have been achieved by investing exclusively
in any one class and stems from the combined effect of deliberate changes in
asset mix and issue selection, as well as from a bias toward the U.S. dollar
compared to local foreign currencies.
During the past 12 months, bond and stock markets around the world posted
gains despite very dissimilar economic conditions in key regions. Japan began to
emerge from economic recession, Europe remained mired in recession-like
conditions, and the United States continued on its path of gradual expansion.
During this period, the Fund followed a distinct policy of favoring markets
(both bond and stock) outside the United States. Within that basic stance, we
made several changes in asset mix which could be described as both tactical
(shorter term) and strategic (longer term). A key example of these changes was a
selling off of U.S. bonds which anticipated the downturn in U.S. fixed-income
markets during 1996's first quarter. In the equity markets, we likewise changed
the Fund's positions among asset classes. For example, when U.S. small-company
stocks went into a corrective phase in June and July, we were extremely
underweighted in U.S. stocks (only 15% of the portfolio). We have recently begun
to add to this position in anticipation of a price recovery. During the past 12
months, we have also held positions in high-yield corporate bonds and in
emerging market bonds
1
<PAGE> 4
LETTER FROM THE CHAIRMAN - continued
(mostly Brady bonds). At present, however, both the high-yield corporate and
Brady bond positions have been reduced to zero after achieving gains.
Some of the Fund's key investments represent consistently held positions
for us and have not involved major changes. These would include stock holdings
in Asia, notably in Malaysia and Hong Kong. Other consistent areas of interest
have been the United Kingdom and Sweden, particularly in the latter's
pharmaceutical industry.
We continue to manage this Fund not as a market-timing vehicle or a
balanced fund, but rather as the expression of the best relative value choices
available to MFS experts that can be reasonably researched and managed. The
reports of the managers of each portfolio who have helped the Fund achieve good
performance over the past year may be found on the following pages.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin /s/ James T. Swanson
- -------------------------- --------------------------
A. Keith Brodkin James T. Swanson
Chairman and President On behalf of the Asset
Allocation Committee
September 17, 1996
2
<PAGE> 5
PORTFOLIO ALLOCATION
[PIE CHART]
U.S. STOCK MARKET - 16.6%
Our holdings in U.S. equities range across a variety of industries and
incorporate both value and growth strategies. Recent additions to the portfolio
include Alco Standard (paper and office products distribution); Cabletron
Systems (telecommunications equipment); and St. Jude Medical (medical-device
technology). Currently, our top three sectors are leisure (15.1%), technology
(13.8%), and financial services (12.0%). Our current outlook remains cautious.
Corporate profits have so far exceeded our expectations; however, we believe
that the rise in long-term interest rates is likely to have a dampening effect
on stock market performance.
-- John F. Brennan, Jr.
FIVE LARGEST HOLDINGS AS OF 8/31/96
- -------------------------------------------------------------------------------
Alco Standard Corp. (Business Services) 0.9%
- -------------------------------------------------------------------------------
Harrah's Entertainment, Inc. (Entertainment) 0.7%
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. (Financial Institutions) 0.6%
- -------------------------------------------------------------------------------
Tyco International Ltd. (Consumer Goods and Services) 0.5%
- -------------------------------------------------------------------------------
Cabletron Systems (Computer Network Company) 0.6%
- -------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKETS - 43.2%
Internationally, we emphasize stock selection as opposed to country or industry
selection. Priority is placed on companies which we believe will generate
above-average earnings growth and which are trading at attractive valuations,
regardless of their home country.
3
<PAGE> 6
INTERNATIONAL STOCK MARKETS - continued
As of August 31, 1996, approximately 43% of the Fund's assets were invested in
international stocks. Over the past quarter, there has been little change to the
broad regional exposures, which are 50% for Europe, 46% for Asia/Pacific, and 4%
for the Americas. The largest individual country exposures are Japan (20%), the
United Kingdom (15%), and Sweden (11%). Roughly 20% of our international
holdings are in emerging markets, 18% of which are in Southeast Asia.
We continue to find few opportunities in cyclical stocks due to our view on
valuations at this point in the economic cycle. As a result, most of our recent
purchases and additions have been in companies which we believe will show steady
earnings growth regardless of the state of the global economy. Examples include
Canadian National Railway, Rhone Poulenc Rorer (a French pharmaceuticals
company), Nitto Denko (a Japanese industrial materials conglomerate), and Enator
(a Swedish information technology company).
-- David Mannheim
FIVE LARGEST HOLDINGS AS OF 8/31/96
- -------------------------------------------------------------------------------
PowerGen PLC (Utilities - Electric - United Kingdom) 1.7%
- -------------------------------------------------------------------------------
DDI Corp. (Telecommunications - Japan) 1.5%
- -------------------------------------------------------------------------------
ABB AB (Electrical Equipment - Sweden) 1.3%
- -------------------------------------------------------------------------------
Lion Nathan Ltd. (Beverages - New Zealand) 1.3%
- -------------------------------------------------------------------------------
Telecom Italia Mobile (Telecommunications - Italy) 1.2%
- -------------------------------------------------------------------------------
U.S. GOVERNMENT BOND MARKET
The U.S. government bond market retreated during the past 12 months as the U.S.
economic outlook brightened significantly. Rates on 10-year Treasury bonds
increased from 6.25% at the beginning of the year to around 7% at the end of
August. After being concerned about slow growth at the end of 1995, the market
is currently concerned that faster growth could lead the Federal Reserve Board
to raise interest rates during the next few months. U.S. payrolls continue to
grow at a brisk rate of approximately 250,000 per month and hourly earnings have
begun to increase, albeit gradually. Despite the backup in rates, new home sales
and auto sales continue to increase. Looking forward, we suspect that the brisk
pace of economic activity could lead to higher interest rates over the balance
of 1996. Given our cautious view for this sector, the Fund continues to maintain
no exposure at this time.
-- Geoffrey L. Kurinsky
4
<PAGE> 7
INTERNATIONAL BOND MARKETS - 13.9%
While the U.S. bond market barely kept pace with short-term money market
instruments over the past 12 months, most foreign markets generated double-digit
returns. Signs of robust growth and fears of rising inflation ended the U.S.
rally in early 1996. In contrast, the rally in the major foreign markets has
been sustained by moderate to slow growth, benign inflation, fiscal austerity
programs, and/or easing monetary policy. As we anticipated, this environment
brought about substantial tightening of yield spreads. Thus, the higher-yielding
markets, such as Italy, Spain, Sweden, and Australia, provided the best
performance. The portfolio benefited from our emphasis on these markets as well
as from our investments in some of the less-developed markets.
We recently adopted a more cautious stance with regard to prospects for further
spread tightening within Europe, since the markets there are once again focused
on the risk that the European Monetary Union planned for 1999 will shake itself
apart. A clearer picture should emerge this fall during the 1997 budget
negotiations and as evidence accumulates regarding convergence or divergence of
growth and inflation within Europe. Australia and Canada remain attractive based
upon what we regard as improving fundamentals. In Japan, we believe the fragile
nature of the recovery could support the bond market over the near term, but it
may also hamper plans to reduce fiscal stimulus. Over time, we expect improved
growth and/or fiscal pressure to push yields higher.
-- Leslie Nanberg
FIVE LARGEST HOLDINGS AS OF 8/31/96
- -------------------------------------------------------------------------------
Republic of Germany 3.0%
- -------------------------------------------------------------------------------
United Kingdom 2.1%
- -------------------------------------------------------------------------------
Kingdom of Spain 1.9%
- -------------------------------------------------------------------------------
Government of Canada 1.4%
- -------------------------------------------------------------------------------
Republic of Ireland 1.3%
- -------------------------------------------------------------------------------
5
<PAGE> 8
FUND MANAGERS' PROFILES
The Asset Allocation Committee consists of Messrs. Swanson and Nanberg as well
as A. Keith Brodkin and Jeffrey Shames, Chairman and President of MFS,
respectively, and John Ballen, Senior Vice President and Director of Equity
Portfolio Management at MFS. The individuals responsible for managing the assets
in the asset classes are as follows:
James Swanson supervises quantitative support and provides oversight of the
Fund's investments. A graduate of Colgate University and the Harvard University
Graduate School of Business Administration, he began his career at MFS in 1985
as Vice President - Investments and was named Senior Vice President in 1989.
Joan Batchelder manages the Fund's U.S. high-yield fixed-income securities. She
rejoined MFS in October of 1983 after three years with a leading investment
counsel firm. She first joined MFS in 1978 and that year was named an Investment
Officer in the Fixed Income Department. A graduate of Colorado College and
recipient of a Master's Degree from the Maxwell School of Syracuse University,
she was appointed Assistant Vice President - Investments in 1979, Vice
President - Investments in 1980 and Senior Vice President in 1983.
John Brennan, along with Mr. Ballen, manages the Fund's U.S. equity securities.
A graduate of the University of Rhode Island and the Stanford University
Graduate School of Business Administration, he began his career at MFS in 1985
as an industry specialist and was promoted to Assistant Vice
President - Investments in 1987. In 1988, he was named Vice President -
Investments and in 1995 he became Senior Vice President.
Geoff Kurinsky manages the Fund's U.S. investment-grade fixed-income securities.
He began his career at MFS in 1987 in the Fixed Income Department. A graduate of
the University of Massachusetts and Boston University's Graduate School of
Management, he was named Assistant Vice President in 1988, Vice President in
1989 and Senior Vice President in 1993.
David Mannheim manages the Fund's foreign equity securities. He began his career
at MFS in 1988 as a research specialist and was promoted to Assistant Vice
President - Investments in 1991. In 1992, he was named Vice
President - Investments. Mr. Mannheim is a graduate of Amherst College and of
Massachusetts Institute of Technology's Sloan School of Management.
6
<PAGE> 9
FUND MANAGERS' PROFILES - CONTINUED
Leslie Nanberg, who manages the Fund's foreign fixed-income securities, joined
the MFS Fixed Income Department in 1980. A graduate of the University of
Illinois with graduate degrees from Northwestern University and the Northwestern
University Graduate School of Management, he was named Assistant Vice
President - Investments in 1981, Vice President - Investments in 1983 and Senior
Vice President in 1986. In addition to serving as head of the MFS International
Fixed Income Department, he has senior responsibility for all fixed-income
assets under MFS management.
- -------------------------------------------------------------------------------
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK
TOTAL RETURN OVER THE LONG TERM THROUGH
INVESTMENTS IN EQUITY AND FIXED-INCOME
SECURITIES.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JULY 22, 1994
SIZE: $244.1 MILLION AS OF AUGUST 31, 1996
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information on the following page illustrates the historical performance of
MFS World Asset Allocation Fund in comparison to various market indicators. In
the graph Class A share results reflect the deduction of the 4.75% maximum sales
charge on the initial investment, while Class B share results reflect the
applicable contingent deferred sales charge (CDSC) which declines over six years
as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C shares have no initial sales
charge but, along with Class B shares, have higher annual fees and expenses than
Class A shares. Class C share purchases made on or after April 1, 1996 will be
subject to a 1% CDSC if redeemed within 12 months of purchase. Benchmark
comparisons are unmanaged and do not reflect the deduction of any fees or
expenses. You cannot invest in an index. All results reflect the reinvestment of
all dividends and capital gains.
7
<PAGE> 10
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from August 1, 1994 to August 31, 1996)
[LINE CHART]
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
<CAPTION>
Life of Class*
through
1 Year 8/31/96
<S> <C> <C>
- -----------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class A) including 4.75%
sales charge +8.8% +10.73%
- -----------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class A) at net asset
value +14.23% +13.28%
- -----------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B) with CDSC+ +9.58% +11.26%
- -----------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B) without CDSC +13.58% +12.51%
- -----------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class C) +12.62% +12.57%
- -----------------------------------------------------------------------------------
Average global flexible portfolio fund +10.28% +9.78%
- -----------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index +18.72% +21.38%
- -----------------------------------------------------------------------------------
Morgan Stanley Capital International EAFE Index +8.19% +5.44%
- -----------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index +4.11% +7.39%
- -----------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government Bond Index +8.67% +11.97%
- -----------------------------------------------------------------------------------
Consumer Price Index[Section Symbol] +2.86% +2.83%
- -----------------------------------------------------------------------------------
- ------------
<FN>
* Fund results (all classes) cover the period from the commencement of investment
operations, July 22, 1994 to August 31, 1996. All benchmark results begin on
August 1, 1994.
+ These returns reflect the maximum contingent deferred sales charge (CDSC) of 4%.
[Section Symbol] The Consumer Price Index is a popular measure of change in prices.
</TABLE>
8
<PAGE> 11
AVERAGE ANNUAL TOTAL RETURNS - continued
In the previous table, we have included the average annual total returns of all
global flexible portfolio funds (including the Fund) tracked by Lipper
Analytical Services, Inc. for the applicable time periods (42 and 40 funds for
the one-year period ended August 31, 1996, and for the period from August 1,
1994 through August 31, 1996, respectively). Because these returns do not
reflect any applicable sales charges, we have also included the Fund's results
at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The principal value and income return of an investment in a mutual fund
will vary with changes in market conditions, and shares, when redeemed, may be
worth more or less than their original cost. Performance results reflect any
applicable expense subsidies and waivers, without which the performance results
would have been less favorable. The subsidy may be rescinded by MFS at any time.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
In January 1997, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
MFS World Asset Allocation Fund has designated $2,458,766 as a long-term capital
gain distribution.
FOREIGN TAX CREDIT
The Fund is estimated to have derived approximately 24.82% of its ordinary
income from dividends paid by foreign companies, and to have paid foreign taxes
equivalent to approximately 3.39% of its ordinary income.
DIVIDENDS RECEIVED DEDUCTION
For the year ended August 31, 1996, the amount of distributions from ordinary
income eligible for the 70% dividends-received deduction for corporations came
to 2.21%.
- --------------------------------------------------------------------------------
9
<PAGE> 12
PORTFOLIO OF INVESTMENTS - August 31, 1996
<TABLE>
Stocks and Warrants - 59.8%
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks and Warrants - 43.2%
Australia - 1.8%
Q.B.E. Insurance Group (Insurance) 383,617 $2,302,354
Seven Network Ltd. (Media) 678,900 2,080,150
----------
$4,382,504
- --------------------------------------------------------------------------------------
Canada - 0.9%
Canadian National Railway Co. (Railroads) 115,000 $2,199,375
- --------------------------------------------------------------------------------------
Chile - 0.5%
Chilectra S.A., ADR (Utilities - Electric) 22,700 $1,229,940
- --------------------------------------------------------------------------------------
Finland - 0.8%
Aamulehti Yhtymae OY II (Publishing) 38,200 $ 973,726
Huhtamaki OY (Food Products) 26,300 1,011,469
TT Tieto OY (Computer Software) 1,000 55,005
----------
$2,040,200
- --------------------------------------------------------------------------------------
France - 2.6%
Michelin (C.G.D.E.) (Tire and Rubber) 25,290 $1,181,248
Rhone Poulenc Rorer, Inc. (Pharmaceuticals) 28,300 1,991,612
TOTAL S.A., "B" (Oils) 15,667 1,152,098
Union des Assurances Federales S.A. (Insurance) 18,900 2,167,781
----------
$6,492,739
- --------------------------------------------------------------------------------------
Germany - 1.4%
Adidas AG (Apparel and Textiles) 25,600 $2,196,015
Volkswagen AG (Automotive) 3,100 1,151,638
----------
$3,347,653
- --------------------------------------------------------------------------------------
Greece - 0.4%
Hellenic Tellecommunication Organization
S.A. (Telecommunications) 51,400 $ 879,906
- --------------------------------------------------------------------------------------
Hong Kong - 2.3%
Asia Satellite Telecommunications Holdings
Ltd., ADR (Telecommunications)* 16,000 $ 420,000
Giordano International Ltd. (Retail) 1,363,000 1,128,155
Hong Kong Land Holdings Ltd. (Real Estate) 377,000 855,790
Liu Chong Hing Bank Ltd. (Banks) 795,000 1,120,712
Peregrine Investment Holdings (Finance) 488,000 687,934
Peregrine Investment Holdings, WarrantS (Finance)* 46,800 7,626
Wing Hang Bank Ltd. (Banks) 339,500 1,312,846
----------
$5,533,063
- --------------------------------------------------------------------------------------
Indonesia - 0.4%
PT Semen Gresik (Building Materials) 364,000 $1,014,350
- --------------------------------------------------------------------------------------
Italy - 1.2%
Telecom Italia Mobile S.p.A., di Risp
(Telecommunications) 2,010,000 $2,449,185
Telecom Italia Mobile S.p.A. (Telecommunications) 227,000 467,529
----------
$2,916,714
- --------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
Stocks and Warrants - continued
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks and Warrants - continued
Japan - 8.7%
Bridgestone Corp. (Tire and Rubber) 88,000 $ 1,438,642
Canon, Inc. (Consumer Goods) 94,000 1,743,935
DDI Corp. (Telecommunications) 473 3,757,761
Daiwa House Industry Co. (Home Construction) 55,000 782,969
East Japan Railway Co. (Railroads) 260 1,213,079
Kinki Coca-Cola Bottling (Beverages) 56,000 781,777
Kirin Beverage Corp. (Beverages) 91,000 1,270,387
Matsushita Electric Industrial Co.
(Electrical Equipment) 69,000 1,159,711
Murata Manufacturing Co. Ltd. (Electrical Equipment) 37,000 1,311,717
Nitto Denko Corp. (Industrial Goods and Services) 100,000 1,524,610
Omron Corp. (Electronics) 97,000 1,772,869
Osaka Sanso Kogyo Ltd. (Chemicals) 287,000 1,033,257
Takeda Chemical Industries (Chemicals) 135,000 2,331,004
Ushio, Inc. (Electronics) 113,000 1,203,891
-----------
$21,325,609
- ---------------------------------------------------------------------------------------
Malaysia - 0.6%
New Straits Time Press Berhad (Publishing) 251,000 $ 1,409,240
- --------------------------------------------------------------------------------------
Netherlands - 1.2%
IHC Caland NV (Transportation Equipment) 23,200 $ 1,257,830
Royal Dutch Petroleum Co. (Oils) 11,000 1,643,372
-----------
$ 2,901,202
- --------------------------------------------------------------------------------------
New Zealand - 2.1%
Lion Nathan Ltd. (Beverages) 1,209,000 $ 3,194,057
Sky City Ltd. (Entertainment)* 430,000 2,040,704
-----------
$ 5,234,761
- --------------------------------------------------------------------------------------
Peru - 0.4%
Telefonica del Peru, "B", ADR
(Telecommunications) 37,500 $ 876,562
- --------------------------------------------------------------------------------------
Philippines - 0.8%
Alsons Cement Corp. (Building Materials)*## 2,057,000 $ 805,973
Pilipino Telephone (Telecommunications)* 905,000 1,193,514
-----------
$ 1,999,487
- --------------------------------------------------------------------------------------
Singapore - 1.3%
Hong Leong Finance (Finance)+ 464,000 $ 1,563,448
Mandarin Oriental International Ltd.
(Lodging) 532,000 739,480
Singapore Press Holdings (Publishing) 52,000 901,966
-----------
$ 3,204,894
- --------------------------------------------------------------------------------------
South Korea - 1.6%
Hanil Cement Manufacturing Co. (Building
Materials) 13,000 $ 674,437
Korea Electric Power Corp.
(Utilities - Electric) 43,920 1,554,785
Korea Mobile Telecommunications Corp.
(Telecommunications) 1,511 1,673,314
-----------
$ 3,902,536
- --------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
Stocks and Warrants - continued
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Foreign Stocks and Warrants - continued
Spain - 2.3%
Acerinox S.A. (Iron and Steel) 20,600 $ 2,304,065
Cubiertas y Mzov S.A. (Engineering and Construction) 25,000 1,643,762
Repsol S.A. (Oils) 51,500 1,672,504
------------
$ 5,620,331
- --------------------------------------------------------------------------------------
Sweden - 4.9%
ABB AB, "B" (Electrical Equipment) 30,500 $ 3,260,700
ASTRA AB, Free Shares, "B" (Pharmaceuticals) 68,000 2,813,439
Enator AB (Computer Software)* 60,600 1,313,111
Nobel Biocare AB (Medical and Health
Products) 60,000 1,141,560
Sparbanken Svergie AB, "A" (Banks) 156,000 1,943,370
Volvo AB, "B" (Automotive) 66,000 1,405,206
------------
$ 11,877,386
- --------------------------------------------------------------------------------------
Thailand - 0.4%
Total Access Communication Public Co. Ltd.
(Telecommunications) 143,000 $ 1,086,800
- --------------------------------------------------------------------------------------
United Kingdom - 6.6%
ASDA Group PLC (Stores) 1,225,000 $ 2,142,035
British Petroleum Co. PLC (Oils) 177,000 1,716,104
British Petroleum Co. PLC, ADR (Oils) 4,800 565,200
Capital Radio PLC (Broadcasting) 90,600 940,654
Dalgety PLC (Food Products) 249,000 1,286,782
Jarvis Hotels Ltd. PLC (Lodging)*+ 368,800 932,769
Kwik-Fit Holdings PLC (Retail) 433,000 1,710,350
Lloyds TSB Group PLC (Banks) 232,000 1,356,481
PowerGen PLC (Utilities - Electric) 726,600 4,106,598
Storehouse PLC (Retail) 266,000 1,322,712
------------
$ 16,079,685
- --------------------------------------------------------------------------------------
Total Foreign Stocks and Warrants $105,554,937
- --------------------------------------------------------------------------------------
U.S. Stocks - 16.6%
Aerospace - 0.4%
Raytheon Co. 11,700 $ 602,550
Rockwell International Corp. 6,600 343,200
------------
$ 945,750
- --------------------------------------------------------------------------------------
Agricultural Products - 0.2%
Case Corp. 12,300 $ 559,650
- --------------------------------------------------------------------------------------
Airlines - 0.1%
Midwest Express Holdings, Inc.* 3,900 $ 117,975
- --------------------------------------------------------------------------------------
Automotive
General Motors Corp. 1,400 $ 69,650
- --------------------------------------------------------------------------------------
Banks and Credit Companies - 0.4%
Wells Fargo & Co. 3,466 $ 862,168
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
Stocks and Warrants - continued
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Business Services - 1.1%
ADT Ltd.* 28,100 $ 551,463
Alco Standard Corp. 49,600 2,163,800
----------
$2,715,263
- ---------------------------------------------------------------------------------------
Cellular Telephones - 0.3%
Telephone & Data Systems, Inc. 15,600 $ 664,950
- --------------------------------------------------------------------------------------
Computer Software - Systems - 1.0%
Adobe Systems, Inc. 23,500 $ 819,563
Oracle Systems Corp.* 21,800 768,450
Sybase, Inc.* 59,800 963,336
----------
$2,551,349
- --------------------------------------------------------------------------------------
Consumer Goods and Services - 1.2%
Colgate-Palmolive Co. 3,700 $ 300,625
Philip Morris Cos., Inc. 7,600 682,100
Tyco International Ltd. 31,700 1,339,325
UST, Inc. 21,700 651,000
----------
$2,973,050
- --------------------------------------------------------------------------------------
Defense Electronics - 0.1%
Loral Space & Communications Corp.* 20,400 $ 285,600
- --------------------------------------------------------------------------------------
Electrical Equipment - 0.2%
Honeywell, Inc. 8,800 $ 511,500
- --------------------------------------------------------------------------------------
Electronics - 0.5%
Analog Devices, Inc.* 8,900 $ 214,713
Atmel Corp.* 19,000 491,625
Intel Corp. 7,100 566,669
----------
$1,273,007
- --------------------------------------------------------------------------------------
Entertainment - 1.5%
Argosy Gaming Corp.* 10,500 $ 68,250
Casino America, Inc.* 17,793 115,654
Chancellor Broadcasting Co., "A"* 500 18,750
Harrah's Entertainment, Inc.* 93,900 1,784,100
LIN Television Corp.* 24,400 872,300
Showboat, Inc. 15,800 314,025
Viacom, Inc.* 11,900 374,850
----------
$3,547,929
- --------------------------------------------------------------------------------------
Financial Institutions - 1.0%
Beneficial Corp. 9,600 $ 541,200
Federal Home Loan Mortgage Corp. 15,600 1,378,650
Union Planters Corp. 19,100 627,912
----------
$2,547,762
- --------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
Stocks and Warrants - continued
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - continued
Food and Beverage Products - 0.8%
Interstate Bakeries Corp. 34,600 $1,046,650
PepsiCo, Inc. 27,700 796,375
----------
$1,843,025
- --------------------------------------------------------------------------------------
Forest and Paper Products - 0.4%
Kimberly Clark Corp. 12,500 $ 979,688
- --------------------------------------------------------------------------------------
Insurance - 0.2%
Highlands Insurance Group* 990 $ 18,810
Penncorp Financial Group, Inc. 19,100 582,550
----------
$ 601,360
- ---------------------------------------------------------------------------------------
Machinery
Ingersoll Rand Co. 1,400 $ 59,850
- ---------------------------------------------------------------------------------------
Medical and Health Products - 0.7%
Lilly (Eli) & Co. 6,300 $ 360,675
Pharmacia & Upjohn 30,100 1,264,200
----------
$1,624,875
- ---------------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.1%
Beverly Enterprises, Inc.* 61,300 $ 628,325
PacifiCare Health Systems, Inc., "B"* 4,100 330,050
Regency Health Services, Inc.* 19,200 211,200
St. Jude Medical, Inc. 33,900 1,216,162
United Healthcare Corp. 5,290 203,396
----------
$2,589,133
- --------------------------------------------------------------------------------------
Oil Services - 0.5%
Halliburton Co. 9,100 $ 478,888
Pennzoil Co. 8,000 427,000
Tidewater, Inc. 9,600 368,400
----------
$1,274,288
- --------------------------------------------------------------------------------------
Oils - 0.6%
Mobil Corp. 4,000 $ 451,000
SEACOR Holdings, Inc.* 12,700 577,850
Union Pacific Resources Group, Inc. 16,100 438,725
----------
$1,467,575
- --------------------------------------------------------------------------------------
Photographic Products - 0.2%
Eastman Kodak Co. 8,000 $ 580,000
- --------------------------------------------------------------------------------------
Printing and Publishing - 0.4%
Scripps (E.W.) Co., "A" 17,900 $ 796,550
Tribune Co., Inc. 2,200 158,125
----------
$ 954,675
- --------------------------------------------------------------------------------------
Railroads - 0.7%
Burlington Northern Santa Fe 6,600 $ 528,000
Wisconsin Central Transportation Corp.* 30,400 1,071,600
----------
$1,599,600
- --------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
PORTFOLIO OF INVESTMENTS - continued
<TABLE>
Stocks and Warrants - continued
<CAPTION>
- --------------------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Stocks - continued
Restaurants and Lodging - 0.7%
FelCor Suite Hotels, Inc. 25,000 $ 762,500
Promus Hotel Corp.* 31,800 957,975
------------
$ 1,720,475
- --------------------------------------------------------------------------------------
Special Products and Services - 0.2%
Stanley Works 21,200 $ 583,000
- --------------------------------------------------------------------------------------
Stores - 0.6%
Office Depot, Inc.* 26,700 $ 423,862
Penney (J.C.), Inc. 6,800 359,550
Sears, Roebuck & Co. 13,100 576,400
------------
$ 1,359,812
- ---------------------------------------------------------------------------------------
Telecommunications - 0.8%
Cabletron Systems, Inc.* 20,600 $ 1,256,600
Cellular Communications International, Inc.* 5,000 155,000
U.S. Robotics Corp.* 8,100 425,250
------------
$ 1,836,850
- ---------------------------------------------------------------------------------------
Utilities - Electric - 0.7%
CMS Energy Corp. 19,700 $ 588,538
Cinergy Corp. 18,600 558,000
Illinova Corp. 23,700 619,162
------------
$ 1,765,700
- --------------------------------------------------------------------------------------
Total U.S. Stocks $ 40,465,509
- --------------------------------------------------------------------------------------
Total Stocks and Warrants (Identified Cost, $138,236,582) $146,020,446
- --------------------------------------------------------------------------------------
BONDS - 13.9%
- --------------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------------------
Foreign Denominated - 13.5%
Belgium - 0.9%
Kingdom of Belgium, 9s, 1998 BEF 20,000 $ 716,033
Kingdom of Belgium, 8.75s, 2002 15,000 563,096
Kingdom of Belgium, 7.25s, 2004 15,000 520,103
Kingdom of Belgium, 8.5s, 2007 10,000 371,430
------------
$ 2,170,662
- ---------------------------------------------------------------------------------------
Canada - 1.4%
Government of Canada, 7.5s, 2003 CAD 3,440 $ 2,560,322
Government of Canada, 8.75s, 2005 75 59,791
Government of Canada, 7s, 2006 1,000 706,558
-----------
$ 3,326,671
- --------------------------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 9s, 2000 DKK 2,968 $ 576,427
Kingdom of Denmark, 8s, 2001 11,305 2,120,490
-----------
$ 2,696,917
- --------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
<CAPTION>
- -------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign Denominated - continued
Germany - 3.0%
Republic of Germany, 6.5s, 2005 DEM 5,429 $ 3,692,673
Republic of Germany, 7.375s, 2005 5,185 3,738,593
-----------
$ 7,431,266
- -------------------------------------------------------------------------------------
Ireland - 1.3%
Republic of Ireland, 8s, 2000 IEP 1,875 $ 3,142,479
- -------------------------------------------------------------------------------------
Italy - 0.8%
Republic of Italy, 8.5s, 1999 ITL 2,345,000 $ 1,557,483
Republic of Italy, 9.5s, 1999 785,000 532,085
-----------
$ 2,089,568
- -------------------------------------------------------------------------------------
Netherlands - 0.4%
Government of Netherlands, 6s, 2006 NLG 1,660 $ 979,500
- -------------------------------------------------------------------------------------
Spain - 1.9%
Kingdom of Spain, 8.3s, 1998 ESP 148,700 $ 1,205,448
Kingdom of Spain, 8.4s, 2001 187,590 1,514,118
Kingdom of Spain, 10.1s, 2001 214,600 1,838,767
-----------
$ 4,558,333
- -------------------------------------------------------------------------------------
Sweden - 0.6%
Kingdom of Sweden, 11s, 1999 SEK 5,000 $ 830,276
Kingdom of Sweden, 10.25s, 2000 3,300 550,822
-----------
$ 1,381,098
- -------------------------------------------------------------------------------------
United Kingdom - 2.1%
U.K. Treasury Gilts, 7s, 2001 GBP 3,265 $ 5,044,765
- --------------------------------------------------------------------------------------
Total Foreign Denominated $32,821,259
- --------------------------------------------------------------------------------------
U.S. Dollar Denominated - 0.4%
United Mexican States, Floating Rate, 2001+ $ 1,000 $ 1,001,700
- --------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $33,434,428) $33,822,959
- -------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 25.1%
- -------------------------------------------------------------------------------------
Foreign Denominated - 0.8%
EuroLira Deposit, 9.225s, due 10/21/96 ITL 2,850,000 $ 1,880,038
- --------------------------------------------------------------------------------------
U.S. Dollar Denominated - 24.3%
Federal Home Loan Mortgage Corp.,
due 9/03/96 - 9/20/96 $ 37,185 $37,124,482
Federal National Mortgage Assn.,
due 9/06/96 - 9/23/96 11,800 11,782,946
Pfizer, Inc., due 9/24/96 5,000 4,983,261
Raytheon Co., due 9/04/96 5,580 5,577,549
-----------
$59,468,238
- -------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $61,348,276
- -------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
PORTFOLIO OF INVESTMENTS - continued
Call Options Purchased - 0.1%
<CAPTION>
- --------------------------------------------------------------------------------------
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Japanese Government Bonds
September/107.254 JPY 385,000 $ 52,360
September/108.659 207,000 51,750
September/109.431 414,000 8,756
October/105.676 175,000 43,400
November/114.355 299,000 41,860
- --------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $70,422) $ 198,126
- --------------------------------------------------------------------------------------
Total Investments (Identified Cost,
$233,089,708) $241,389,807
- ---------------------------------------------------------------------------------------
PUT OPTIONS WRITTEN
- ---------------------------------------------------------------------------------------
Japanese Government Bonds
September/108.659 JPY 207,000 $ (207)
October/105.676 175,000 (1,050)
November/114.355 299,000 (7,475)
- --------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $55,463) $ (8,732)
- --------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES - 1.1% $ 2,757,504
- --------------------------------------------------------------------------------------
Net Assets - 100.0% $244,138,579
- --------------------------------------------------------------------------------------
<FN>
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
</TABLE>
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
BEF = Belgian Francs
CAD = Canadian Dollars
CZK = Czech Republic Korunas
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
GBP = British Pounds
HKD = Hong Kong Dollars
IEP = Irish Punts
ITL = Italian Lire
JPY = Japanese Yen
NLG = Dutch Guilders
SEK = Swedish Kronor
SGD = Singapore Dollars
See notes to financial statements
17
<PAGE> 20
FINANCIAL STATEMENTS
<TABLE>
Statement of Assets and Liabilities
<CAPTION>
=================================================================================
August 31, 1996
- ---------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $233,089,708) $241,389,807
Net receivable for forward foreign currency contracts purchased 678,805
Receivable for Fund shares sold 984,866
Receivable for investments sold 5,242,400
Interest and dividends receivable 1,448,476
Deferred organization expenses 24,001
------------
Total assets $249,768,355
============
Liabilities:
Cash overdraft $ 70,284
Payable for Fund shares reacquired 62,443
Payable for investments purchased 3,255,946
Written options outstanding, at value (premiums received, $55,463) 8,732
Net payable for forward foreign currency exchange contracts sold 629,201
Net payable for forward foreign currency exchange contracts 1,251,943
Payable to affiliates -
Management fee 8,023
Shareholder servicing agent fee 2,484
Distribution fee 182,846
Accrued expenses and other liabilities 157,874
------------
Total liabilities $ 5,629,776
============
Net assets $244,138,579
============
Net assets consist of:
Paid-in capital $218,720,179
Unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 7,154,666
Accumulated undistributed net realized gain
on investments and foreign currency transactions 16,650,527
Accumulated undistributed net investment income 1,613,207
------------
Total $244,138,579
============
Shares of beneficial interest outstanding 13,832,999
============
Class A shares:
Net asset value per share
(net assets of $86,456,942 / 4,889,664 shares of beneficial
interest outstanding) $ 17.68
============
Offering price per share (100/95.25 of net asset value per share) $ 18.56
============
Class B shares:
Net asset value and offering price per share
(net assets of $124,399,076 / 7,054,256 shares of beneficial
interest outstanding) $ 17.63
============
Class C shares:
Net asset value and offering price per share
(net assets of $33,282,561 / 1,889,079 shares of beneficial
interest outstanding) $ 17.62
============
</TABLE>
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B and Class C shares.
See notes to financial statements
18
<PAGE> 21
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Operations
<CAPTION>
=================================================================================
Year Ended August 31, 1996
- ---------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $ 5,758,640
Dividends 2,462,680
Foreign taxes withheld (279,039)
-----------
Total investment income $ 7,942,281
-----------
Expenses -
Management fee $ 1,218,613
Trustees' compensation 38,681
Shareholder servicing agent fee (Class A) 109,411
Shareholder servicing agent fee (Class B) 230,227
Shareholder servicing agent fee (Class C) 38,271
Distribution and service fee (Class A) 364,822
Distribution and service fee (Class B) 1,046,481
Distribution and service fee (Class C) 255,138
Custodian fee 193,118
Auditing fees 48,763
Postage 47,837
Printing 46,926
Amortization of organization expenses 6,943
Legal fees 3,521
Miscellaneous 175,425
-----------
Total expenses $ 3,824,177
Fees paid indirectly (9,956)
Reduction of expenses by distributor (Class A) (36,351)
-----------
Net expenses $ 3,777,870
-----------
Net investment income $ 4,164,411
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions and swap agreements $19,776,975
Written option transactions 76,606
Foreign currency transactions 1,576,243
Futures contracts 69,649
-----------
Net realized gain on investments and foreign currency
transactions $21,499,473
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 255,744
Written options 57,873
Translation of assets and liabilities in foreign currencies (1,915,556)
Futures contracts (118,652)
-----------
Net unrealized loss on investments $(1,720,591)
-----------
Net realized and unrealized gain on investments and foreign
currency $19,778,882
-----------
Increase in net assets from operations $23,943,293
===========
</TABLE>
See notes to financial statements
19
<PAGE> 22
<TABLE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<CAPTION>
===================================================================================
Year Ended August 31, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 4,164,411 $ 3,797,951
Net realized gain on investments and
foreign currency transactions 21,499,473 4,195,488
Net unrealized gain (loss) on investments and
foreign currency translation (1,720,591) 7,977,967
------------ ------------
Increase in net assets from operations $ 23,943,293 $ 15,971,406
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,008,957) $ (1,026,466)
From net investment income (Class B) (2,218,582) (1,012,521)
From net investment income (Class C) (565,751) (239,932)
From net realized gain on investments and
foreign currency transactions (Class A) (2,800,463) (258,501)
From net realized gain on investments and
foreign currency transactions (Class B) (4,012,442) (350,041)
From net realized gain on investments and
foreign currency transactions (Class C) (929,505) (82,468)
------------ ------------
Total distributions declared to shareholders $(12,535,700) $ (2,969,929)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 91,720,629 $118,013,307
Net asset value of shares issued to shareholders
in reinvestment of distributions 10,664,692 2,475,151
Cost of shares reacquired (31,243,387) (27,084,609)
------------ ------------
Increase in net assets from
Fund share transactions $ 71,141,934 $ 93,403,849
------------ ------------
Total increase in net assets $ 82,549,527 $106,405,326
Net assets:
At beginning of period 161,589,052 55,183,726
------------ ------------
At end of period (including accumulated
undistributed (distributions in excess of) net
investment income of $1,613,207 and $(823,582),
respectively) $244,138,579 $161,589,052
============ ============
</TABLE>
See notes to financial statements
20
<PAGE> 23
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
========================================================================================
Year Ended August 31,
---------------------------------------------------------
1996 1995 1994* 1996 1995 1994*
- ----------------------------------------------------------------------------------------
Class A Class B
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each
period):
Net asset value - beginning
of period $ 16.63 $ 15.33 $ 15.00 $ 16.58 $ 15.31 $ 15.00
------- ------- ------- -------- ------- -------
Income from investment
operations# -
Net investment
income[section] $ 0.43 $ 0.55 $ 0.04 $ 0.32 $ 0.43 $ 0.02
Net realized and unrealized
gain on investments and
foreign currency
transactions 1.85 1.17 0.29 1.85 1.17 0.29
------- ------- ------- -------- ------- -------
Total from investment
operations $ 2.28 $ 1.72 $ 0.33 $ 2.17 $ 1.60 $ 0.31
------- ------- ------- -------- ------- -------
Less distributions declared
to shareholders -
From net investment income $ (0.49) $ (0.37) $ -- $ (0.38) $ (0.28) $ --
From net realized gain on
investments and foreign
currency transactions (0.74) (0.05) -- (0.74) (0.05) --
------- ------- ------- -------- ------- -------
Total distributions
declared to
shareholders $ (1.23) $ (0.42) $ -- $ (1.12) $ (0.33) $ --
------- ------- ------- -------- ------- -------
Net asset value - end of
period $ 17.68 $ 16.63 $ 15.33 $ 17.63 $ 16.58 $ 15.31
------- ------- ------- -------- ------- -------
Total return++ 14.23% 11.48% 2.20%++ 13.58% 10.65% 2.07%++
Ratios (to average net assets)/Supplemental data[Section Symbol]:
Expenses## 1.48% 1.47% 1.50%+ 2.10% 2.24% 2.57%+
Net investment income 2.45% 3.49% 2.43%+ 1.83% 2.75% 1.39%+
Portfolio turnover 202% 118% 1% 202% 118% 1%
Average commission rate### $0.0219 -- -- $ 0.0219 -- --
Net assets at end of period
(000 omitted) $86,457 $58,663 $25,254 $124,399 $83,601 $26,495
- --------------
<FN>
* For the period from the commencement of investment operations, July 22,
1994 to August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
[Section Symbol] The investment adviser and/or the distributor voluntarily waived a portion
of their management fee and/or distribution fee, respectively, for certain
of the periods indicated. If these fees had been incurred by the Fund, the
net investment income per share and the ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $0.42 $0.52 $0.02 -- -- $0.01
Ratios (to average net assets):
Expenses## 1.53% 1.67% 2.62%+ -- -- 3.21%+
Net investment income 2.40% 3.29% 1.31%+ -- -- 0.75%+
</TABLE>
See notes to financial statements
21
<PAGE> 24
<TABLE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<CAPTION>
===================================================================================
Year Ended August 31, 1996 1995 1994*
- -----------------------------------------------------------------------------------
Class C
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 16.58 $ 15.31 $15.00
------- ------- ------
Income from investment operations# -
Net investment income[Section Symbol] $ 0.33 $ 0.46 $ 0.03
Net realized and unrealized gain on investments and
foreign currency transactions 1.85 1.16 0.28
------- ------- ------
Total from investment operations $ 2.18 $ 1.62 $ 0.31
------- ------- ------
Less distributions declared to shareholders -
From net investment income $ (0.40) $ (0.30) $ --
From net realized gain on investments and
foreign currency transactions (0.74) (0.05) --
------- ------- ------
Total distributions declared to shareholders $ (1.14) $ (0.35) $ --
------- ------- ------
Net asset value - end of period $ 17.62 $ 16.58 $15.31
------- ------- ------
Total return 13.62% 10.72% 2.07%++
Ratios (to average net assets)/Supplemental data[Section Symbol]:
Expenses## 2.03% 2.18% 2.50%+
Net investment income 1.89% 2.91% 1.68%+
Portfolio turnover 202% 118% 1%
Average commission rate### $0.0219 -- --
Net assets at end of period (000 omitted) $33,283 $19,325 $3,435
- ----------
<FN>
* For the period from the commencement of investment operations, July 22,
1994 to August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
[Section Symbol] The investment adviser and the distributor voluntarily waived a portion
of their management fee and distribution fee, respectively, for certain
of the periods indicated. If these fees had been incurred by the Fund,
the net investment income per share and the ratios would have been:
Net investment income -- -- $0.02
Ratios (to average net assets):
Expenses -- -- 3.18%+
Net investment income -- -- 1.00%+
</TABLE>
See notes to financial statements
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
MFS World Asset Allocation Fund (the Fund) is a non-diversified series of MFS
Series Trust I (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to effects of changes in
each country's legal, political and economic environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Non-U.S. dollar denominated short-term
obligations are valued at amortized cost as calculated in the base currency and
translated into U.S. dollars at the closing daily exchange rate. Futures
contracts, options and options on futures contracts listed on commodities
exchanges are valued at closing settlement prices. Over-the-counter options are
valued by brokers through the use of a pricing model which takes into account
closing bond valuations, implied volatility and short-term repurchase rates.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS - continued
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses - Costs incurred by the Fund in connection with
its organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
investment operations of the Fund.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as a part of an income producing strategy reflecting the view of
the Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. The Fund is required to deposit either in cash or
securities an amount equal to a certain percentage of the contract amount.
Subsequent payments are made or received by the Fund each day, depending on the
daily fluctuations in the value of the underlying security, and are recorded for
financial statement purposes as unrealized gains or losses by the Fund. The
Fund's investment in futures contracts is designed to hedge against anticipated
future changes in interest or exchange rates or securities prices. Investments
in interest rate futures for purposes other than hedging may be made to modify
the duration of the portfolio without incurring the additional transaction costs
involved in buying and selling the underlying securities. Investments in
currency futures for purposes other than hedging may be made to change the
Fund's relative position in one or more currencies without buying and selling
portfolio assets. Investments in equity-index contracts, or contracts on related
options, for purposes other than hedging may be made when the Fund has cash on
hand and wishes to participate in anticipated market appreciation while cash is
being invested. Should interest or exchange rates
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS - continued
or securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and change in value is recorded as unrealized
appreciation and depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes, the Fund may use swaps to take a position on anticipated changes in
the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for both financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS - continued
expenses incurred to preserve and protect the value of a security owned are
added to the cost of the security; other legal fees are expensed. Capital
infusions, which are generally non-recurring, incurred to protect or enhance the
value of high-yield debt securities, are reported as an addition to the cost
basis of the security. Costs that are incurred to negotiate the terms or
conditions of capital infusions or that are expected to result in a plan of
reorganization are reported as realized losses. Ongoing costs incurred to
protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. This fee is reduced according to an expense
offset arrangement with Investors Bank & Trust Co., the dividend disbursing
agent, which provides for partial reimbursement of custody fees based on a
formula developed to measure the value of cash deposited by the Fund with the
custodian and with the dividend disbursing agent. This amount is shown as a
reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return, and consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV. Foreign taxes have been provided for on interest
and dividend income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended August 31, 1996, $3,065,668 was reclassified from
accumulated net realized gain on investments to accumulated undistributed net
investment income due to differences between book
26
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS - continued
and tax accounting for mortgage-backed securities and currency transactions.
This change had no effect on the net assets or net asset value per share. At
August 31, 1996, accumulated undistributed net investment income under book
accounting was different from tax accounting due to temporary differences in
accounting for foreign currency transactions.
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B and Class C shares. The three classes of shares differ in their
respective shareholder servicing agent, distribution and service fees. All
shareholders bear the common expenses of the Fund pro rata based on the average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses.
(3) TRANSACTIONS WITH AFFILIATES
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.60% of average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $6,406 for the year ended
August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$114,694 for the year ended August 31, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted separate
distribution plans for Class A, Class B and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.25% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and
27
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS - continued
other such distribution-related expenses that are approved by the Fund. MFD
retains the service fee for accounts not attributable to a securities dealer
which amounted to $7,610 for the year ended August 31, 1996. MFD waived a
portion of its fee, which is reflected as a reduction of expenses on the
Statement of Operations. Fees, net of waiver, incurred under the distribution
plan during the year ended August 31, 1996 were 0.45% of average daily net
assets attributable to Class A shares on an annualized basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per annum,
of the Fund's average daily net assets attributable to Class B and Class C
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $5,617 and $2,269 for Class B and Class C
shares, respectively, for the year ended August 31, 1996. Fees incurred under
the distribution plans during the year ended August 31, 1996 were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class C shares in the event of a shareholder redemption within twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
August 31, 1996 were $40, $142,038 and $887 for Class A, Class B and Class C
shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the 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.
28
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS - continued
(4) PORTFOLIO SECURITIES
<TABLE>
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
<CAPTION>
Purchases Sales
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities $ 36,233,891 $ 44,008,579
------------ ------------
Investments (non-U.S. government securities) $315,007,638 $305,133,013
------------ ------------
</TABLE>
<TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
<S> <C>
Aggregate cost $233,659,097
------------
Gross unrealized appreciation $ 13,753,070
Gross unrealized depreciation (6,022,360)
------------
Net unrealized appreciation $ 7,730,710
------------
</TABLE>
(5) SHARES OF BENEFICIAL INTEREST
<TABLE>
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<CAPTION>
YEAR ENDED AUGUST 3 1996 1995
------------------------ -------------------------
Shares Amount Shares Amount
======================================================================================
<S> <C> <C> <C> <C>
Shares sold 1,942,820 $ 34,004,181 2,594,208 $ 39,819,615
Shares issued to shareholders in
reinvestment of distributions 250,334 4,239,097 72,285 1,112,578
Shares reacquired (830,481) (14,577,459) (787,357) (12,300,613)
--------- ------------ --------- ------------
Net increase 1,362,673 $ 23,665,819 1,879,136 $ 28,631,580
========= ============ ========= ============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
YEAR ENDED AUGUST 31, 1996 1995
------------------------ -------------------------
Shares Amount Shares Amount
=======================================================================================
<S> <C> <C> <C> <C>
Shares sold 2,433,897 $ 42,393,057 3,914,029 $ 59,970,108
Shares issued to shareholders in
reinvestment of distributions 308,270 5,200,860 72,092 1,107,833
Shares reacquired (728,702) (12,706,594) (675,931) (10,554,603)
--------- ------------ --------- ------------
Net increase 2,013,465 $ 34,887,323 3,310,190 $ 50,523,338
========= ============ ========= ============
</TABLE>
Class C Shares
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996 1995
--------------------- -----------------------
Shares Amount Shares Amount
=====================================================================================
<S> <C> <C> <C> <C>
Shares sold 877,452 $15,323,391 1,198,363 $18,223,584
Shares issued to shareholders in
reinvestment of distributions 72,545 1,224,735 16,620 254,740
Shares reacquired (226,844) (3,959,334) (273,394) (4,229,393)
-------- ----------- --------- -----------
Net increase 723,153 $12,588,792 941,589 $14,248,931
======== =========== ========= ===========
</TABLE>
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS - continued
(6) LINE OF CREDIT
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August 31,
1996 was $2,362.
(7) FINANCIAL INSTRUMENTS
The Fund trades financial instruments with off-balance sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options and forward foreign currency exchange
contracts. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
do not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at August 31, 1996, is as follows:
<TABLE>
Written Option Transactions
<CAPTION>
1996 Calls 1996 Puts
-----------------------------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period -
British Pounds -- $ -- 785 $ 14,524
Deutsche Marks -- -- 3,557 21,419
Italian Lire/Deutsche Marks -- -- 337,563 2,711
Japanese Yen 92,111 21,847 358,824 47,638
Options written -
Deutsche Marks -- -- 2,171 5,799
Japanese Yen -- -- 3,170,000 293,719
Options terminated in closing
transactions -
Deutsche Marks -- -- (4,490) (23,846)
Japanese Yen (92,111) (21,847) (2,847,824) (285,894)
Options expired -
British Pounds -- -- (785) (14,524)
Deutsche Marks -- -- (1,238) (3,372)
Italian Lire/Deutsche Marks -- -- (337,563) (2,711)
------- ------- ---------- ---------
Outstanding, end of period -- $ -- 681,000 $ 55,463
======= ======= ========== =========
Options outstanding at end of
period consist of -
Japanese Yen -- $ -- 681,000 $ 55,463
======= ======= ========== =========
</TABLE>
30
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS - continued
At August 31, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
Contracts Net Unrealized
Settlement to Deliver/ In Exchange Contracts Appreciation
Date Receive For at Value (Depreciation)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
2/24/97 BEF 69,064,477 $ 2,273,353 $ 2,295,045 $ (21,692)
11/01/96 CAD 2,409,374 1,761,098 1,765,827 (4,729)
11/04/96 -
11/25/96 DEM 22,650,932 15,065,451 15,370,085 (304,634)
9/09/96 DKK 16,183,560 2,740,190 2,830,399 (90,209)
9/04/96 -
9/09/96 GBP 10,666,750 16,451,588 16,651,344 (199,756)
12/04/96 HKD 13,267,240 1,708,595 1,715,630 (7,035)
2/24/97 IEP 1,089,556 1,751,515 1,762,361 (10,846)
11/06/96 ITL 10,691,383,742 6,982,534 7,039,208 (56,674)
11/06/96 JPY 669,611,927 6,246,555 6,210,953 35,602
2/03/97 NLG 1,650,980 1,008,294 1,007,069 1,225
2/03/97 SEK 92,401,842 14,023,060 13,993,320 29,740
9/05/96 SGD 269,036 191,117 191,310 (193)
----------- ----------- ---------
$70,203,350 $70,832,551 $(629,201)
=========== =========== =========
Purchases
9/19/96 CZK 56,521,909 $ 1,999,784 $ 2,169,053 $ 169,269
11/04/96 -
2/03/97 DEM 82,839,396 55,739,028 56,248,528 509,500
9/05/96 GBP 14,518 22,629 22,665 36
----------- ----------- ---------
$57,761,441 $58,440,246 $ 678,805
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net receivable of $37,278 with Bankers Trust and a net payable of $995,988
with C.S. First Boston, $182,612 with Chase Manhattan, $4,771 with J.P. Morgan,
$79,791 with Merrill Lynch and $26,059 with Swiss Bank at August 31, 1996.
At August 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At August 31, 1996, the
Fund owned the following restricted securities (constituting 1.43% of net
assets) which
31
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
may not be publicly sold without registration under the Securities Act of 1933.
The Fund does not have the right to demand that such securities be registered.
The value of these securities is determined by valuations supplied by a pricing
service or broker.
<CAPTION>
Date of Share/
Description Acquisition Par Amount Cost Value
=====================================================================================
<S> <C> <C> <C> <C>
Hong Leong Finance 6/12/95 - 8/02/96 464,000 $1,612,549 $1,563,448
Jarvis Hotels Ltd. PLC 7/02/96 - 8/02/96 368,800 951,426 932,769
United Mexican States,
Floating Rate, 2001 7/28/96 1,000,000 995,000 1,001,700
----------
$3,497,917
==========
</TABLE>
32
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS World Asset
Allocation Fund:
We have audited the accompanying statement of assets and liabilities of MFS
World Asset Allocation Fund (the Fund) (one of the portfolios constituting MFS
Series Trust I), including the schedule of portfolio investments, as of August
31, 1996, the related statement of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the two years in the period then
ended, and for the period from July 22, 1994 (commencement of operations) to
August 31, 1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996, by correspondence with the custodian and brokers, or other
appropriate auditing procedures where replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
World Asset Allocation Fund at August 31, 1996, the results of its operations
for the year then ended, and the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the two
years in the period then ended, and for the period from July 22, 1994
(commencement of operations) to August 31, 1994, in conformity with generally
accepted accounting principles.
[Ernst & Young Logo]
Boston, Massachusetts
October 4, 1996
---------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
33
<PAGE> 36
IT'S EASY TO CONTACT US
[GRAPHIC] MFS AUTOMATED INFORMATION
ACCOUNT INFORMATION:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
MARKET OUTLOOK:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
[GRAPHIC] MFS PERSONAL SERVICE
ACCOUNT SERVICE/LITERATURE:
Call 1-800-637-2929 any business day
from 8 a.m. to 8 p.m. Eastern time.
PRODUCT INFORMATION:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
SERVICE FOR THE HEARING - IMPAIRED:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[GRAPHIC] MFS MAILING ADDRESS
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
WEB SITE
http://www.mfs.com
34
<PAGE> 37
A WORD ABOUT MFS PRODUCTS AND SERVICES
MAKING ADDITIONAL INVESTMENTS AT YOUR CONVENIENCE
There are several easy ways to make additional single investments of at least
$50:
- send a check with the lower portion of your account statement
- contact your financial adviser to purchase shares on your behalf
- wire additional investments through your bank; call us first for
instructions
MAKING ADDITIONAL INVESTMENTS AUTOMATICALLY
By investing a set amount at regular intervals, over time you will buy more
shares when prices are low, and fewer shares when prices are high. Because
dollar-cost averaging involves periodic purchases regardless of fluctuating
share prices, you should consider your financial ability to continue investing
in periods of low prices. MFS offers two dollar-cost averaging programs. See
the prospectus for further details. Dollar-cost averaging does not assure a
profit or avoid a loss.
THE AUTOMATIC INVESTMENT PLAN offers a simple way to make regular investments
of at least $50 through automatic withdrawals from your checking account.
THE AUTOMATIC EXCHANGE PLAN automatically exchanges shares from any MFS fund
with $5,000 or more into the same class of shares in up to four other MFS
funds. You choose the amounts of the exchanges (as little as $50) and their
frequency.
<TABLE>
A HYPOTHETICAL EXAMPLE OF AN AUTOMATIC MONTHLY INVESTING COMPOUNDING AT 8% A YEAR
<CAPTION>
Amount 5 Years 10 15 20 25
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 50 3,671 9,064 16,989 28,633 45,742
$ 75 5,506 13,596 25,483 42,950 68,613
$100 7,341 18,128 33,978 57,266 91,484
$200 14,683 38,257 67,956 114,532 182,968
<FN>
For illustration only. Not indicative of future performance of any MFS fund.
</TABLE>
For applications or further information call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
If you are a participant in a retirement plan, check with your plan sponsor
regarding the availability of these options.
35
<PAGE> 38
THE MFS FAMILY OF FUNDS*
AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or sending
money.
STOCK
- ----------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS[Registered Trademark] Capital Growth Fund
MFS[Registered Trademark] Emerging Growth Fund
MFS[Registered Trademark] Gold & Natural Resources Fund
MFS[Registered Trademark] Growth Opportunities Fund
MFS[Registered Trademark] Managed Sectors Fund
MFS[Registered Trademark] OTC Fund
MFS[Registered Trademark] Research Fund
MFS[Registered Trademark] Value Fund
STOCK AND BOND
- ----------------------------------------------------------------
MFS[Registered Trademark] Total Return Fund
MFS[Registered Trademark] Utilities Fund
BOND
- ----------------------------------------------------------------
MFS[Registered Trademark] Bond Fund
MFS[Registered Trademark] Government Mortgage Fund
MFS[Registered Trademark] Government Securities Fund
MFS[Registered Trademark] High Income Fund
MFS[Registered Trademark] Intermediate Income Fund
MFS[Registered Trademark] Strategic Income Fund
LIMITED MATURITY BOND
- ----------------------------------------------------------------
MFS[Registered Trademark] Government Limited Maturity Fund
MFS[Registered Trademark] Limited Maturity Fund
MFS[Registered Trademark] Municipal Limited Maturity Fund
WORLD
- ----------------------------------------------------------------
MFS[Registered Trademark]/Foreign & Colonial Emerging Markets
Equity Fund
MFS[Registered Trademark]/Foreign & Colonial International
Growth Fund
MFS[Registered Trademark]/Foreign & Colonial International
Growth and Income Fund
MFS[Registered Trademark] World Asset Allocation Fund[Trademark]
MFS[Registered Trademark] World Equity Fund
MFS[Registered Trademark] World Governments Fund
MFS[Registered Trademark] World Growth Fund
MFS[Registered Trademark] World Total Return Fund
NATIONAL TAX-FREE BOND
- ----------------------------------------------------------------
MFS[Registered Trademark] Municipal Bond Fund
MFS[Registered Trademark] Municipal High Income Fund
MFS[Registered Trademark] Municipal Income Fund
STATE TAX-FREE BOND
- ----------------------------------------------------------------
Alabama, Arkansas, California, Florida
Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
MONEY MARKET
- ----------------------------------------------------------------
MFS[Registered Trademark] Cash Reserve Fund
MFS[Registered Trademark] Government Money Market Fund
MFS[Registered Trademark] Money Market Fund
36
<PAGE> 39
<TABLE>
MFS[Registered Trademark] WORLD ASSET ALLOCATION FUND[Trademark]
<S> <C>
TRUSTEES ASSISTANT TREASURER
A. Keith Brodkin* - Chairman and President James O. Yost*
Richard B. Bailey* - Private Investor; SECRETARY
Former Chairman and Director (until 1991), Stephen E. Cavan*
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, ASSISTANT SECRETARY
Cambridge Trust Company James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor CUSTODIAN
Investors Bank & Trust Company
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; AUDITOR
Professor of Surgery, Harvard Medical School Ernst & Young LLP
The Hon. Sir J. David Gibbons, KBE - Chief INVESTOR INFORMATION
Executive Officer, Edmund Gibbons, Ltd.; For MFS stock and bond market outlooks, call
Chairman, Bank of N.T. Butterfield & Son ltd. toll free: 1-800-637-4458 anytime from a
touch-tone telephone.
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc. For information on MFS mutual funds,
(investment advisers) call your financial adviser or, for an
information kit, call toll free:
Walter E. Robb, III - President and Treasurer, 1-800-637-2929 any business day from
Benchmark Advisers, Inc. (corporate financial 9 a.m. to 5 p.m. Eastern time (or leave
consultants); President, Benchmark Consulting a message anytime).
Group, Inc. (office services); Trustee, Landmark
Funds (mutual funds) INVESTOR SERVICE
MFS Service Center, inc.
Arnold D. Scott* - Senior Executive Vice P.O. Box 2281
President, Director and Secretary, Boston, MA 02107-9906
Massachusetts Financial Services Company
For general information, call toll free:
Jeffrey L. Shames* - President and Director, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
J. Dale Sherratt - President, Insight Resources, For service to speech- or hearing-impaired, call
Inc. (acquisition planning specialists) toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. To use
Ward Smith - Former Chairman (until 1994), NACCO this service, your phone must be equipped with
Industries; Director, Sundstrand a Telecommunications Device for the Deaf.
Corporation
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
WEB SITE
DISTRIBUTOR http://www.mfs.com
MFS Fund Distributors, Inc.
500 Boylston Street [GRAPHIC] For the second year in a row, MFS earned a #1
Boston, MA 02116-3741 ranking in DALBAR, Inc.'s Broker/Dealer Survey, Main Office
Operations Service Quality category. The firm achieved a 3.49
ASSET ALLOCATION COMMITTEE* overall score - on a scale of 1 to 4 - in the 1995 survey. A total
A. Keith Brodkin of 71 firms responded, offering input on the quality of service
Jeffery L. Shames they receive from 36 mutual fund companies nationwide. The survey
John W. Ballen contained questions about service quality in 17 categories,
Leslie J. Nanberg including knowledge of phone service contacts, accuracy of
James T. Swanson transaction processing, and overall ease of doing business with
the firm. The 1996 survey results were not available at the time
TREASURER of this printing.
W. Thomas London*
<FN>
* Affiliated with the Investment Adviser
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
MFS[REGISTERED TRADEMARK] WORLD [LOGO]
ASSET ALLOCATION ----------------------
FUND[SERVICEMARK] BULK RATE
500 Boylston Street U.S. POSTAGE
Boston, MA 02116 PAID
[LOGO] PERMIT #55638
----------------------
</TABLE>
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MAA-2 10/96 28.5M 88/288/388
<PAGE> 202
MFS RESEARCH GROWTH AND INCOME FUND
SUPPLEMENT TO THE JANUARY 1, 1997 PROSPECTUS AND
STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUND'S INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS P
-------
<S> <C>
Maximum Initial Sales Charge Imposed on Purchases of Fund
Shares (as a percentage of offering price)........................................... None
Maximum Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as applicable).................... None
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees........................................................................ 0.65%
Rule 12b-1 Fees........................................................................ None
Other Expenses (after fee reduction)(1)(2)............................................. 0.60%
----
Total Operating Expenses (after fee reduction)(3)...................................... 1.25%
</TABLE>
- ---------------
(1) Except for the shareholder servicing agent fee component, "Other Expenses"
is based on Class A expenses incurred during the fiscal year ended August
31, 1996. As discussed below in footnote 3, the Adviser is bearing certain
expenses of Class P shares of the Fund subject to reimbursement by the Fund.
Absent this arrangement, "Other Expenses," expressed as a percentage of
average daily net assets, would be 3.31%.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(3) The Adviser has agreed to bear expenses of the Fund, subject to
reimbursement by the Fund as described under "Information Concerning Shares
of the Fund - Expenses." Under this arrangement, "Total Operating Expenses"
will not exceed, on an annualized basis, 1.25% of the Fund's average daily
net assets with respect to Class P shares, during the current fiscal year
and each fiscal year through August 31, 2006. This arrangement 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 3.96%.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a
$1,000 investment in the Fund, assuming (a) a 5% annual return and (b)
redemption at the end of each of the time periods indicated (unless otherwise
noted):
<TABLE>
<CAPTION>
PERIOD CLASS P
------ -------
<S> <C>
1 year........................................ $13
3 years....................................... 40
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
-1-
<PAGE> 203
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUND
Four classes of shares of the Fund currently are offered for sale,
Class A shares, Class B shares, Class C shares and Class P shares. Class P
shares are available for purchase only by the MFS Retirement Plans and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 5.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") of 1.00% upon redemption during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares 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 1.00% CDSC upon redemption during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C shares and
Class P shares do not convert to any other class of shares of the Fund.
INFORMATION CONCERNING CLASS P SHARES OF THE FUND
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
MFS Retirement Plans may exchange Class P shares of the Fund for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Fund
at net asset value. Distributions paid by the Fund with respect to Class P
shares generally will be greater than those paid with respect to Class A shares,
Class B shares and Class C shares because expenses attributable to Class A
shares, Class B shares and Class C shares generally will be higher.
Subject to termination or revision at the discretion of MFS, MFS has
agreed to pay until August 31, 2006 the expenses of the Fund, such that the
Fund's aggregate operating expenses do not exceed, on an annualized basis, 1.50%
of the average daily net assets with respect to Class P shares. Such payments by
MFS are subject to reimbursement by the 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 the Fund would not exceed, on an annualized basis, 1.50%
of the average daily net assets with respect to Class P shares. The expense
reimbursement agreement terminates for the 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.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1997
-2-
<PAGE> 204
PROSPECTUS
JANUARY 1, 1997
MFS(R) RESEARCH GROWTH CLASS A SHARES OF BENEFICIAL INTEREST
AND INCOME FUND CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
1. Expense Summary.................................................................... 2
2. The Fund........................................................................... 3
3. Condensed Financial Information.................................................... 4
4. Investment Objective and Policies.................................................. 4
5. Investment Techniques and Risk Factors............................................. 5
6. Additional Risk Factors............................................................ 10
7. Management of the Fund............................................................. 12
8. Information Concerning Shares of the Fund.......................................... 13
Purchases....................................................................... 13
Exchanges....................................................................... 17
Redemptions and Repurchases..................................................... 18
Distribution Plan............................................................... 21
Distributions................................................................... 22
Tax Status...................................................................... 23
Net Asset Value................................................................. 23
Expenses........................................................................ 23
Description of Shares, Voting Rights and Liabilities............................ 24
Performance Information......................................................... 25
9. Shareholder Services............................................................... 25
Appendix A -- Waivers of Sales Charges................................................. A-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MFS RESEARCH GROWTH AND INCOME FUND
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116 (617) 954-5000
This Prospectus pertains to MFS Research Growth and Income Fund (the "Fund"), a
diversified series of MFS Series Trust I (the "Trust"). The investment objective
of the Fund is long-term growth of capital, current income and growth of income.
The Fund invests, under normal market conditions, at least 65% of its total
assets in equity securities of companies with a market capitalization of at
least $2 billion which, in the judgment of the Fund's investment adviser, offer
earnings growth potential while paying current dividends and may invest up to
35% of its total assets in other equity securities which offer prospects for
growth of capital and future income. The minimum initial investment generally is
$1,000 per account (see "Purchases"). The Fund's investment adviser and
distributor are Massachusetts Financial Services Company ("MFS" or the
"Adviser") and MFS Fund Distributors, Inc. ("MFD"), respectively, both of which
are located at 500 Boylston Street, Boston, Massachusetts 02116.
INVESTMENT PRODUCTS ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY,
AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION. SHARES OF MUTUAL FUNDS ARE SUBJECT TO INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED, AND WILL FLUCTUATE IN VALUE. YOU
MAY RECEIVE MORE OR LESS THAN YOU PAID WHEN YOU REDEEM YOUR SHARES.
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information ("SAI"), dated January 1, 1997, as
amended or supplemented from time to time, which contains more detailed
information about the Trust and the Fund. The SAI is incorporated into this
Prospectus by reference. See page 27 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site that
contains the SAI materials that are incorporated by reference into the
Prospectus and the SAI, and other information regarding the Fund. This
Prospectus is available on the Adviser's Internet World Wide Web site at
http://www.mfs.com.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 205
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
---------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on Purchases of
Fund Shares (as a percentage of offering price)... 5.75% 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):
Management Fees..................................... 0.65% 0.65% 0.65%
Rule 12b-1 Fees (after fee reduction)............... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses (after fee reduction)(4)(5).......... 0.60% 0.60% 0.60%
---- ---- ----
Total Operating Expenses (after fee reduction)(6)... 1.50% 2.25% 2.25%
</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 Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to Class A
shares. MFD is currently waiving its right to receive the 0.10% per annum
distribution fee under the Distribution Plan. Distribution expenses paid
under this Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See
"Distribution Plan" below.
(3) The Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plan,
together with any CDSC payable upon redemption of Class B and Class C
shares, may cause long-term shareholders to pay more than the maximum sales
charge that would have been permissible if imposed entirely as an initial
sales charge (the "Distribution Plan").
(4) As discussed below in footnote 5, the Adviser is bearing certain expenses of
the Fund, subject to reimbursement by the Fund. Absent this arrangement,
"Other Expenses," expressed as a percentage of average daily net assets,
would be 3.31%, 3.31% and 3.31% for Class A, Class B and Class C shares,
respectively.
(5) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(6) The Adviser has agreed to bear expenses of the Fund, subject to
reimbursement by the Fund as described under "Information Concerning Shares
of the Fund -- Expenses," such that "Total Operating Expenses" do not
exceed, on an annualized basis, 1.50% of the Fund's average daily net assets
with respect to Class A shares, 2.25% of the Fund's average daily net assets
with respect to Class B shares, and 2.25% 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, 2006. This arrangement may be terminated
by the Adviser at any time. Absent any expense reductions, "Total Operating
Expenses," expressed as a percentage of average daily net assets, would be
4.21%, 4.96% and 4.96% for Class A, Class B and Class C shares,
respectively.
2
<PAGE> 206
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) unless otherwise
noted redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
------------------------------------ ------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
(1) (2) (1)
1 year............................. $ 72 $ 63 $23 $33 $23
3 years............................ 102 100 70 70 70
</TABLE>
- ---------------
(1) Assumes no redemption.
(2) Purchases subsequent to April 1, 1996 which are redeemed within 12 months of
purchase are subject to a CDSC of 1%.
The purpose of the expense table above is to assist investors in understanding
the various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. More complete descriptions of the following Fund expenses are set
forth in the following sections: (i) varying sales charges on share
purchases -- "Purchases"; (ii) varying CDSCs -- "Purchases"; (iii) management
fees -- "Investment Adviser"; and (iv) Rule 12b-1 (i.e., distribution plan)
fees -- "Distribution Plan."
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
2. THE FUND
The 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. The Trust presently consists of thirteen series,
which are offered for sale pursuant to separate prospectuses, and each of which
represents a portfolio with separate investment objectives and policies. Shares
of the Fund are sold continuously to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Three classes of shares are
currently offered to the general public. Class A shares are offered at net asset
value plus an initial sales charge up to a maximum of 5.75% of the offering
price (or a CDSC of 1.00% upon redemption during the first year in the case of
certain purchases of $1 million or more and certain purchases by retirement
plans) and are subject to an annual distribution fee and service fee up to a
maximum of 0.35% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares 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 of 1.00% upon redemption during the first year and an
annual distribution fee and service fee up to a maximum of 1.00% per annum.
Class C shares do not convert to any other class of shares of the Fund. In
addition, the Fund offers an additional Class of shares, Class I shares,
exclusively to certain institutional investors. Class I shares are made
available by means of a separate prospectus supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. MFS is the Fund's investment adviser and is responsible for the management
of the Fund's assets. The officers of the Trust are responsible for its
operations. The Adviser manages the Fund's portfolio from day to day in
accordance with the Fund's investment objective and policies. A majority of the
Trustees are not affiliated with the Adviser. The selection of investments and
the way they are managed depend on the conditions and trends in the 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 the Fund from shareholders at any time at net asset value,
less any applicable CDSC.
3
<PAGE> 207
3. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP. During the period from the
commencement of investment operations on January 2, 1996 to August 31, 1996,
only Class A shares of the Fund were available for sale.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31,
1996*
--------------
CLASS A
--------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value -- beginning of period........................................................... $ 10.00
Income from investment operations# --
Net investment income[section]................................................................. $ 0.05
Net realized and unrealized gain on investments and foreign currency transactions.............. 1.08
-------
Total from investment operations................................................................. $ 1.13
-------
Net asset value -- end of period................................................................. $ 11.13
-------
Total return..................................................................................... 11.30%++
Ratios (to average net assets)/Supplemental data[section]:
Expenses....................................................................................... 1.50%+
Net investment income.......................................................................... 0.65%+
Portfolio turnover............................................................................... 58%
Average commission rate.......................................................................... $ 0.0113
Net assets at end of period (000 omitted)........................................................ $ 492
</TABLE>
* For the period from the commencement of investment operations,
January 2, 1996 to August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
[section] The investment adviser voluntarily agreed to maintain the expenses
of the Class A shares of the Fund at not more than 1.50% of the
Fund's average daily net assets after consideration of fees paid
indirectly. To the extent actual expenses, without considering fees
paid indirectly, were over/under these limitations, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment loss........................................................................... $ (0.13)
Ratios (to average net assets):
Expenses.................................................................................... 4.58%+
Net investment loss......................................................................... (1.86)%
The reduction of expenses by fees paid indirectly, as a percentage of net assets,
amounted to:.................................................................................. (0.03)%+
</TABLE>
4. INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is long-term growth of capital, current income
and growth of income. The investment objective and polices of the Fund may,
unless otherwise specifically stated, be changed by the Trustees of the Trust
without a vote of the
4
<PAGE> 208
shareholders. A change in the 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.
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. The Fund's assets are allocated among 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 industry responsibility.
Under normal market conditions, the Fund invests at least 65% of its total
assets in equity securities of companies with a market capitalization of at
least $2 billion which, in the Adviser's judgment, offer earnings growth
potential while paying current dividends (see "Investment Techniques -- Equity
Securities" below). Over time, continued growth of earnings tends to lead to
higher dividends and enhancement of capital value. The Fund may also invest up
to 35% of its total assets in other equity securities which offer prospects for
growth of capital and future income.
Consistent with its investment objective and policies described above, the Fund
may also invest up to (but not including) 20% (and generally expects to invest
between 5% and 15%) of its net assets in foreign equity securities which are not
traded on a 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."
5. INVESTMENT TECHNIQUES AND RISK FACTORS
Additional information about certain of these investment techniques can be found
under the caption "Investment Techniques" in the SAI.
EQUITY SECURITIES: The Fund may invest in all types of equity securities,
including the following: common stocks, preferred stocks and preference stocks;
securities such as bonds, warrants or rights that are convertible into stocks;
and depository receipts for those securities. These securities may be listed on
securities exchanges, traded in various over-the-counter markets or have no
organized market.
RESTRICTED SECURITIES: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). 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 the Fund's investments in Rule 144A securities, focusing on
such important factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of decreasing the
level of liquidity in 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 the 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: The 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
5
<PAGE> 209
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: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, a Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). The
Fund has adopted certain procedures intended to minimize the risks of such
transactions.
"WHEN ISSUED" SECURITIES: The 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 Fund, for temporary defensive purposes, as
discussed below, may invest, in U.S. Government securities, including: (1) the
following U.S. Treasury obligations, which differ only in their interest rates,
maturities and times of issuance: U.S. Treasury bills (maturities of one year or
less); U.S. Treasury notes (maturities of one to ten years); and U.S. Treasury
bonds (generally maturities of 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 the 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: The Fund may invest in securities of foreign growth
companies, including established foreign companies, whose rates of earnings
growth are expected to accelerate because of special factors, such as
rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. 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 the Fund's investment objective
and policies, the 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
6
<PAGE> 210
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.
INDEXED SECURITIES: The Fund may invest in indexed securities whose value is
linked to foreign currencies, interest rates, commodities, indices or other
financial indicators. Most indexed securities are short to intermediate term
fixed income securities whose values at maturity (i.e., principal value) 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, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a principal
amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the Fund agreed to exchange payments
in dollars for payments in foreign currency, in each case based on a fixed rate,
the swap agreement would tend to decrease the Fund's exposure to U.S. interest
rates and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of the Fund's investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed. As a
result, swaps can be highly volatile and may have a considerable impact on the
Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Swaps, caps, floors and collars are highly
specialized activities which involve certain risks.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options
and purchase put and call options on securities. The 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 the 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
7
<PAGE> 211
premium. The Fund may also write combinations of put and call options on the
same security, known as "straddles." Such transactions can generate additional
premium income but also present increased risk.
By writing a call option on a security, the Fund limits its opportunity to
profit from any increase in the market value of the underlying security, since
the holder will usually exercise the call option when the market value of the
underlying security exceeds the exercise price of the call. However, the Fund
retains the risk of depreciation in value of securities on which it has written
call options.
The Fund may also purchase put or call options in anticipation of market
fluctuations which may adversely affect the value of its portfolio or the prices
of securities that the Fund wants to purchase at a later date. In the event that
the expected market fluctuations occur, the Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, the Fund may enter into options on Treasury securities
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: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
"YIELD CURVE" OPTIONS: The 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 the Fund will be covered as described
in the SAI. The trading of yield curve options is subject to all the risks
associated with trading other types of options, as discussed below under
"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: The 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 Fund 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."
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<PAGE> 212
Such transactions will be entered into for hedging purposes or for non-hedging
purposes to the extent permitted by applicable law. The Fund will incur
brokerage fees when it purchases and sells Futures Contracts, and will be
required to maintain margin deposits. In addition, Futures Contracts entail
risks. Although the Adviser believes that use of such contracts will benefit the
Fund, if its investment judgment about the general direction of exchange rates
or the stock market is incorrect, the Fund's overall performance may be poorer
than if it had not entered into any such contract and the Fund may realize a
loss. The Fund will not enter into any Futures Contract if immediately
thereafter the value of securities and other obligations underlying all such
Futures Contracts would exceed 50% of the value of its total assets. In
addition, the 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 the
Fund's portfolio than the purchase or sale of the underlying Futures Contracts
since the potential loss is limited to the amount of the premium plus related
transaction costs, although it may be necessary to exercise the option to
realize any profit, which results in the establishment of a futures position.
The writing of Options on Futures Contracts, however, does not present less risk
than the trading of Futures Contracts and will constitute only a partial hedge,
up to the amount of the premium received. In addition, if an option is
exercised, the Fund may suffer a loss on the transaction.
Futures Contracts and Options on Futures Contracts that are entered into by the
Fund will be traded on U.S. and foreign exchanges.
FORWARD CONTRACTS: The Fund may enter into forward foreign currency exchange
contracts for the purchase or sale of a fixed quantity of a foreign currency at
a future date at a price set at the time of the contract ("Forward Contracts").
The Fund may enter into Forward Contracts for hedging purposes and for
non-hedging purposes of increasing the Fund's current income. By entering into
transactions in Forward Contracts for hedging purposes, the Fund may be required
to forego the benefits of advantageous changes in exchange rates and, in the
case of Forward Contracts entered into for non-hedging purposes, the Fund may
sustain losses which will reduce its gross income. Such transactions, therefore,
could be considered speculative. Forward Contracts are traded over-the-counter
and not on organized commodities or securities exchanges. As a result, 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. The 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, the Fund may hold such currencies for an
indefinite period of time. The 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. The Fund has established
procedures consistent with statements of the SEC and its staff regarding the use
of Forward Contracts by registered investment companies, which requires use of
segregated assets or "cover" in connection with the purchase and sale of such
contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may also purchase and write options on
foreign currencies ("Options on Foreign Currencies") for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and the Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. The Fund may also choose to, 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, the Fund may hold such
currencies for an indefinite period of time.
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<PAGE> 213
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.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the 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 the
Fund's hedging strategy unsuccessful and could result in losses. The Fund also
may enter into transactions in options, Futures Contracts, Options on Futures
Contracts and Forward Contracts for other than hedging purposes, which involves
greater risk. In particular, such transactions may result in losses for the Fund
which are not offset by gains on other portfolio positions, thereby reducing
gross income. In addition, foreign currency markets may be extremely volatile
from time to time. There also can be no assurance that a liquid secondary market
will exist for any contract purchased or sold, and the Fund may be required to
maintain a position until exercise or expiration, which could result in losses.
The SAI contains a description of the nature and trading mechanics of options,
Futures Contracts, 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.
FOREIGN SECURITIES: The 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
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. The 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. The Fund
may also hold foreign currency in anticipation of purchasing foreign securities.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. 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: The 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 the Fund is uninvested and no return is earned thereon. The inability
of the Fund to make intended securities purchases due to settlement problems
could cause the Fund to
10
<PAGE> 214
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result in losses to the Fund due to
subsequent declines in value of the portfolio security, a decrease in the level
of liquidity in the Fund's portfolio, or, if the Fund has entered into a
contract to sell the security, possible liability to the purchaser. Certain
markets may require payment for securities before delivery, and in such markets
the Fund bears the risk that the securities will not be delivered and that the
Fund's payments will not be returned. Securities prices in emerging markets can
be significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and 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. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
PORTFOLIO TRADING: The 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.
The Fund will engage in portfolio trading if it believes a transaction, net of
costs (including custodian charges), will help in attaining its investment
objective. In trading portfolio securities, the 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 Fund in
trading portfolio securities, see "Portfolio Transactions and Brokerage
Commissions" in the SAI.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. Consistent with the foregoing primary consideration, the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. (the "NASD")
and such other policies as the Trustees 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 the Fund's
portfolio transactions. From time to time the Adviser may direct certain
portfolio transactions to broker-dealer firms which, in turn, have agreed to pay
a portion of the Fund's operating expenses (e.g., fees charged by the custodian
of the Fund's assets).
------------------------
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the investment policies of the
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.
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<PAGE> 215
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated January 2, 1996. The Fund is managed by a committee
comprised of various equity research analysts. The Adviser provides the Fund
with overall investment advisory and administrative services, as well as general
office facilities. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for the Fund. For its services and
facilities, the Adviser is entitled to receive a management fee, computed and
paid monthly, in an amount equal to the sum of 0.65% of the first $500 million
of the Fund's average daily net assets and 0.55% of the amount in excess of $500
million. For the period from the commencement of investment operations, January
2, 1996, to the fiscal year end of August 31, 1996, the Adviser waived its right
to receive management fees from the Fund.
MFS also serves as investment adviser to each of the other MFS Funds and to
MFS[Registered Trademark] 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 Institutional Advisors, Inc., provide investment advice to
substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $52.3
billion on behalf of approximately 2.2 million investor accounts as of November
29, 1996. As of such date, the MFS organization managed approximately $20.3
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $28.1 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, John D. McNeil
and Donald A. Stewart. Mr. Brodkin is the Chairman, Mr. Shames is the President
and Mr. Scott is the Secretary and a Senior Executive Vice President of MFS.
Messrs. McNeil and Stewart are the Chairman and President, respectively, of Sun
Life. Sun Life, a mutual life insurance company, is one of the largest
international life insurance companies and has been operating in the U.S. since
1895, establishing a headquarters office here in 1973. The executive officers of
MFS report to the Chairman of Sun Life. A. Keith Brodkin, the Chairman and a
Director of MFS, is also the Chairman, President and a Trustee of the 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.
("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the world's
oldest financial services institutions, the London-based Foreign & Colonial
Investment Trust PLC, which pioneered the idea of investment management in 1868,
and HYPO-BANK (Bayerische Hypotheken-und 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 Foreign & Colonial 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 Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial 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 the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
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<PAGE> 216
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUNDS
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer and other financial institutions ("dealers")
having a selling agreement with MFD. Dealers may also charge their customers
fees relating to investments in the Fund.
This Prospectus offers Class A, Class B and Class C shares, which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE* AS DEALER
PERCENTAGE OF: ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000............................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000............... 4.75 4.99 4.00
$100,000 but less than $250,000.............. 4.00 4.17 3.20
$250,000 but less than $500,000.............. 2.95 3.04 2.25
$500,000 but less than $1,000,000............ 2.20 2.25 1.70
$1,000,000 or more........................... None** None** See Below**
- -------------------------------------------------------------------------------------------------------
</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 5% and MFD retains approximately
3/4 of 1% of the public offering price. The sales charge may vary depending on
the number of shares of the Fund as well as certain other MFS Funds owned or
being purchased, the existence of an agreement to purchase additional shares
during a 13-month period (or 36-month period for purchases of $1 million or
more) or other special purchase programs. A description of the Right of
Accumulation, Letter of Intent and Group Purchase privileges by which the sales
charge may be reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
four circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans subject to
the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i)
the
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<PAGE> 217
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of the Funds in the MFS Funds would be
in an aggregate amount of at least $250,000 within a reasonable period of
time, as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans subject to
ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent
(the "MFS Participant Recordkeeping System"); (b) the plan establishes an
account with the Shareholder Servicing Agent on or after July 1, 1996; and
(c) the aggregate purchases by the retirement plan of Class A shares of
the MFS Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
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 such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- -------------------------------
<C> <S>
1.00% On the first $2,000,000, plus
Over $2,000,000 to $3,000,000,
0.80% plus
Over $3,000,000 to $50,000,000,
0.50% plus
0.25% Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares 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
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<PAGE> 218
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:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------------------------------------------- ---------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
Except as described below, MFD will pay commissions to dealers of 3.75% of the
purchase price of Class B shares purchased through dealers. MFD will also
advance to dealers the first year service fee payable under the Fund's
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under the Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS ELIGIBLE TO PURCHASE CLASS A SHARES UNDER THIS CATEGORY;
THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION INDEPENDENTLY TO DETERMINE
WHETHER SUCH A PLAN QUALIFIES UNDER THIS CATEGORY FOR THE PURCHASE OF CLASS A
SHARES.
WAIVERS OF CDSC. In certain circumstances, the CDSC imposed upon redemption of
Class B shares is waived. These circumstances are described in Appendix A to
this Prospectus. In addition to these circumstances, the CDSC imposed upon the
redemption of Class B shares is waived with respect to shares held by a
retirement plan whose sponsoring organization subscribes to the MFS Participant
Recordkeeping System and which has established an account with the Shareholder
Servicing Agent on or after July 1, 1996; provided, however, that the CDSC will
not be waived (i.e., it will be imposed) in the event that there is a change in
law or regulations which results in a material adverse change to the tax
advantaged nature of the plan, or in the event that the plan and/or sponsoring
organization: (i) becomes insolvent or bankrupt; (ii) is terminated or partially
terminated under ERISA or is liquidated or dissolved; or (iii) is acquired by,
merged into, or consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain outstanding
for approximately eight years will convert to Class A shares of the same Fund.
Shares purchased through the reinvestment of distributions paid in respect of
Class B shares will be treated as Class B shares for purposes of the payment of
the distribution and service fees under the Fund's Distribution
15
<PAGE> 219
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of Class
B shares (and which have not converted to Class A shares as provided in the
following sentence) will be held in a separate sub-account. Each time any Class
B shares in the shareholder's account (other than those in the sub-account)
convert to Class A shares, a portion of the Class B shares then in the
sub-account will also convert to Class A shares. The portion will be determined
by the ratio that the shareholder's Class B shares not acquired through
reinvestment of dividends and distributions that are converting to Class A
shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC of 1.00% upon redemption 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 Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the 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 the
Fund's shares.
MINIMUM INVESTMENT. Except as described below, the minimum initial investment is
$1,000 per account and the minimum additional investment is $50 per account.
Accounts being established for monthly automatic investments and under payroll
savings programs and tax-deferred retirement programs (other than 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. The 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. The Fund and MFD each reserve the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the
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individual or organization makes three or more exchange requests out of the Fund
per calendar year and (ii) any one of such exchange requests represents shares
equal in value to 1/2 of 1% or more of the Fund's net assets at the time of the
request. Accounts under common ownership or control, including accounts
administered by market timers, will be aggregated for purposes of this
definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Funds may have different and/or more or less
restrictive policies with respect to market timers than the Fund. These policies
are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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 the Fund. Such
concessions provided by MFD may include financial assistance to dealers in
connection with preapproved conferences or seminars, sales or training programs
for invited registered representatives, payment for travel expenses, including
lodging, incurred by registered representatives for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more MFS Funds, and/or other dealer-sponsored events. From time to time, MFD
may make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
Other concessions may be offered to the extent not prohibited by state laws or
any self-regulatory agency, such as the NASD.
SPECIAL INVESTMENT PROGRAMS. For shareholders who elect to participate in
certain investment programs (e.g., the Automatic Investment Plan) or other
shareholder services, MFD or its affiliates may either (i) give a gift of
nominal value, such as a hand-held calculator, or (ii) make a nominal charitable
contribution on their behalf.
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales 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 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.
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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.
REDEMPTIONS AND REPURCHASES
A shareholder may withdraw all or any portion of the value of his account on any
date on which the Fund is open for business by redeeming shares at their net
asset value (a redemption) or by selling such shares to the Fund through a
dealer (a repurchase). Certain redemptions and repurchases are, however, subject
to a CDSC. See "Contingent Deferred Sales Charge" below. Because the net asset
value of shares of the account fluctuates, redemptions or repurchases, which are
taxable transactions, are likely to result in gains or losses to the
shareholder. When a shareholder withdraws an amount from his account, the
shareholder is deemed to have tendered for redemption a sufficient number of
full and fractional shares in his account to cover the amount withdrawn. The
proceeds of a redemption or repurchase will normally be available within seven
days, except for shares purchased or received in exchange for shares purchased
by check (including certified checks or cashier's checks). Payment of redemption
proceeds may be delayed for up to 15 days from the purchase date in an effort to
assure that such check has cleared.
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REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the shares
in his account by mailing or delivering to the Shareholder Servicing Agent (see
back cover for address) a stock power with a written request for redemption or
letter of instruction, together with his share certificates (if any were
issued), all in "good order" for transfer. "Good order" generally means that the
stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature 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 the Fund purchased prior to
January 1, 1993, transactions will be aggregated on a calendar year basis -- all
transactions made during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year. 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
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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 the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for Class C
shares and certain Class A share purchases, a CDSC will be imposed upon
redemption. Such purchases under the Reinstatement Privilege are subject to all
limitations in the SAI regarding this privilege.
IN-KIND DISTRIBUTIONS. The Trust agrees to redeem shares of the Fund solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. The Fund has reserved the
right to pay other redemptions either totally or partially, by a distribution
in-kind of securities (instead of cash) from the Fund's portfolio. The
securities distributed in such a distribution would be valued at the same amount
as that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder received a distribution in-kind, the shareholder could
incur brokerage or transaction charges when converting the securities to cash.
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then-current value if at any time the total investment in such
account drops below $500 because of redemptions, except in the case of accounts
being established for monthly automatic investments and certain payroll savings
programs, Automatic Exchange Plan accounts and tax-deferred retirement plans,
for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
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DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan 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 Plan"), after having concluded that there is a reasonable
likelihood that the Plan would benefit the Fund and its shareholders.
In certain circumstances, the fees described below may not be imposed or are
being waived. These circumstances, if any, are described below under the heading
"Current Level of Distribution and Service Fees."
FEATURES COMMON TO EACH CLASS OF SHARES: There are features of the Distribution
Plan that are common to each Class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a
service fee of up to 0.25% of the average daily net assets attributable to the
class of shares to which the Distribution Plan relates (i.e., Class A, Class B
or Class C shares, as appropriate) (the "Designated Class") annually in order
that MFD may pay expenses on behalf of the Fund relating to the servicing of
shares of the Designated Class. The service fee is used by MFD to compensate
dealers which enter into a sales agreement with MFD in consideration for all
personal services and/or account maintenance services rendered by the dealer
with respect to shares of the Designated Class owned by investors for whom such
dealer is the dealer or holder of record. MFD may from time to time reduce the
amount of the service fees paid for shares sold prior to a certain date. Service
fees may be reduced for a dealer that is the holder or dealer of record for an
investor who owns shares of the Fund having an aggregate net asset value at or
above a certain dollar level. Dealers may from time to time be required to meet
certain criteria in order to receive service fees. MFD or its affiliates are
entitled to retain all service fees payable under the Distribution Plan for
which there is no dealer of record or for which qualification standards have not
been met as partial consideration for personal services and/or account
maintenance services performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that the Fund may pay MFD a
distribution fee 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 the Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, renewal, amendment and termination are substantially identical
as they relate to each Class of shares covered by the Distribution Plan.
FEATURES UNIQUE TO EACH CLASS OF SHARES: There are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In addition to the initial sales charge,
the dealer also generally receives the ongoing 0.25% per annum service fee, as
discussed above.
The distribution fee paid to MFD under the Class A Distribution Plan is equal,
on an annual basis, to 0.10% of the Fund's average daily net assets attributable
to Class A shares. As noted above, MFD may use the distribution fee to cover
distribution-related expenses incurred by it under its distribution agreement
with the Fund, including commissions to dealers and payments to
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wholesalers employed by MFD (e.g., MFD pays commissions to dealers with respect
to purchases of $1 million or more and purchases by certain retirement plans of
Class A shares which are sold at net asset value but which are subject to a 1%
CDSC for one year after purchase). See "Purchases -- Class A Shares" above. In
addition, to the extent that the aggregate service and distribution fees paid
under the Distribution Plan do not exceed 0.35% per annum of the average daily
net assets of the Fund attributable to Class A shares, the Fund is permitted to
pay such distribution-related expenses or other distribution-related expenses.
CLASS B SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by the Fund with respect to such
shares for the first year after purchase. Dealers will become eligible to
receive the ongoing 0.25% per annum service fee with respect to such shares
commencing in the thirteenth month following purchase.
Under the Distribution Plan, the Fund pays MFD a distribution fee equal, on an
annual basis, to 0.75% of the Fund's average daily net assets attributable to
Class B shares. As noted above, this distribution fee may be used by MFD to
cover its distribution-related expenses under its distribution agreement with
the Fund (including the 3.75% commission it pays to dealers upon purchase of
Class B shares, as described under "Purchases -- Class B Shares" above).
CLASS C SHARES. Class C shares are offered at net asset value without an
initial sales charge but subject to a CDSC of 1.00% upon redemption 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 Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan, equal, on an annual basis, to 0.75% of
the Fund's average daily net assets attributable to Class C shares.
CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES: The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.25%,
1.00% and 1.00%, per annum, respectively. MFD is currently waiving its right to
receive the 0.10% per annum Class A distribution fee.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. If the Fund earns less than
projected, or otherwise distributes more than its earnings for the year, a
portion of the distributions may constitute a return of capital. The Fund may
make one or more distributions during the calendar year to its shareholders from
any long-term capital gains and may also make one or more distributions during
the calendar year to its shareholders from short-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made. See "Tax Status" and "Shareholder Services -- Distribution
Options" below. Distributions paid by the Fund with respect to Class A shares
will generally be greater than those paid with respect to Class B and Class C
shares because expenses attributable to Class B and Class C shares will
generally be higher.
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TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
net investment income and net realized capital gains to its shareholders in
accordance with the timing requirements imposed by the Code, it is not expected
that the Fund will be required to pay federal income or excise taxes, although
the Fund's foreign-source income may be subject to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. A portion of the dividends received from the Fund (but none
of the Fund's capital gains distributions) may qualify for the dividends
received deduction for corporations.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year, including the portion taxable as ordinary income,
the portion taxable as long-term capital gain, the portion, if any, representing
a return of capital (which is free of current taxes but results in a basis
reduction), and the amount, if any, of federal income tax withheld.
Fund distributions will reduce the Fund's net asset value per share.
Shareholders who buy shares shortly before the Fund makes a distribution may
thus pay the full price for the shares and then effectively receive a portion of
the purchase price back as a taxable distribution.
The Fund intends to withhold U.S. federal income tax at the rate of 30% on
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S., regardless
of whether a lower rate may be permitted under an applicable treaty. The Fund is
also required in certain circumstances to apply backup withholding at the rate
of 31% on taxable dividends and redemption proceeds paid to any shareholder
(including a shareholder who is neither a citizen nor a resident of the U.S.)
who does not furnish to the Fund certain information and certifications or who
is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments that have been subject to 30% withholding.
Prospective investors should read the Fund's Account Application for additional
information regarding backup withholding of federal income tax and should
consult their own tax advisers as to the tax consequences to them of an
investment in the Fund.
NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received 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 Fund (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Fund; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Fund; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution,
23
<PAGE> 227
recording and settlement of portfolio security transactions; insurance premiums;
fees and expenses of State Street Bank and Trust Company, the Fund's custodian,
for all services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating the net asset
value of shares of the Fund; and expenses of shareholder meetings. Expenses
relating to the issuance, registration and qualification of shares of the Fund
and the preparation, printing and mailing of prospectuses are borne by the Fund
except that the 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 Fund such that the
Fund's aggregate operating expenses do not exceed, on an annualized basis, 1.50%
of the average daily net assets with respect to Class A shares, 2.25% of the
average daily net assets with respect to Class B shares, and 2.25% of the
average daily net assets with respect to Class C shares. Such payments by MFS
are subject to reimbursement by the 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 the Fund would not exceed, on an annualized basis, 1.50%
of the average daily net assets with respect to Class A shares, 2.25% of the
average daily net assets with respect to Class B shares, and 2.25% of the
average daily net assets with respect to Class C shares. The expense
reimbursement agreement terminates for the 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.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund has three classes of shares which it offers to the general public,
entitled Class A, Class B and Class C shares of Beneficial Interest (without par
value). The Fund also has a class of shares, which it offers exclusively to
certain institutional investors, entitled Class I shares. 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 the Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Trust's
Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of a class of the Fund represents an equal proportionate interest in
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 the Fund be liquidated, shareholders of each class are
entitled to share pro rata in the net assets attributable to that class
available for distribution to shareholders. Shares will remain on deposit with
the Shareholder Servicing Agent and certificates will not be issued except in
connection with pledges and assignments and in certain other limited
circumstances. Certain of the MFS retirement plans own 98% of the Class A shares
of the Fund and therefore control the Fund.
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.
24
<PAGE> 228
PERFORMANCE INFORMATION
From time to time, the 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 the Fund to shareholders of that class during the
past 12 months and is computed by dividing the amount of such dividends by the
maximum public offering price of that class at the end of such period. Current
distribution rate calculations for Class B and Class C shares 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 premium income from option writing, short-term capital
gains, and return of invested capital, and is calculated over a different period
of time. Total rate of return quotations will reflect the average annual
percentage change over stated periods in the value of an investment in each
class of shares of the Fund made at the maximum public offering price of 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. The Fund offers multiple classes of shares which were
initially offered for sale to the public on different dates. The calculation of
total rate of return for a class of shares which initially was offered for sale
to the public subsequent to another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from the date it initially was
offered for sale to the public and (ii) the performance of the Fund's oldest
class from the date it initially was offered for sale to the public up to the
date that the newer class initially was offered for sale to the public. See the
SAI for further information on the calculation of total rate of return for share
classes initially offered for sale to the public on different dates.
All performance quotations are based on historical performance and are not
intended to indicate future performance. Yield reflects only net portfolio
income as of a stated period of time and current distribution rate reflects only
the rate of distributions paid by the Fund over a stated period of time, while
total rate of return reflects all components of investment return over a stated
period of time. The Fund's quotations may from time to time be used in
advertisements, shareholder reports or other communications to shareholders. For
a discussion of the manner in which the Fund will calculate its yield, current
distribution rate and total rate of return, see the SAI. For further information
about the Fund's performance for the fiscal year ended August 31, 1996, please
see the Fund's annual report. A copy of the Fund's annual report may be obtained
without charge by contacting the Shareholder Servicing Agent (see back cover for
address and phone number). In addition to information provided in shareholder
reports, the Fund may, in its discretion, from time to time, make a list of all
or a portion of its holdings available to investors upon request.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number). A shareholder
whose shares are held in the name of, or controlled by, a dealer might not
receive many of the privileges and services from the Fund (such as Right of
Accumulation, Letter of Intent and certain recordkeeping services) that the Fund
ordinarily provides.
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").
25
<PAGE> 229
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 the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, or
the shareholder does not respond to mailings from the Shareholder Servicing
Agent with regard to uncashed distribution checks, such shareholder's
distribution option will automatically be converted to having all dividends and
other distributions reinvested in additional shares. Any request to change a
distribution option must be received by the Shareholder Servicing Agent by the
record date for a dividend or distribution in order to be effective for that
dividend or distribution. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
INVESTMENT AND WITHDRAWAL PROGRAMS -- For the convenience of shareholders, the
Fund makes available the following programs designed to enable shareholders to
add to their investment in an account with the Fund or withdraw from it with a
minimum of paper work. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser as
described in the SAI) anticipates purchasing $50,000 or more of Class A shares
of the Fund alone or in combination with shares of Class B or Class C shares of
the 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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): -- Shareholders
of any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege
known as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to
call MFS and have money transferred from a checking or savings account into
their MFS account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of any class of shares of that
shareholder in the MFS Funds or MFS Fixed Fund (a bank collective investment
fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by the Fund may be
automatically invested at net asset value 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).
26
<PAGE> 230
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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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 the 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 Fund's SAI, dated January 1, 1997, as amended or supplemented from time to
time, contains more detailed information about the Fund, including, but not
limited to, information related to: (i) the 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 Plan; and (vii)
various services and privileges provided by the Fund for the benefit of its
shareholders, including additional information with respect to the exchange
privilege.
27
<PAGE> 231
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 Institutional Advisors, 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.
A-1
<PAGE> 232
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will constitute
new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or certain
participant expenses) of the 401(a) or ESP Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS FUNDamental
401(k) Plan or another similar recordkeeping system made available by the
Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in one
or more of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan first invests
its assets in one or more of the MFS Funds. The sales charges will be
waived in the case of a redemption of all of the 401(a) or ESP Plan's
shares in all MFS Funds (i.e., all the assets of the 401(a) or ESP Plan
invested in the MFS Funds are withdrawn), unless immediately prior to the
redemption, the aggregate amount invested by the 401(a) or ESP Plan in
shares of the MFS Funds (excluding the reinvestment of distributions)
during the prior four years equals 50% or more of the total value of the
401(a) or ESP Plan's assets in the MFS Funds, in which case the sales
charges will not be waived.
SECTION 403(b) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
A-2
<PAGE> 233
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. INVESTMENT OF REDEMPTION PROCEEDS FROM UNAFFILIATED MUTUAL FUNDS
- Shares acquired through the investment of redemption proceeds from another
open-end management investment company not distributed or managed by MFD or
its affiliates if: (i) the investment is made through a dealer and
appropriate documentation is submitted to MFD; (ii) the redeemed shares
were subject to an initial sales charge or deferred sales charge (whether
or not actually imposed); (iii) the redemption occurred no more than 90
days prior to the purchase of Class A shares; and (iv) the MFS Fund, MFD
or its affiliates have not agreed with such company or its affiliates,
formally or informally, to waive sales charges on Class A shares or
provide any other incentive with respect to such redemption and sale.
2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares be
sold for the sole benefit of clients participating in a "wrap" account or a
similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD or
one of its affiliates to perform certain administrative services, subject
to certain operational and minimum size requirements specified from time to
time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of 59 1/2
years old; and
- Tax-free returns of excess IRA contributions.
401(a) PLANS
- Distributions made on or after the 401(a) Plan participant has attained the
age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with certain
automatic withdrawals from a 401(a) Plan.
A-3
<PAGE> 234
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-4
<PAGE> 235
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 LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund[servicemark]
MFS[registered trademark] Research Growth
and Income Fund
500 Boylston Street
Boston, MA 02116
MRG-1-1/97/205M
[MFS LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund[servicemark]
MFS[registered trademark] Research Growth
and Income Fund
Prospectus
January 1, 1997
[graphic omitted]
<PAGE> 236
<TABLE>
<S> <C>
[MFS LOGO]
We invented the mutual fund[servicemark]
MFS[Registered Trademark] RESEARCH GROWTH STATEMENT OF
AND INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds[Registered Trademark]) January 1, 1997
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
Investment Techniques............................................................... 2
3. Management of the Fund................................................................ 14
Trustees............................................................................ 15
Officers............................................................................ 15
Investment Adviser.................................................................. 16
Custodian........................................................................... 16
Shareholder Servicing Agent......................................................... 16
Distributor......................................................................... 16
4. Portfolio Transactions and Brokerage Commissions...................................... 17
5. Shareholder Services.................................................................. 18
Investment and Withdrawal Programs.................................................. 18
Exchange Privilege.................................................................. 21
Tax-Deferred Retirement Plans....................................................... 21
6. Tax Status............................................................................ 22
7. Distribution Plan..................................................................... 23
8. Determination of Net Asset Value and Performance...................................... 24
9. Description of Shares, Voting Rights and Liabilities.................................. 26
10. Independent Auditors and Financial Statements......................................... 27
Appendix A -- Trustee Compensation Table.............................................. A-1
</TABLE>
MFS[Registered Trademark] RESEARCH GROWTH AND INCOME FUND
A series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
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 Fund's 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> 237
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Research Growth and In-
come Fund, a diversified
series of the Trust.
"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 the "Adviser" -- Massachusetts Financial
Services Company, a
Delaware corporation.
"MFD" -- MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1997, as
amended or supplemented
from time to time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
INVESTMENT OBJECTIVE AND POLICIES. The investment objective and policies of the
Fund are described in the Prospectus and below. The following discussion of the
Fund's investment techniques and restrictions supplements, and should be read in
conjunction with, the information set forth in the "Investment Objective and
Policies," "Investment Techniques" and "Additional Risk Factors" sections of the
Prospectus.
INVESTMENT TECHNIQUES
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities. Such loans will usually be made only to member
firms (and subsidiaries thereof) of the New York Stock Exchange (the "Exchange")
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). The 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 the Fund's net
assets.
REPURCHASE AGREEMENTS: The 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 the Fund purchases and holds
through its agent are U.S. Government securities, the values of which are equal
to or greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: The Fund may purchase securities on a "when-issued" or
on a "forward delivery" basis. When the 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 the Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment,
the Fund will always have cash, short-term money market instruments or high
quality debt securities (if consistent with the Fund's investment policies)
sufficient to cover any commitments or to limit any potential risk. Although the
Fund
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does not intend to make such purchases for speculative purposes and intends to
adhere to the provisions of the SEC policy, purchases of securities on such
bases may involve more risk than other types of purchases. For example, the Fund
may have to sell assets which have been set aside in order to meet redemptions.
Also, if the Fund determines it 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: The 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, the Fund may receive interest or dividend
payments, or the proceeds of the sale or redemption of such securities, in the
foreign currencies in which such securities are denominated. Under certain
circumstances, such as where the Adviser believes that the applicable exchange
rate is unfavorable at the time the currencies are received or the Adviser
anticipates, for any other reason, that the exchange rate will improve, the Fund
may hold such currencies for an indefinite period of time. While the holding of
currencies will permit the Fund to take advantage of favorable movements in the
applicable exchange rate, such strategy also exposes the Fund to risk of loss if
exchange rates move in a direction adverse to the Fund's position. Such losses
could reduce any profits or increase any losses sustained by the Fund from the
sale or redemption of securities and could reduce the dollar value of interest
or dividend payments received.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depository (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depository which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositories. Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depository of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depository receipts in the U.S. can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the 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.
INDEXED SECURITIES: The Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, precious metals
or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity (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: The Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates,
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or other factors such as securities prices or inflation rates. Swap agreements
can take many different forms and are known by a variety of names. The Fund is
not limited to any particular form or variety of swap agreement if MFS
determines it is consistent with the Fund's investment objective and policies.
The Fund will maintain cash or appropriate liquid assets with its custodian to
cover its current obligations under swap transactions. If the Fund enters into a
swap agreement on a net basis (i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments), the Fund will maintain cash or liquid assets with its
custodian with a daily value at least equal to the excess, if any, of the Fund's
accrued obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, it will maintain cash or liquid assets with
a value equal to the full amount of the Fund's accrued obligations under the
agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Fund would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Fund, the Fund must be prepared to make such 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, the Fund's risk of loss consists of the net amount
of payments that the Fund is contractually entitled to receive. The Fund
anticipates that it will be able to eliminate or reduce its exposure under these
arrangements by assignment or other disposition or by entering into an
offsetting agreement with the same or another counterparty.
OPTIONS ON SECURITIES: The Fund may write (sell) covered put and call options,
and purchase put and call options, on securities. Call and put options written
by the Fund may be covered in the manner set forth below.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds a call on the same security and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash, short-term money market instruments or high quality debt
securities in a segregated account with its custodian. A put option written by
the Fund is "covered" if the Fund maintains cash, short-term money market
instruments or high-quality debt securities with a value equal to the exercise
price in a segregated account with its custodian, or else holds a put on the
same security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price of
the put written or where the exercise price of the put held is less than the
exercise price of the put written if the difference is maintained by the Fund in
cash, short-term money market instruments or high-quality debt securities in a
segregated account with its custodian. Put and call options written by the Fund
may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both, or in the case of a written
put option will permit the Fund to write another put option to the extent that
the exercise price thereof is secured by deposited cash, short-term money market
instruments or high-quality debt securities. Such transactions permit the Fund
to generate additional premium income, which will partially offset declines in
the value of portfolio securities or increases in the cost of securities to be
acquired. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments of the Fund, provided that another option on such security is
not written. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction in connection with the option prior to or concurrent with the sale
of the security.
The Fund will realize a profit from a closing transaction if the premium paid in
connection with the closing of an option written by the Fund is less than the
premium received from writing the option, or if the premium received in
connection with the closing of an option purchased by the Fund is more than the
premium paid for the original purchase. Conversely, the Fund will suffer a loss
if the premium paid or received in connection with a closing transaction is more
or less, respectively, than the premium received or paid in establishing the
option position. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option previously written by the
Fund is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call 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
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written. Buy-and-write transactions using in-the-money call options may be used
when it is expected that the price of the underlying security will decline
moderately during the option period. Buy-and-write transactions using
out-of-the-money call options may be used when it is expected that the premiums
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price, less related transaction costs. If the options are not exercised and the
price of the underlying security declines, the amount of such decline will be
offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received, less related transaction costs. If the market price of the underlying
security declines or otherwise is below the exercise price, the Fund may elect
to close the position or retain the option until it is exercised, at which time
the Fund will be required to take delivery of the security at the exercise
price; the Fund's return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price, which could result in a loss. Out-of-the-money, at-the-money and
in-the-money put options may be used by the Fund in the same market environments
that call options are used in equivalent buy-and-write transactions.
The Fund may also write combinations of put and call options on the same
security, known as "straddles," with the same exercise price and expiration
date. By writing a straddle, the Fund undertakes a simultaneous obligation to
sell and purchase the same security in the event that one of the options is
exercised. If the price of the security subsequently rises sufficiently above
the exercise price to cover the amount of the premium and transaction costs, the
call will likely be exercised and the Fund will be required to sell the
underlying security at a below market price. This loss may be offset, however,
in whole or part, by the premiums received on the writing of the two options.
Conversely, if the price of the security declines by a sufficient amount, the
put will likely be exercised. The writing of straddles will likely be effective,
therefore, only where the price of the security remains stable and neither the
call nor the put is exercised. In those instances where one of the options is
exercised, the loss on the purchase or sale of the underlying security may
exceed the amount of the premiums received.
By writing a call option, the Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price above its
then-current market value, resulting in a capital loss unless the security
subsequently appreciates in value. The writing of options on securities will not
be undertaken by the Fund solely for hedging purposes, and could involve certain
risks which are not present in the case of hedging transactions. Moreover, even
where options are written for hedging purposes, such transactions constitute
only a partial hedge against declines in the value of portfolio securities or
against increases in the value of securities to be acquired, up to the amount of
the premium.
The Fund may 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 the
Fund to sell the securities at the exercise price, or to close out the options
at a profit. By using put options in this way, the Fund will reduce any profit
it might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
The Fund may 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 the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Fund's assets (the "SEC illiquidity ceiling"). Although the
Adviser disagrees with this position, the Adviser intends to limit the Fund's
writing of over-the-counter options in accordance with the following procedure.
Except as provided below, the Fund intends to write over-the-counter options
only with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts 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. The Fund will treat all or a
part of the formula price as illiquid for purposes of the SEC illiquidity
ceiling. The Fund may also write over-the-counter options with non-primary
dealers, including foreign dealers, and will treat the assets used to cover
these options as illiquid for purposes of such SEC illiquidity ceiling.
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RESET OPTIONS: In certain instances, the Fund may enter into options on U.S.
Treasury securities which provide for periodic adjustment of the strike price
and may also provide for the periodic adjustment of the premium during the term
of each such option. Like other types of options, these transactions, which may
be referred to as "reset" options or "adjustable strike" options grant the
purchaser the right to purchase (in the case of a call) or sell (in the case of
a put), a specified type 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: The Fund may write (sell) covered call and put options
and purchase call and put options on stock indices. In contrast to an option on
a security, an option on a stock index provides the holder with the right but
not the obligation to make or receive a cash settlement upon exercise of the
option, rather than the right to purchase or sell a security. The amount of this
settlement is equal to (i) the amount, if any, by which the fixed exercise price
of the option exceeds (in the case of a call) or is below (in the case of a put)
the closing value of the underlying index on the date of exercise, multiplied by
(ii) a fixed "index multiplier."
The Fund may cover call options on stock indices by owning securities whose
price changes, in the opinion of the Adviser, are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio. Where the Fund
covers a call option on a stock index through ownership of securities, such
securities may not match the composition of the index and, in that event, the
Fund will not be fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. The Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, short-term money market instruments or
high-quality debt securities in a segregated account with its custodian. The
Fund may cover put options on stock indices by maintaining cash, short-term
money market instruments or high-quality debt securities with a value equal to
the exercise price in a segregated account with its custodian, or by holding a
put on the same stock index and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written or where the exercise price of the put held is
less than the exercise price of the put written if the difference is maintained
by the Fund in cash, short-term money market instruments or high-quality debt
securities in a segregated account with its custodian. Put and call options on
stock indices may also be covered in such other manner as may be in accordance
with the rules of the exchange on which, or the counterparty with which, the
option is traded and applicable laws and regulations.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of an index on which the Fund has
written a call option falls or remains the same, the Fund will realize a profit
in the form of the premium received (less transaction costs) that could offset
all or a portion of any decline in the value of the securities it owns. If the
value of the index rises, however, the Fund will realize a loss in its call
option position, which will reduce the benefit of any unrealized appreciation in
the Fund's stock investments. By writing a put option, the Fund assumes the risk
of a decline in the index. To the extent that the price changes of securities
owned by the Fund correlate with changes in the value of the index, writing
covered put options on indices will increase the Fund's losses in the event of a
market decline, although such losses will be offset in part by the premium
received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
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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: The Fund may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, the Fund may purchase or write such options for
hedging purposes. For example, the Fund may purchase a call option on the yield
spread between two securities, if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. The Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of the Adviser, the Fund will
be able to profit from movements in the spread between the yields of the
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a direction or to
an extent which was not anticipated. Yield curve options written by the Fund
will be "covered." A call (or put) option is covered if the Fund holds another
call (or put) option on the spread between the same two securities and maintains
in a segregated account with its custodian cash or cash equivalents sufficient
to cover the Fund's net liability under the two options. Therefore, the Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed. Because these securities are traded
over-the-counter, the SEC has taken the position that yield curve options are
illiquid and, therefore, cannot exceed the SEC illiquidity ceiling. (See
"Options on Securities.")
FUTURES CONTRACTS: The 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. 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 the Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, the Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When the Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will
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purchase such securities upon termination of the futures position, but under
unusual market conditions, a long futures position may be terminated without a
related purchase of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on the Fund's current or intended
investments in fixed income securities. For example, if the Fund owned long-term
bonds and interest rates were expected to increase, the Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in the
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds,
the Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and the Fund's cash reserves could then be
used to buy long-term bonds on the cash market. The Fund could accomplish
similar results by selling bonds with long maturities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of
interest rate futures contracts as a hedging technique allows the Fund to hedge
its interest rate risk without having to sell its portfolio securities.
As noted in the Prospectus, the Fund may purchase and sell foreign currency
futures contracts for hedging purposes, to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such
fluctuations could reduce the dollar value of portfolio securities denominated
in foreign currencies, or increase the cost of foreign-denominated securities to
be acquired, even if the value of such securities in the currencies in which
they are denominated remains constant. The Fund may sell futures contracts on a
foreign currency, for example, where it holds securities denominated in such
currency and it anticipates a decline in the value of such currency relative to
the dollar. In the event such decline occurs, the resulting adverse effect on
the value of foreign-denominated securities may be offset, in whole or in part,
by gains on the futures contracts.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. Where the Fund purchases futures contracts under such
circumstances, however, and the prices of securities to be acquired instead
decline, the Fund will sustain losses on its futures position which could reduce
or eliminate the benefits of the reduced cost of portfolio securities to be
acquired.
FORWARD CONTRACTS: The 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. The 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 the Fund seeks
to protect against an anticipated increase in the exchange rate for a specific
currency which could reduce the dollar value of portfolio securities denominated
in such currency. Conversely, the Fund may enter into a Forward Contract to
purchase a given currency to protect against a projected increase in the dollar
value of securities denominated in such currency which the Fund intends to
acquire.
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. The 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.
The Fund has established procedures consistent with statements by the SEC and
its staff regarding the use of Forward Contracts by registered investment
companies, which require the use of segregated assets or "cover" in connection
with the purchase and sale of such Contracts. In those instances in which the
Fund satisfies this requirement through segregation of assets, it will maintain,
in a segregated account, cash, cash equivalents or high grade debt securities,
which will be marked to market on a daily basis, in an amount equal to the value
of its commitments under Forward Contracts.
OPTIONS ON FUTURES CONTRACTS: The 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
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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 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 the 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 exchange clearinghouse. In addition, Options on Futures
Contracts may be traded on foreign exchanges. The Fund may cover the writing of
call Options on Futures Contracts (a) through purchases of the underlying
Futures Contract, (b) through ownership of the instrument, or instruments
included in the index, underlying the Futures Contract, or (c) through the
holding of a call on the same Futures Contract and in the same principal amount
as the call written where the exercise price of the call held (i) is equal to or
less than the exercise price of the call written or (ii) is greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash or securities in a segregated account with its custodian. The Fund may
cover the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of cash, short-term money
market instruments or high quality debt securities in an amount equal to the
value of the security or index underlying the Futures Contract, or (c) through
the holding of a put on the same Futures Contract and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written or where the exercise
price of the put held is less than the exercise price of the put written if the
difference is maintained by the Fund in cash, short-term money market
instruments or high quality debt securities in a segregated account with its
custodian. Put and call Options on Futures Contracts may also be covered in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Upon the exercise of a
call Option on a Futures Contract written by the Fund, the Fund will be required
to sell the underlying Futures Contract which, if the Fund has covered its
obligation through the purchase of such Contract, will serve to liquidate its
futures position. Similarly, where a put Option on a Futures Contract written by
the Fund is exercised, the Fund will be required to purchase the underlying
Futures Contract which, if the Fund has covered its obligation through the sale
of such Contract, will close out its futures position.
The writing of a call option on a Futures Contract for hedging purposes
constitutes a partial hedge against declining prices of the securities or other
instruments required to be delivered under the terms of the Futures Contract. If
the futures price at expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium, less related transaction
costs, which provides a partial hedge against any decline that may have occurred
in the Fund's portfolio holdings. The writing of a put option on a Futures
Contract constitutes a partial hedge against increasing prices of the securities
or other instruments required to be delivered under the terms of the Futures
Contract. If the futures price at expiration of the option is higher than the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities which
the Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and the changes in the value of its
futures positions, the Fund's losses from existing Options on Futures Contracts
may to some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures Contracts for hedging purposes instead
of purchasing or selling the underlying Futures Contracts. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
could, in lieu of selling Futures Contracts, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or in part, by a
profit on the option. Conversely, where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due to
a market advance or changes in interest or exchange rates, the Fund could
purchase call Options on Futures Contracts, rather than purchasing the
underlying Futures Contracts.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or Forward Contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole in
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part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund deriving from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates. The Fund may write options on foreign
currencies for the same types of hedging purposes. For example, where the Fund
anticipates a decline in the dollar value of foreign-denominated securities due
to adverse fluctuations in exchange rates it could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in
value of portfolio securities will be offset by the amount of the premium
received 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, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by the
Fund will generally be covered in a manner similar to the covering of other
types of options. As in the case of other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction. If this
does not occur, the option may be exercised and the Fund would be required to
purchase or sell the underlying currency at a loss which may not be offset by
the amount of the premium. Through the writing of options on foreign currencies,
the Fund also may be required to 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 THE FUND'S
PORTFOLIO -- The 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 the Fund purchases a put option on an index and the index
decreases less than the value of the hedged securities, the Fund would
experience a loss which is not completely offset by the put option. It is also
possible that there may be a negative correlation between the index or
obligation underlying an option or Futures Contract in which the Fund has a
position and the portfolio securities the Fund is attempting to hedge, which
could result in a loss on both the portfolio and the hedging instrument. In
addition, the Fund may enter into transactions in Forward Contracts or options
on foreign currencies in order to hedge against exposure arising from the
currencies underlying such 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 the
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,
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the Fund is subject to the risk of market movements between the time that the
option is exercised and the time of performance thereunder. This could increase
the extent of any loss suffered by the Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract, the
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where the Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of the Fund's portfolio. When the Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, the Fund may be
required to 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, the Fund's overall return may be
lower than if it had not engaged in the hedging transactions.
The Fund 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 Fund will only write
covered options, such that cash or securities necessary to satisfy an option
exercise will be segregated at all times, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. Nevertheless, the method
of covering an option employed by the Fund may not fully protect it against risk
of loss and, in any event, the Fund could suffer losses on the option position
which might not be offset by corresponding portfolio gains. 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, the Fund incurs the risk
that the price of the underlying security will not remain stable, that one of
the options written will be exercised and that the resulting loss will not be
offset by the amount of the premiums received. Such transactions, therefore,
create an opportunity for increased return by providing the Fund with two
simultaneous premiums on the same security, but involve additional risk, since
the Fund may have an option exercised against it regardless of whether the price
of the security increases or decreases.
RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET -- Prior to exercise or
expiration, a futures or option position can only be terminated by entering into
a closing purchase or sale transaction. This requires a secondary market for
such instruments on the exchange on which the initial transaction was entered
into. While the Fund will enter into options or futures positions only if there
appears to be a liquid secondary market therefor, there can be no assurance that
such a market will exist for any particular contract at any specific time. In
that event, it may not be possible to close out a position held by the Fund, and
the Fund could be required to purchase or sell the instrument underlying an
option, make or receive a cash settlement or meet ongoing variation margin
requirements. Under such circumstances, if the Fund has insufficient cash
available to meet margin requirements, it will be necessary to liquidate
portfolio securities or other assets at a time when it is disadvantageous to do
so. The inability to close out options and futures positions, therefore, could
have an adverse impact on the Fund's ability effectively to hedge its portfolio,
and could result in trading losses.
The liquidity of a secondary market in a Futures Contract or option thereon may
be adversely affected by "daily price fluctuation limits," established by
exchanges, which limit the amount of fluctuation in the price of a contract
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures or option positions and requiring
traders to make additional margin deposits. Prices have in the past moved 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
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can result in substantial unrealized gains or losses. Where the Fund enters into
such transactions for hedging purposes, any losses incurred in connection
therewith should, if the hedging strategy is successful, be offset, in whole or
in part, by increases in the value of securities or other assets held by the
Fund or decreases in the prices of securities or other assets the Fund intends
to acquire. Where the Fund enters into such transactions for other than hedging
purposes, the margin requirements associated with such transactions could expose
the Fund to greater risk.
TRADING AND POSITION LIMITS -- The 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 the Fund assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.
RISKS OF TRANSACTIONS RELATED TO FOREIGN CURRENCIES AND TRANSACTIONS NOT
CONDUCTED ON U.S. EXCHANGES -- Transactions in Forward Contracts on foreign
currencies, as well as futures and options on foreign currencies and
transactions executed on foreign exchanges, are subject to all of the
correlation, liquidity and other risks outlined above. In addition, however,
such transactions are subject to the risk of governmental actions affecting
trading in or the prices of currencies underlying such contracts, which could
restrict or eliminate trading and could have a substantial adverse effect on the
value of positions held by the Fund. Further, the value of such positions could
be adversely affected by a number of other complex political and economic
factors applicable to the countries issuing the underlying currencies.
Further, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying contracts thereon. As a result, the available information
on which trading systems will be based may not be as complete as the comparable
data on which the Fund makes investment and trading decisions in 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 the Fund in Futures Contracts and
exchange-traded options, options on foreign currencies, Forward Contracts and
over-the-counter options on securities are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the SEC. To the contrary, such instruments are traded through financial
institutions acting as market-makers, although foreign currency options are also
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of Forward Contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of the
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and the Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and the Fund will
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therefore be subject to the risk of default by, or the bankruptcy of, the
financial institution serving as its counterparty. One or more of such
institutions also may decide to discontinue their role as market-makers in a
particular currency or security, thereby restricting the Fund's ability to enter
into desired hedging transactions. The Fund will enter into an over-the-counter
transaction only with parties whose creditworthiness has been reviewed and found
satisfactory by the Adviser.
Options on securities, options on stock 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 the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS -- In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that the Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
The Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of the Fund's total assets. In addition, the 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 the Fund purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby ensuring that the leveraging effect of such Futures Contract is
minimized.
The 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.
The policies stated above are not fundamental and may be changed without
shareholder approval, as may the Fund's investment objective.
INVESTMENT RESTRICTIONS -- The Fund has adopted the following restrictions which
cannot be changed without the approval of the holders of a majority of the
Fund's shares (which, as used in this SAI, means the lesser of (i) more than 50%
of the outstanding shares of the Trust or a 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):
The Fund may not:
(1) borrow amounts in excess of 33 1/3 of its assets including amounts
borrowed;
(2) underwrite securities issued by other persons except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein and securities
of companies, such as real estate investment trusts, which deal in real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (excluding Options, Options on Futures Contracts, Options
on Stock Indices, Options on Foreign Currency and any other type of option,
Futures Contracts, any other type of futures contract, and Forward Contracts)
in the ordinary course of its business. The Fund reserves the freedom of action
to hold and to sell real estate, mineral leases, commodities or commodity
contracts (including Options, Op-
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tions 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 Investment Company
Act of 1940, as amended (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 the
Fund's assets in repurchase agreements, shall not be considered the making of a
loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its 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, the Fund has the following nonfundamental policies which may be
changed without shareholder approval. The Fund will not:
(1) invest in illiquid investments, including securities subject to legal or
contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of unlisted
securities, where no market exists), if more than 15% of the Fund's net assets
(taken at market value) would be invested in such securities. Repurchase
agreements maturing in more than seven days will be deemed to be illiquid for
purposes of the Fund's limitation on investment in illiquid securities.
Securities that are not registered under the 1933 Act and sold in reliance on
Rule 144A thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% limitation;
(2) invest more than 5% of the value of the Fund's net assets, valued at the
lower of cost or market, in warrants. Included within such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York or American Stock Exchange. Warrants acquired by the
Fund in units or attached to securities may be deemed to be without value;
(3) 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 the Trust,
or is an officer or a director of the investment adviser of the Fund, if one or
more of such persons also owns beneficially more than 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 the Fund may obtain such short-term credit as may be necessary for the
clearance of any transaction and except that the Fund may make margin deposits
in connection with any type of option (including Options on Futures Contracts,
Options, Options on Stock Indices and Options on Foreign Currencies), any short
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, indices 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 FUND
The Trust's Board of Trustees provides broad supervision over the affairs of the
Fund. The Adviser is responsible for the investment management of the Fund's
assets, and the officers of the Trust are responsible for 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.)
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TRUSTEES
A. KEITH BRODKIN,* Chairman and President
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY*
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (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, Senior Vice President and
Associate General Counsel
- ---------------
*"Interested persons" (as defined in the 1940 Act) of the Adviser, whose address
is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
While the Fund pays the compensation of the non-interested Trustees and Mr.
Bailey, the Trustees are currently waiving their rights to receive such fees.
The 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. The Fund will accrue its allocable portion of compensation expenses
under the retirement plan each year to cover the current year's service and
amortize past service cost.
Set forth in Appendix A hereto is certain information concerning the cash
compensation paid by the Fund during its current fiscal year to the Trustees.
As of November 30, 1996, the Trustees and officers as a group owned less than 1%
of the Fund's shares, not including 45,491.377 Class A shares of the Fund (which
represent approximately 98% of the outstanding shares of the Fund) owned of
record by certain employee benefit plans of MFS of which Messrs. Brodkin, Scott
and Shames are Trustees.
As of November 30, 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 98% of the outstanding Class A
shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to 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.
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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 the Fund pursuant to an
Investment Advisory Agreement, dated January 2, 1996 (the "Advisory Agreement").
The Adviser provides the Fund with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Trustees may determine, the Adviser makes investment decisions
for the Fund. For these services and facilities, the Adviser receives an annual
management fee, computed and paid monthly, as disclosed in the Prospectus under
the heading "Management of the Funds."
For the period from the commencement of investment operations on January 2, 1996
to the Fund's fiscal year end of August 31, 1996, the Adviser waived its right
to receive management fees from the Fund.
In order to comply with the expense limitations of certain state securities
commissions, the Adviser will reduce its management fee or otherwise reimburse
the Fund for any expenses, exclusive of interest, taxes and brokerage
commissions, incurred by the Fund in any fiscal year to the extent such expenses
exceed the most restrictive of such state expense limitations. The Adviser will
make appropriate adjustments to such reimbursements in response to any amendment
or rescission of the various state requirements.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement 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
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. The Advisory
Agreement terminates automatically if it is assigned and may be terminated
without penalty by vote of a majority of the Fund's shares (as defined in
"Investment Objectives, Policies and Restrictions"), or by either party on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
provides that if MFS ceases to serve as the Adviser to the Fund, the Fund will
change its name so as to delete the initials "MFS" and that MFS may render
services to others and may permit other fund clients to use the initials "MFS"
in their names. The Advisory Agreement also provides that neither the Adviser
nor its personnel shall be liable for any error of judgment or mistake of law or
for any loss arising out of any investment or for any act or omission in the
execution and management of the Fund, except for willful misfeasance, bad faith
or gross negligence in the performance of its or their duties or by reason of
reckless disregard of its or their obligations and duties under the Advisory
Agreement.
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of the
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities, determining income and collecting interest and dividends on the
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and accounts, and calculating the daily net
asset value of each class of shares of the Fund. The Custodian does not
determine the investment policies of the Fund or decide which securities the
Fund will buy or sell. The Fund may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. The Custodian also acts as the dividend disbursing agent of the
Fund. The Custodian has contracted with the Adviser for the Adviser to perform
certain accounting functions related to options transactions for which the
Adviser receives remuneration on a cost basis.
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc. (the "Shareholder Servicing Agent"), a wholly owned
subsidiary of MFS, is the Fund's shareholder servicing agent, pursuant to 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 the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.13%. In addition, the Shareholder Servicing
Agent will be reimbursed by the Fund for certain expenses incurred by the
Shareholder Servicing Agent on behalf of the Fund. 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 the 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 the Fund to
dealers. The public offering price of Class A shares of the Fund is their net
asset value next computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of a Class A share of the
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Fund is calculated by dividing the net asset value of a Class A share by the
difference (expressed as a decimal) between 100% and the sales charge percentage
of offering price applicable to the purchase (see "Purchases" in the
Prospectus). The sales charge scale set forth in the Prospectus applies to
purchases of Class A shares of the Fund alone or in combination with shares of
all classes of certain other funds in the MFS Family of Funds (the "MFS Funds")
and other funds (as noted under Right of Accumulation) by any person, including
members of a family unit (e.g., husband, wife and minor children) and bona fide
trustees, and also applies to purchases made under the Right of Accumulation or
a Letter of Intent (see "Investment and Withdrawal Programs" below). A group
might qualify to obtain quantity sales charge discounts (see "Investment and
Withdrawal Programs" below).
Class A shares of the Fund may be sold at their net asset value to certain
persons and in certain instances, as described in the Prospectus. Such sales are
made without a sales charge to promote good will with employees and others with
whom MFS, MFD and/or the Fund have business relationships, and because the sales
effort, if any, involved in making such sales is negligible.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price of the Class A shares. Dealer allowances
expressed as a percentage of offering price for all offering prices are set
forth in the Prospectus (see "Purchases" in the Prospectus). The difference
between the total amount invested and the sum of (a) the net proceeds to the
Fund and (b) the dealer commission, is the commission paid to the distributor.
Because of rounding in the computation of offering price, the portion of the
sales charge paid to the distributor may vary and the total sales charge may be
more or less than the sales charge calculated using the sales charge expressed
as a percentage of the offering price or as a percentage of the net amount
invested as listed in the Prospectus. In the case of the maximum sales charge,
the dealer retains 5.00% and MFD retains approximately 3/4 of 1% of the public
offering price. MFD, on behalf of the Fund, pays a commission to dealers who
initiate and are responsible for purchases of $1 million or more as described in
the Prospectus.
CLASS B SHARES, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in selling
Class B, Class C and Class I shares of the Fund to dealers. The public offering
price of Class B, Class C and Class I shares is their net asset value next
computed after the sale (see "Purchases" in the Prospectus and the Prospectus
supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of the Fund to dealers. MFD may
benefit from its temporary holding of funds paid to it by investment dealers for
the purchase of Fund shares.
For the period from the commencement of investment operations on January 2, 1996
to the Fund's fiscal year end of August 31, 1996, MFD did not receive any sales
charges on sales of Class A shares of the Fund.
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.
4. PORTFOLIO TRANSACTIONS AND BROKERAGE
COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
U.S. and in some other countries debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. In other countries both debt and equity securities
are traded on exchanges at fixed commission rates. The cost of securities
purchased from underwriters includes an underwriter's commission or concession,
and the prices at which securities are purchased and sold from and to dealers
include a dealer's mark-up or mark-down. The Adviser normally seeks to deal
directly with the primary market makers or on major exchanges unless, in its
opinion, better prices are available elsewhere. Subject to the requirement of
seeking execution at the best available price, securities may, as authorized by
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 the Fund and of the other investment company clients of MFD as a factor in
the selection of broker-dealers to execute the Fund's portfolio transactions.
Under the Advisory Agreement and as permitted by Section 28(e) of the Securities
Exchange Act of 1934, the Adviser may cause 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
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for the transaction, if the Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or their respective overall responsibilities to the Fund
or to their other clients. Not all of such services are useful or of value in
advising the Fund.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto, such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of the
Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers who were selected to execute transactions on behalf of
the Fund and the Adviser's other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other factual
information or services ("Research") to the Adviser for no consideration other
than brokerage or underwriting commissions. Securities may be bought or sold
from time to time through such broker-dealers, on behalf of the Fund. The
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $39,100 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Services
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the period ended August 31, 1996, the Fund paid total brokerage commissions
of $986 on total transactions of $710,876.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for that of one or more of the other clients of the Adviser
or any subsidiary of the Adviser. Investment decisions for the Fund and for such
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed by the adviser to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. In other cases, however, the Fund believes that its ability to
participate in volume transactions will produce better executions for the Fund.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and, in certain
cases, in the Prospectus. The programs involve no extra charge to shareholders
(other than a sales charge in the case of certain Class A share purchases) and
may be changed or discontinued at any time by a shareholder or the Fund.
LETTER OF INTENT -- If a shareholder (other than a group purchaser described
below) anticipates purchasing $50,000 or more of Class A shares of the 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 share-
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holder or his dealer must inform MFD that the Letter of Intent is in effect each
time shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months (or 36 months in the
case of purchases of $1 million or more) plus the value of shares credited
toward completion of the Letter of Intent do not total the sum specified, he
will pay the increased amount of the sales charge as described below.
Instructions for issuance of shares in the name of a person other than the
person signing the Letter of Intent application must be accompanied by a written
statement from the dealer stating that the shares were paid for by the person
signing such Letter. Neither income dividends nor capital gain distributions
taken in additional shares will apply toward the completion of the Letter of
Intent. Dividends and distributions of other MFS Funds automatically reinvested
in shares of the Fund pursuant to the Distribution Investment Program will also
not apply toward completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of 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 current offering price value of
$37,500 and purchases an additional $12,500 of Class A shares of the Fund, the
sales charge for the $12,500 purchase would be at the rate of 4.75% (the rate
applicable to single transactions of $50,000). 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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): -- Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 the Fund at the net asset value in effect at the close
of business on the record date for such distributions. To initiate this service,
shares having an aggregate value of at least $5,000 either must be held on
deposit by, or certificates for such shares must be deposited with, the
Shareholder Servicing Agent. With respect to Class A shares, maintaining a
withdrawal plan concurrently with an investment program would be disadvantageous
because of the sales charges included in share purchases and the imposition of a
CDSC on certain redemptions. The share-
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holder may deposit into the account additional shares of the Fund, change the
payee or change the dollar amount of each payment. The Shareholder Servicing
Agent may charge the account for services rendered and expenses incurred beyond
those normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but one could be instituted by
the Shareholder Servicing Agent on 60 days' notice in writing to the shareholder
in the event that the Fund ceases to assume the cost of these services. The Fund
may terminate any SWP for an account if the value of the account falls below
$5,000 as a result of share redemptions (other than as a result of a SWP) or an
exchange of shares of the Fund for shares of another MFS Fund. Any SWP may be
terminated at any time by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if available for sale). Under
the Automatic Exchange Plan, exchanges of at least $50 each may be made to up to
six different funds effective on the seventh day of each month or of every third
month, depending whether monthly or quarterly exchanges are elected by the
shareholder. If the seventh day of the month is not a business day, the
transaction will be processed on the next business day. Generally, the initial
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 funds may not be available for exchanges until the
following month; therefore, care should be used to avoid inadvertently
terminating the Automatic Exchange Plan through exhaustion of the account
balance.
No transaction fee for exchanges will be charged in connection with the
Automatic Exchange Plan. However, exchanges of shares of MFS Money Market Fund,
MFS Government Money Market Fund and Class A shares of MFS Cash Reserve Fund
will be subject to any applicable sales charge. Changes in amounts to be
exchanged to the Fund, the funds to which exchanges are to be made and the
timing of exchanges (monthly or quarterly), or termination of a shareholder's
participation in the Automatic Exchange Plan will be made after instructions in
writing or by telephone (an "Exchange Change Request") are received by the
Shareholder Servicing Agent in proper form (i.e., if in writing -- signed by the
record owner(s) exactly as shares are registered; if by telephone -- proper
account identification is given by the dealer or shareholder of record). Each
Exchange Change Request (other than termination of participation in the program)
must involve at least $50. Generally, if an Exchange Change Request is received
by telephone or in writing before the close of business on the last business day
of a month, the Exchange Change Request will be effective for the following
month's exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including the treatment of
any CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE -- Shareholders of the Fund and shareholders of the
other MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund
and holders of Class A shares of MFS Cash Reserve Fund in the case where shares
of such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
MFS Money Market Fund, MFS Government Money Market Fund and Class A shares of
MFS Cash Reserve Fund, the shareholder has the right to exchange the acquired
shares for shares of another MFS Fund at net asset value pursuant to the
exchange privilege described below. Such a reinvestment must be made within 90
days of the redemption and is limited to the amount of the redemption proceeds.
If the shares credited for any CDSC paid are then redeemed within six years of
the initial purchase in the case of Class B shares or 12 months of the initial
purchase in the case of Class C shares
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and certain Class A shares, a CDSC will be imposed upon redemption. Although
redemptions and repurchases of shares are taxable events, a reinvestment within
a certain period of time in the same fund may be considered a "wash sale" and
may result in the inability to recognize currently all or a portion of a loss
realized on the original redemption for federal income tax purposes. Please see
your tax Adviser for further information.
EXCHANGE PRIVILEGE -- Subject to the requirements set forth below, some or all
of the shares of the same class in an account with the Fund for which payment
has been received by the Fund (i.e., an established account) may be exchanged
for shares of the same class of any of the other MFS Funds (if available for
sale and if the purchaser is eligible to purchase the Class of shares) at net
asset value. Exchanges will be made only after instructions in writing or by
telephone (an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the requirements set
forth above have been complied with at that time. However, payment of the
redemption proceeds by the Fund, and thus the purchase of shares of the other
MFS Fund, may be delayed for up to seven days if the Fund determines that such a
delay would be in the best interest of all its shareholders. Investment dealers
which have satisfied criteria established by MFD may also communicate a
shareholder's Exchange Request to MFD by facsimile subject to the requirements
set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of the Fund, subject to the conditions, if any,
set forth in their respective prospectuses. In addition, unitholders of the MFS
Fixed Fund have the right to exchange their units (except units acquired through
direct purchases) for shares of the Fund, subject to the conditions, if any,
imposed upon such unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state-specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax Advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws. The exchange privilege (or any aspect of it) may be changed or
discontinued and is subject to certain limitations (see "Purchases" in the
Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Shares of the Fund may be purchased by all
types of tax-deferred retirement plans. MFD makes available through investment
dealers plans and/or custody agreements for the following:
- - Individual Retirement Accounts (IRAs) (for individuals and their Non-employed
spouses who desire to make limited contributions to a Tax-deferred retirement
program and, if eligible, to receive a federal Income tax deduction for
amounts contributed);
- - Simplified Employee Pension (SEP-IRA) Plans;
- - Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (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.
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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
The Fund has elected to be treated and intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code by meeting all
applicable requirements of Subchapter M, including requirements as to the nature
of the Fund's gross income, the amount of Fund distributions, and the
composition and holding period of the Fund's portfolio assets. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to shareholders in accordance with the timing requirements imposed by the
Code, it is not expected that the Fund will be required to pay any federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund will have to pay federal income taxes and any state or
local taxes on the dividends and capital gain distributions they receive from
the Fund. Dividends from ordinary income and any distributions from net
short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. A portion of the Fund's ordinary income
dividends 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 or result in certain basis
adjustments. Distributions of net capital gains (i.e., the excess of net
long-term capital gains over net shortterm capital losses), whether paid in cash
or reinvested in additional shares, are taxable to shareholders as long-term
capital gains without regard to the length of time shareholders have owned their
shares. Any Fund dividend that is declared in October, November or December of
any calendar year, that is payable to shareholders of record in such a month,
and that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. The
Fund will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.
Any Fund distribution will have the effect of reducing the per share net asset
value of shares in the Fund by the amount of the distribution. Shareholders
purchasing shares shortly before the record date of any distribution may thus
pay the full price for the shares and then effectively receive a portion of the
purchase price back as a taxable distribution.
In general, any gain or loss realized upon a taxable disposition of shares of
the Fund by a shareholder that holds such shares as a capital asset will be
treated as long-term capital gain or loss if the shares have been held for more
than twelve months and otherwise as short-term capital gain or loss. However,
any loss realized upon a disposition of shares in the Fund held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a disposition of shares may also be disallowed under rules
relating to wash sales. Gain may be increased (or loss reduced) upon a
redemption of Class A shares of the Fund within 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).
The Fund's current dividend and accounting policies will affect the amount,
timing, and character of distributions to shareholders and may under certain
circumstances make an economic return of capital taxable to shareholders. Any
investment in zero coupon securities and certain securities purchased at a
market discount will cause the Fund to recognize income prior to the receipt of
cash payments with respect to those securities. In order to distribute this
income and avoid a tax on the Fund, the Fund may be required to liquidate
portfolio securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts and Forward Contracts will
be subject to special tax rules that may affect the amount, timing and character
of Fund income and distributions to shareholders. For example, certain positions
held by the Fund on the last business day of each taxable year will be marked to
market (i.e., treated as if closed out) on that day, and any gain or loss
associated with the positions will be treated as 60% long-term and 40% short
term capital gain or loss. Certain positions held by the Fund that substantially
diminish its risk of loss with respect to other positions in its portfolio may
constitute "straddles," and may be subject to special tax rules that would cause
deferral of Fund losses, adjustments in the holding periods of Fund securities
and conversion of short-term into long-term capital losses. Certain tax
elections exist for straddles which could alter the effects of these rules. The
Fund will limit its activities in options, Futures Contracts, Forward Contracts,
and swaps and related transactions to the extent necessary to meet the
requirements of Subchapter M of the Code.
Special tax considerations apply with respect to foreign investments of the
Fund. Foreign exchange gains or losses realized by the Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes and investment by the Fund in certain "passive foreign investment
companies" may be limited in order to avoid a tax on the Fund.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes; the Fund does not
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expect to be able to pass through to shareholders foreign tax credits with
respect to such foreign taxes. The United States has entered into tax treaties
with many foreign countries that may entitle the Fund to a reduced rate of tax
or an exemption from tax on such income; the Fund intends to qualify for treaty
reduced rates where available. It is not possible, however, to determine the
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax at the rate of 30% on dividends and other
payments to Non-U.S. Persons that are subject to such withholding, regardless of
whether a lower rate may be permitted under an applicable treaty. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons may also be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications or who is otherwise subject to backup withholding. Backup
withholding will not, however, be applied to payments that have been subject to
30% withholding.
The Fund will not be required to pay Massachusetts income or excise taxes as
long as it qualifies as a regulated investment company under the Code.
7. DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares (the "Distribution Plan") pursuant to Section 12(b) of the 1940 Act and
Rule 12b-1 thereunder (the "Rule") after having concluded that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and each
respective class of shareholders. The provisions of the Distribution Plan are
severable with respect to each Class of shares offered by the Fund. The
Distribution Plan is designed to promote sales, thereby increasing the net
assets of the Fund. Such an increase may reduce the expense ratio to the extent
the Fund's fixed costs are spread over a larger net asset base. Also, an
increase in net assets may lessen the adverse effect that could result were the
Fund required to liquidate portfolio securities to meet redemptions. There is,
however, no assurance that the net assets of the Fund will increase or that the
other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to the Class A shares, 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 the Fund at their
net asset value in connection with annuity agreements issued in connection with
the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
With respect to Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expense and
equipment.
During the period from the commencement of investment 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: The of the Distribution Plan 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"). The
Distribution Plan also requires that the Fund and MFD each shall provide the
Trustees, and the Trustees shall review, at least quarterly, a written report of
the amounts expended (and purposes therefor) under such Plan. The Distribution
Plan may be terminated at any time by vote of a majority of the Distribution
Plan Qualified Trustees or by vote of the holders of a majority of the
respective class of the Fund's shares (as defined in "Investment Restrictions").
All agreements relating to the Distribution
23
<PAGE> 259
Plan entered into between the Fund or MFD and other organizations must be
approved by the Board of Trustees, including a majority of the Distribution Plan
Qualified Trustees. Agreements under the Distribution Plan must be in writing,
will be terminated automatically if assigned, and may be terminated at any time
without payment of any penalty, by vote of a majority of the Distribution Plan
Qualified Trustees or by vote of the holders of a majority of the respective
class of the Fund's shares. The Distribution Plan may be amended to increase
materially the amount of permitted distribution expenses without the approval of
a majority of the respective class of the Fund's shares (as defined in
"Investment Restrictions") or may not be materially amended in any case without
a vote of the Trustees and a majority of the Distribution Plan Qualified
Trustees. The selection and nomination of Distribution Plan Qualified Trustees
shall be committed to the discretion of the non-interested Trustees then in
office. No Trustee who is not an "interested person" has any financial interest
in the Distribution Plan or in any related agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day;
Presidents' Day; Good Friday; Memorial Day; Independence Day; Labor Day;
Thanksgiving Day and Christmas Day.) This determination is made once each day as
of the close of regular trading on the Exchange by deducting the amount of the
liabilities attributable to the class from the value of the assets attributable
to the class and dividing the difference by the number of shares of the class
outstanding. Equity securities in the Fund's portfolio are valued at the last
sale price on the exchange on which they are primarily traded or on the NASDAQ
system for unlisted national market issues, or at the last quoted bid price for
listed securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Bonds and other fixed income
securities (other than short-term obligations) of U.S. issuers in the Fund's
portfolio are valued on the basis of valuations furnished by a pricing service
which utilizes both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect more
accurately the fair value of such securities. Forward Contracts will be valued
using a pricing model taking into consideration market data from an external
pricing source. Use of the pricing services has been approved by the Board of
Trustees. All other securities, futures contracts and options in the Fund's
portfolio (other than short-term obligations) for which the principal market is
one or more securities or commodities exchanges (whether domestic or foreign)
will be valued at the last reported sale price or at the settlement price prior
to the determination (or if there has been no current sale, at the closing bid
price) on the primary exchange on which such securities, futures contracts or
options are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available, be
valued at current bid prices, unless such securities are reported on the NASDAQ
system, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations in
the Fund's portfolio are valued at amortized cost, which constitutes fair value
as determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer supplied valuations.
Portfolio investments for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction of the
Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by MFD prior to the
close of that business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares 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 (5.75% maximum with
respect to Class A shares) and/or (iii) total rates of return which represent
aggregate performance over a period or year-by-year performance, and which may
or may not reflect the effect of the maximum or other sales charge or CDSC.
The Fund offers multiple classes of shares which were initially offered for sale
to the public on different dates. The calculation of total rate of return for a
class of shares which initially was offered for sale to the public subsequent to
another class of shares of the Fund is based both on (i) the performance of the
24
<PAGE> 260
Fund's newer class from the date it initially was offered for sale to the public
and (ii) the performance of the Fund's oldest class from the date it initially
was offered for sale to the public up to the date that the newer class initially
was offered for sale to the public.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of the Fund's classes of shares differ. In
calculating total rate of return for a newer class of shares in accordance with
certain formulas required by the SEC, the performance will be adjusted to take
into account the fact that the newer class is subject to a different sales
charge than the oldest class (e.g., if the newer class is Class A shares, the
total rate of return quoted will reflect the deduction of the initial sales
charge applicable to Class A shares; if the newer class is Class B shares, the
total rate of return quoted will reflect the deduction of the CDSC applicable to
Class B shares). However, the performance will not be adjusted to take into
account the fact that the newer class of shares bears different class specific
expenses than the oldest class of shares (e.g., Rule 12b-1 fees). Therefore, the
total rate of return quoted for a newer class of shares will differ from the
return that would be quoted had the newer class of shares been outstanding for
the entire period over which the calculation is based (i.e., the total rate of
return quoted for the newer class will be higher than the return that would have
been quoted had the newer class of shares been outstanding for the entire period
over which the calculation is based if the class specific expenses for the newer
class are higher than the class specific expenses of the oldest class, and the
total rate of return quoted for the newer class will be lower than the return
that would be quoted had the newer class of shares been outstanding for this
entire period if the class specific expenses for the newer class are lower than
the class specific expenses of the oldest class).
The aggregate total rate of return for Class A shares of the Fund for the period
from January 2, 1996 (commencement of investment operations) to August 31, 1996
was 6.00% (including the effect of the sales charge) and 11.30% (without the
effect of the sales charge). Class B and Class C shares were not available for
sale during this period.
Total rate 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.
YIELD: Any yield quotation for a class of shares of the Fund is based on the
annualized net investment income per share of that class 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 5.75% in the case of Class A shares and no payment of
any CDSC in the case of Class B and Class C shares.
The yield for Class A shares of the Fund for the 30-day period ended August 31,
1996, was -1.27% (including any waivers) and -17.38% (not including any
waivers). Class B and Class C shares were not available for sale during this
period.
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the Fund's shareholders. Amounts paid to shareholders of each class are
reflected in the quoted "current distribution rate" for that class. The current
distribution rate for a class is computed by dividing the total amount of
dividends per share paid by the Fund to shareholders of that class during the
past 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. The Fund's current distribution rate calculation for Class A
shares assumes a maximum sales charge of 5.75%. The Fund's current distribution
rate calculation for Class B and Class C shares assumes no CDSC is paid.
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical
25
<PAGE> 261
rates of return to illustrate the effects of compounding and tax-deferral. The
Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against a loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning[servicemark] 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[Registered Trademark] 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[Registered Trademark] World Governments Fund is established
as America's first globally diversified fixed-income mutual fund.
-- 1984 -- MFS[Registered Trademark] Municipal High Income Fund is the first
open-end mutual fund to seek high tax-free income from lower-rated
municipal securities.
-- 1986 -- MFS[Registered Trademark] Managed Sectors Fund becomes the first
mutual fund to target and shift investments among industry sectors for
shareholders.
-- 1986 -- MFS[Registered Trademark] Municipal Income Trust is the first
closed-end, high-yield municipal bond fund traded on the New York Stock
Exchange.
-- 1987 -- MFS[Registered Trademark] Multimarket Income Trust is the first
closed-end, multimarket high income fund listed on the New York Stock
Exchange.
-- 1989 -- MFS[Registered Trademark] Regatta becomes America's first
non-qualified market value adjusted fixed/variable annuity.
-- 1990 -- MFS[Registered Trademark] World Total Return Fund is the first
global balanced fund.
-- 1993 -- MFS[Registered Trademark] World Growth Fund is the first global
emerging markets fund to offer the expertise of two sub-advisers.
-- 1993 -- MFS[Registered Trademark] becomes money manager of MFS(@) 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
26
<PAGE> 262
Interest (without par value) of one or more separate series and to divide or
combine the shares of any series into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in that series.
The Trustees have currently authorized shares of the Fund and thirteen 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 the Fund
(Class A, Class B, Class C and Class P shares). Each share of a class of the
Fund represents an equal proportionate interest in the assets of the Fund
allocable to that class. Upon liquidation of the Fund, shareholders of each
class of the Fund are entitled to share pro rata in the Fund's net assets
allocable to such class available for distribution to shareholders. The Trust
reserves the right to create and issue a number of series and additional classes
of shares, in which case the shares of each class of a series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
To the extent a shareholder of the Fund owns a controlling percentage of the
Fund's shares, such shareholder may affect the outcome of such matters to a
greater extent than other Fund shareholders (see "Description of Shares, Voting
Rights and Liabilities" in the Prospectus). Although Trustees are not elected
annually by the shareholders, the Declaration of Trust provides that a Trustee
may be removed from office at a meeting of shareholders by a vote of two-thirds
of the outstanding shares of the Trust. A meeting of shareholders will be called
upon the request of shareholders of record holding in the aggregate not less
than 10% of the outstanding voting securities of the Trust. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's outstanding shares (as defined in "Investment
Restrictions"). The Trust or any series of the Trust may be terminated (i) upon
the merger or consolidation of the Trust or any series of the Trust with another
organization or upon the sale of all or substantially all of its assets (or all
or substantially all of the assets belonging to any series of the Trust), if
approved by the vote of the holders of two-thirds of the Trust's or the affected
series' outstanding shares voting as a single class, or of the affected series
of the Trust, except that if the Trustees recommend such merger, consolidation
or sale, the approval by vote of the holders of a majority of the Trust's or the
affected series' outstanding shares will be sufficient, or (ii) upon liquidation
and distribution of the assets of a Fund, if approved by the vote of the holders
of two-thirds of its outstanding shares of the Trust, or (iii) by the Trustees
by written notice to its shareholders. If not so terminated, the Trust will
continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of his willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
10. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Ernst & Young LLP are the Fund's independent auditors, providing audit services,
tax services, and assistance and consultation with respect to the preparation of
filings with the SEC.
The Portfolio of Investments and the Statement of Assets and Liabilities at
August 31, 1996, the Statement of Operations for the period from January 2, 1996
(commencement of investment operations) to August 31, 1996, the Statement 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 Fund, are incorporated by reference into this SAI
in reliance upon the report of Ernst & Young LLP, independent auditors, given
upon their authority as experts in accounting and auditing. A copy of the Annual
Report accompanies this SAI.
27
<PAGE> 263
APPENDIX A
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT BENEFIT
TRUSTEE FEES ACCRUED AS ESTIMATED TOTAL TRUSTEE
FROM PART OF FUND CREDITED YEARS FEES FROM
TRUSTEE THE FUND(1) EXPENSE(1) OF SERVICE(2) FUND COMPLEX(3)
- -------------------------------------------------- ------------ ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
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. The non-interested Trustees served as Trustees of 36
funds within the MFS fund complex (having aggregate net assets at December
31, 1995, of approximately $12.5 billion) while Mr. Bailey 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> 264
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[Registered Trademark] RESEARCH GROWTH AND INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
We invented the mutual fund[servicemark]
MRG-13-1/97 500
<PAGE> 265
<PAGE>
[logo] M F S(SM)
INVESTMENT MANAGEMENT ANNUAL REPORT
We invented the mutual fund(SM) FOR YEAR ENDED
AUGUST 31, 1996
- --------------------------------------------------------------------------------
MFS(R) EQUITY INCOME FUND
MFS(R) RESEARCH GROWTH AND INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
<PAGE>
MFS(R) INCUBATOR FUNDS
MFS(R) EQUITY INCOME FUND
MFS(R) RESEARCH GROWTH AND INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
<TABLE>
<C> <C>
TRUSTEES FUND MANAGERS*
A. Keith Brodkin* - Chairman and President John F. Brennan
Christian A. Felipe
Richard B. Bailey* - Private Investor; John D. Laupheimer, Jr.
Former Chairman and Director (until 1991), Robert J. Manning
Massachusetts Financial Services Company; Lisa B. Nurme
Director, Cambridge Bancorp; Director, Kevin R. Parke
Cambridge Trust Company Stephen Pesek
Marshall N. Cohan - Private Investor TREASURER
W. Thomas London*
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; ASSISTANT TREASURER
Professor of Surgery, Harvard Medical School James O. Yost*
The Hon. Sir J. David Gibbons, KBE - Chief SECRETARY
Executive Officer, Edmund Gibbons Ltd.; Stephen E. Cavan*
Chairman, Bank of N.T. Butterfield & Son Ltd.
ASSISTANT SECRETARY
Abby M. O'Neill - Private Investor; Director, James R. Bordewick, Jr.*
Rockefeller Financial Services, Inc.
(investment advisers) CUSTODIAN
State Street Bank and Trust Company
Walter E. Robb, III - President and
Treasurer, Benchmark Advisors, Inc. AUDITORS
(corporate financial consultants); President, Ernst & Young LLP
Benchmark Consulting Group, Inc. (office
services); Trustee, Landmark Funds (mutual INVESTOR INFORMATION
funds) For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
Arnold D. Scott* - Senior Executive Vice touch-tone telephone.
President, Director and Secretary,
Massachusetts Financial Services Company For information on MFS mutual funds, call
your financial adviser or, for an information
Jeffrey L. Shames* - President and Director, kit, call toll free: 1-800-637-2929 any
Massachusetts Financial Services Company business day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
J. Dale Sherratt - President, Insight
Resources, Inc. (acquisition planning INVESTOR SERVICE
specialists) MFS Service Center, Inc.
P.O. Box 2281
Ward Smith - Former Chairman (until 1994), Boston, MA 02107-9906
NACCO Industries; Director, Sundstrand
Corporation For general information, call toll free:
1-800-225-2606 any business day from 8 a.m.
INVESTMENT ADVISER to 8 p.m. Eastern time.
Massachusetts Financial Services Company
500 Boylston Street For service to speech- or hearing-impaired,
Boston, MA 02116-3741 call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
DISTRIBUTOR
MFS Fund Distributors, Inc. To use this service, your phone must be
500 Boylston Street equipped with a Telecommunications Device for
Boston, MA 02116-3741 the Deaf.
WEB SITE For share prices, account balances, and
http://www.mfs.com exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
*Affiliated with the Investment Adviser telephone.
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
MFS Equity Income Fund, MFS Research Growth and Income Fund, MFS Core Growth
Fund, MFS Aggressive Growth Fund, and MFS Special Opportunities Fund, commenced
operations on January 2, 1996. From that date through August 31, 1996, the Funds
Class A shares at net asset value provided the following total returns, all of
which assume the reinvestment of any distributions: MFS EQUITY INCOME FUND,
10.7%; MFS RESEARCH GROWTH AND INCOME FUND, 11.3%; MFS CORE GROWTH FUND, 23.3%;
and MFS SPECIAL OPPORTUNITIES FUND, 13.6%. The returns for these four Funds
compare to a 7.45% return over the same period for the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock
performance. MFS AGGRESSIVE GROWTH FUND'S 22.6% total return compares to a
return of 6.57% for the Russell 2000 Total Return Index (the Russell Index), an
unmanaged index comprised of 2,000 of the smallest U.S.-domiciled company stocks
which are traded on the New York Stock Exchange, the American Stock Exchange,
and the National Association of Security Dealers Automated Quotron System,
NASDAQ. A discussion of each Fund's investments can be found in the Fund
Managers' Overviews section of this report.
Economic Environment
The U.S. economy in 1996 appears to have settled into a pattern of moderate
growth and inflation -- two factors that we think may be important contributors
to a favorable long-term investment climate. During the first quarter of 1996,
real (inflation-adjusted) economic growth was 2.3% on an annualized basis,
followed by a rate of 4.7% in the second quarter. Real growth in gross domestic
product has started the year at a rate exceeding our expectations. While we
continue to believe that growth from quarter to quarter will be uneven, it is
now our expectation that growth for all of 1996 could exceed 2.5%. Although
individual consumers appear to be carrying an excessive debt load, the consumer
sector itself, which represents two-thirds of the economy, continues to be
impressive as the automobile and housing markets remain resilient. Consumer
spending has also been positively impacted by widespread job growth. However,
the economies of Europe and Japan continue to be in the doldrums, weakening the
U.S. export markets while subduing the capital spending plans of American
corporations.
Stock Market
While we do not expect the U.S. stock market to match the extraordinary
performance of 1995, we continue to be positive about the equity market this
year. Although we believe the equity market represents fair value at current
levels, the expected slowdown in the growth of corporate earnings and the
increases in interest rates experienced so far this year have raised some
near-term concerns, as was seen in July's stock market correction. Further
increases in interest rates, and an acceleration of inflation coupled with an
additional slowdown in corporate earnings growth, could have a negative effect
on the stock market. However, to the extent that some earnings disappointments
are taken as a sign that the economy is not overheating, this may prove
beneficial for the longer-term health of the equity market. We continue to
believe that many of the technology-driven productivity gains that U.S.
companies have made in recent years will continue to enhance corporate America's
competitiveness and profitability. Therefore, while we have some near-term
concerns, we remain quite constructive on the long-term viability of the equity
market.
Bond Market
In the bond market, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. However, should signs of economic growth and, particularly, of higher
inflation continue, we would expect the Fed to maintain its anti-inflationary
stance. In the beginning of the year, the bond market traded in a narrow range
as investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reportsand low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the strength of the economy with more volatile
trading patterns marked by an upward bias in interest rates. Interest rates may
move even higher over the coming months, but we believe the current rise in bond
yields is reaching a point where fixed-income markets are fairly valued.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
-----------------------------------
A. Keith Brodkin
Chairman and President
September 19, 1996
<PAGE>
FUND MANAGERS' OVERVIEWS
MFS EQUITY INCOME FUND
The Fund's performance was favorably impacted by significant weightings in four
sectors: financial services, industrial goods and services, energy, and basic
materials. Financial services' performance was led by bank stocks such as
Southern National, Chase, and Bank of Boston, whose strong regional franchises
and merger-related cost cutting supported our outlook for strong earnings
growth. The industrial goods and services sector benefited from strong
performance from such stocks as United Technologies and Honeywell, both took
advantage of the growing global demand for new airplanes. Energy sector
performance was underpinned by significant holdings in British Petroleum and gas
pipeline stocks such as Sonat, PanEnergy, and El Paso. The pipelines have been
helped by higher natural gas commodity pricing as well as by consolidation
within the industry. The basic materials sector contributed to performance with
the help of significant holdings in specialty chemical and material stocks such
as BetzDearborn and Hexcel. These companies typically do well late in the
economic cycle and, in the case of Hexcel, have benefited from the strength of
the emerging commercial airplane trend.
The Fund continues to seek holdings in companies that provide attractive
dividend yields and reasonable valuations, characteristics that we believe could
provide downside support in a volatile market. Additionally, the Fund continues
to favor holdings in companies that we feel have significant opportunities to
improve returns through cyclical improvement as well as through actions specific
to each company. Overall, holdings remain focused on the energy, financial
services, utilities and communications, and industrial goods and services
sectors. The Fund has reduced its exposure somewhat to financial services given
the strong performance of many of these stocks, and has decreased the previous
overweighting in the sector. The Fund increased its exposure to the energy
sector and to the consumer staples sector, given the defensive nature of these
businesses. Within the utilities and communications sector, the Fund's holdings
are focused on low-cost, high-quality electric utilities and local distribution
companies in the natural gas and propane businesses.
/s/ Lisa B. Nurme
------------------------------
Lisa B. Nurme
Fund Manager
MFS RESEARCH GROWTH AND INCOME FUND
The Fund's top holdings are in basic materials, consumer staples, technology,
and health care. Within basic materials, the Fund is invested in the industrial
gas company Praxair. We believe Praxair could outperform other specialty
chemical companies within the gas industry due to higher top line growth, solid
supply/demand fundamentals, and attractive economics. Du Pont & Co., another of
the Fund's top holdings, is another basic materials company that has benefited
from similar trends. We continue to believe both companies could have favorable
performance over the long term.
The Fund retains Microsoft Corp. as one of its top securities. We believe
Microsoft could maintain its market dominance in the software industry through
enhancement of existing offerings and the development of new products. Within
the consumer staples sector, the Fund holds tobacco industry giant Philip
Morris, which has continued to demonstrate steady growth at reasonable
valuations despite the recent negative press on the tobacco industry.
/s/ Kevin R. Parke
--------------------------------
Kevin R. Parke
Director of Research
Certain MFS Research Analysts, acting as a committee, are responsible for the
day-to-day management of the Fund under the general supervision of Mr. Parke.
MFS CORE GROWTH FUND
The Fund's portfolio is built from the bottom up, based on individual stock
selection. Many of the holdings generally fit within four major categories.
First, the Fund seeks companies with high unit growth, whose organic volume
growth helps support above-average revenue growth. The second theme includes
companies which we believe could exhibit accelerated earnings growth driven by
new product cycles and/or acquisitions that contribute to growth. Third, the
Fund seeks companies that appear able to control their destiny via internal
change, such as through cost cutting or consolidation. This encompasses
companies with the potential to make higher-than-average levels of incremental
internal investment. Finally, the Fund seeks companies which, in our opinion,
have the potential to benefit from a fundamental mismatch in the balance between
supply and demand.
/s/ John D. Laupheimer /s/ Stephen Pesek
----------------------------- --------------------------
John D. Laupheimer, Jr. Stephen Pesek
Fund Manager Fund Manager
MFS AGGRESSIVE GROWTH FUND
The Fund's performance versus the Russell Index was a result of favorable stock
selections in two major sectors: telecommunications and media. Both of these
sectors benefited from recent government deregulation of the entire radio,
television and cable, long-distance, and local telephone markets. We anticipate
the result could be a consolidation in the media and telephone markets and major
capital spending increases for the Regional Bell Operating Companies (RBOCs).
Two of the Fund's radio holdings, American Radio and Clear Channel, made major
purchases of media assets, and the anticipated pricing power created by these
combinations has increased the prices of their stocks.
The deregulation of the local and long-distance telephone markets also
benefited many of the Fund's holdings. Companies such as MCI are believed to be
important resellers of long-distance services to the major RBOCs, and their
stock prices have risen on this basis. Also, their need to protect their local
markets from competition from cable companies has led to a massive increase in
capital spending by the RBOCs. Our holdings in Tellabs and U.S. Robotics have
been major beneficiaries of this trend.
Looking ahead, we anticipate an intensified pace to these developments, and
we plan to maintain and add to our holdings in companies we believe will benefit
from these events.
/s/ Christian A. Felipe
--------------------------------
Christian A. Felipe
Fund Manager
MFS SPECIAL OPPORTUNITIES FUND
The favorable performance of the Fund versus the S&P 500 was a result of
significant exposure to several top-performing industries including: industrial
goods, which advanced 12%; gaming and lodging, up 31.1%; radio and television
broadcasting; and retailing, up 21.3%. Our stock selection also aided
performance, with EZ Communications, a radio broadcaster; Promus Hotel Corp., a
hotel franchiser; BE Aerospace, a commercial aerospace company; and New World
Communications, a television broadcaster, having particularly significant
impact.
We continue to use a value-oriented approach to investing. A portion of the
Fund's assets is invested in turnaround situations and bankruptcy workouts,
while the balance is invested in companies with solid growth prospects at what
we believe are reasonable valuations.
/s/ John F. Brennan /s/ Robert J. Manning
---------------------------- -----------------------------
John F. Brennan Robert J. Manning
Fund Manager Fund Manager
<PAGE>
FUND MANAGERS PROFILE
JOHN BRENNAN has been a member of the MFS investment staff since 1985. A
graduate of the University of Rhode Island and Stanford University's Graduate
School of Business Administration, he began his career at MFS as an industry
specialist and was promoted to Assistant Vice President -- Investments in 1987.
He was named Vice President -- Investments in 1988 and Senior Vice President --
Investments in 1995.
CHRISTIAN FELIPE joined MFS in 1986. A graduate of U.C.L.A. and the University
of Pennsylvania's Wharton School of Finance and Commerce, he was named
Investment Officer in 1987, Assistant Vice President -- Investments in 1988,
Vice President Investments in 1989 and Senior Vice President in 1996.
JOHN LAUPHEIMER joined MFS in 1981 as an industry specialist. A graduate of
Boston University and the Sloan School of Management of the Massachusetts
Institute of Technology, he was named Investment Officer in 1983, Assistant Vice
President -- Investments in 1984, Vice President -- Investments in 1986, and
Senior Vice President in 1995.
ROBERT MANNING began his career at MFS in 1984 as a research analyst in the High
Yield Bond Department. A graduate of the University of Lowell and Boston
College's Graduate School of Management, he was named Vice President --
Investments in 1988 and Senior Vice President in 1993.
LISA NURME joined MFS in 1987 as a research analyst. She was named Investment
Officer in 1990, Assistant Vice President -- Investments in 1991, and Vice
President -- Investments in 1992. Ms. Nurme is a graduate of the University of
North Carolina.
STEPHEN PESEK joined MFS as a research analyst and was named Vice President --
Investments in 1994. He is a graduate of the University of Pennsylvania and
Columbia University.
KEVIN PARKE joined the MFS Research Department in 1985 as an industry
specialist. A graduate of Lehigh University and the Harvard University Graduate
School of Business Administration, he was named Assistant Vice President --
Investments in 1987, Vice President -- Investments in 1988, Senior Vice
President -- Investments in 1993 and Director of Research in 1995. Mr. Parke
became a Fund Manager of Massachusetts Investors Trust in 1992.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Currently each Fund only offers Class A shares for sale, which are available for
purchase at net asset value only by certain retirement plans established for the
benefit of employees of MFS and its affiliates and certain of their family
members who are also residents of the Commonwealth of Massachusetts.
MFS EQUITY INCOME FUND
The objective of the Fund is to achieve a yield that exceeds the yield of the
S&P 500. In selecting investments, the Fund also considers the potential for
capital appreciation. Under normal market conditions, the Fund invests at least
65% of its total assets in income-producing equity securities. 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 Rating Group or Fitch Investors Service, Inc., or Ba or lower by Moody's
Investors Service, Inc.
MFS RESEARCH GROWTH AND INCOME FUND
The objective of the Fund is long-term growth of capital, current income, and
growth of income. Under normal market conditions, the Fund invests at least 65%
of its total assets in equity securities of companies which offer earnings
growth potential while paying current dividends. The Fund may also invest up to
35% of its total assets in fixed-income securities, which do not pay current
dividends but which offer prospects for growth of capital and future income. In
addition, the Fund may invest up to 35% of its net assets in foreign equity
securities which are not traded on a U.S. exchange.
MFS CORE GROWTH FUND
The objective of the Fund is long-term growth of capital. Under normal market
conditions, the Fund invests at least 65% of its total assets in equity
securities of well-known and established companies who have above-average growth
potential. The Fund may also invest up to 35% of its total assets in equity
securities of companies in the developing stages of their life cycles that offer
the potential for accelerated earnings or revenue growth (emerging growth
companies).
MFS AGGRESSIVE GROWTH FUND
The objective of the Fund is capital appreciation. Under normal market
conditions, the Fund invests substantially all of its assets in equity
securities of companies which have above-average growth potential. The Fund may
invest in companies of any size, including smaller, lesser-known companies in
the developing stages of their life cycles that offer the potential for
accelerated earnings or revenue growth (emerging growth companies). In addition,
the Fund may invest up to 35% of its net assets in foreign equity securities
which are not traded on a U.S. exchange.
MFS SPECIAL OPPORTUNITIES FUND
The objective of the Fund is capital appreciation. Under normal market
conditions, the Fund invests substantially all of its assets in equity and
fixed-income securities which represent uncommon value by having the potential
for significant capital appreciation over a period of 12 months or longer. The
Fund may invest a substantial amount of its assets in U.S. government securities
when, in the judgment of the Investment Adviser, securities with the potential
for significant capital appreciation are not available for purchase by the Fund.
TAX FORM SUMMARY
FEDERAL INCOME TAX INFORMATION
Fund Dividend Received Deduction
- ------------------------------------------------------------------------------
Equity Income Fund 57.79%
Research Growth and Income Fund 11.71%
Core Growth Fund 1.45%
Aggressive Growth Fund 0.78%
Special Opportunities Fund 3.90%
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS EQUITY INCOME FUND
Common Stocks - 88.1%
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
U.S. Stocks - 82.6%
Aerospace - 3.1%
United Technologies Corp. 130 $ 14,658
- ------------------------------------------------------------------------------
Automotive - 2.4%
Ford Motor Co. 120 $ 4,020
Goodrich (B.F.) Co. 200 7,500
--------
$ 11,520
- ------------------------------------------------------------------------------
Banks and Credit Companies - 8.5%
Bank of Boston Corp. 200 $ 10,550
Chase Manhattan Corp. 60 4,462
Medallion Financial Corp.* 400 5,150
National City Corp. 200 7,525
Southern National Corp. 200 6,250
Union Planters Corp. 200 6,575
--------
$ 40,512
- ------------------------------------------------------------------------------
Chemicals - 9.3%
Air Products & Chemicals, Inc. 100 $ 5,475
Betz Laboratories, Inc. 300 14,737
Dexter Corp. 500 14,563
Olin Corp. 60 4,755
Witco Corp. 160 4,840
--------
$ 44,370
- ------------------------------------------------------------------------------
Consumer Goods and Services - 2.3%
Colgate-Palmolive Co. 60 $ 4,875
Philip Morris (Cos.), Inc. 70 6,283
--------
$ 11,158
- ------------------------------------------------------------------------------
Electrical Equipment - 2.1%
Honeywell, Inc. 100 $ 5,813
Hubbell, Inc. 120 4,335
--------
$ 10,148
- ------------------------------------------------------------------------------
Electronics - 1.7%
General Electric Co. 100 $ 8,313
- ------------------------------------------------------------------------------
Financial Institutions - 1.0%
Bank United Corp., "A"* 200 $ 4,825
- ------------------------------------------------------------------------------
Food and Beverage Products - 3.2%
General Mills, Inc. 100 $ 5,500
Hormel Foods Corp. 250 5,312
PepsiCo, Inc. 160 4,600
--------
$ 15,412
- ------------------------------------------------------------------------------
Forest and Paper Products - 1.2%
Schweitzer-Mauduit International, Inc. 180 $ 5,760
- ------------------------------------------------------------------------------
Insurance - 1.0%
CIGNA Corp. 40 $ 4,645
- ------------------------------------------------------------------------------
Machinery - 1.8%
Cooper Industries, Inc. 100 $ 4,050
Manitowoc, Inc. 150 4,706
--------
$ 8,756
- ------------------------------------------------------------------------------
Medical and Health Products - 3.1%
Abbott Laboratories, Inc. 100 $ 4,513
American Home Products Corp. 90 5,332
Rhone-Poulenc Rorer, Inc. 70 4,926
--------
$ 14,771
- ------------------------------------------------------------------------------
Metals and Minerals - 0.7%
Century Aluminum Co. 200 $ 3,200
- ------------------------------------------------------------------------------
Oil Services - 1.7%
McDermott International, Inc. 400 $ 8,300
- ------------------------------------------------------------------------------
Oils - 8.6%
Atlantic Richfield Co. 40 $ 4,670
Exxon Corp. 60 4,883
Mobil Corp. 50 5,638
Occidental Petroleum Corp. 300 6,975
Panhandle Eastern Corp. 250 8,281
USX-Marathon Group 500 10,437
--------
$ 40,884
- ------------------------------------------------------------------------------
Pharmaceuticals - 1.1%
Pharmacia & Upjohn, Inc. 125 $ 5,250
- ------------------------------------------------------------------------------
Photographic Products - 2.0%
Eastman Kodak Co. 130 $ 9,425
- ------------------------------------------------------------------------------
Printing and Publishing - 1.4%
Gannett Co., Inc. 100 $ 6,700
- ------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.1%
American General Hospitality Corp.* 250 $ 4,406
Hospitality Property Trust 170 4,547
Storage Trust Reality 200 4,375
--------
$ 13,328
- ------------------------------------------------------------------------------
Restaurants and Lodging - 1.2%
Mandarin Oriental 4,000 $ 5,560
- ------------------------------------------------------------------------------
Special Products and Services - 5.0%
Dimon, Inc. 300 $ 5,513
Sherwin Williams Co. 150 6,562
UST, Inc. 180 5,400
Westpoint Stevens, Inc. 250 6,531
--------
$ 24,006
- ------------------------------------------------------------------------------
Stores - 1.1%
Sears, Roebuck & Co. 120 $ 5,280
- ------------------------------------------------------------------------------
Transportation - 1.0%
Sea Containers Ltd., "A" 250 $ 4,688
- ------------------------------------------------------------------------------
Utilities - Electric - 5.2%
Allegheny Power Systems, Inc. 150 $ 4,444
Cinergy Corp. 150 4,500
FPL Group, Inc. 100 4,425
Pinnacle West Capital Corp. 200 5,750
Portland General Corp. 150 5,437
--------
$ 24,556
- ------------------------------------------------------------------------------
Utilities - Gas - 3.8%
El Paso Natural Gas Co. 150 $ 6,244
Sonat, Inc. 250 11,031
UGI Corp. 300 7,013
--------
$ 24,288
- ------------------------------------------------------------------------------
Utilities - Telephone - 5.0%
Ameritech Corp. 50 $ 2,581
BellSouth Corp. 120 4,350
Carolina Power & Light Co. 100 3,488
GTE Corp. 150 5,906
MCI Communications Corp. 300 7,537
--------
$ 23,862
- ------------------------------------------------------------------------------
Total U.S. Stocks $394,175
- ------------------------------------------------------------------------------
Foreign Stocks - 5.5%
Canada - 1.0%
Canadian National Railway Co. 250 $ 4,781
- ------------------------------------------------------------------------------
New Zealand - 1.1%
Lion Nathan Ltd. (Food and Beverage Products) 2,000 $ 5,284
- ------------------------------------------------------------------------------
United Kingdom - 2.9%
British Petroleum PLC, ADR (Oils) 70 $ 8,242
SmithKline Beecham PLC, ADR (Pharmaceuticals) 100 5,825
--------
$ 14,067
- ------------------------------------------------------------------------------
Peru - 0.5%
Telefonica Delaware Peru S.A., ADR (Utilities - Telephone) 100 $ 2,338
- ------------------------------------------------------------------------------
Total Foreign Stocks $ 26,470
- ------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $398,978) $420,645
- ------------------------------------------------------------------------------
Convertible Preferred Stocks - 2.9%
- ------------------------------------------------------------------------------
Matewan Bancshares, Inc., 7.5s (Banks and
Credit Companies) 150 $ 3,862
Unocal Corp., 7s (Oil Services) 100 5,750
Williams Cos., Inc., 3.5s (Pipelines) 50 4,000
- ------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified
Cost, $12,881) $ 13,612
- ------------------------------------------------------------------------------
Preferred Stocks - 4.4%
- ------------------------------------------------------------------------------
Case Corp. (Machinery) 50 $ 5,762
Merrill Lynch & Co Inc. (Financial Institutions) 100 4,300
MCN Corp. (Utilities - Gas) 200 5,550
Penncorp Financial Group Inc.## (Insurance) 100 5,438
- ------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $19,921) $ 21,050
- ------------------------------------------------------------------------------
Convertible Bonds - 4.1%
- ------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------
Fieldcrest Cannon Industries, 6s, 3/15/2012
(Textiles) $10,000 $ 7,350
Midcom Communications Inc, 8.25s, 8/15/2003
(Telecommunications)
(Identified Cost, $5,000) 5,000 5,625
Hexcel Corp New, 7s, 8/1/2003 (Diversified
Manufacturer)
(Identified Cost, $5,000) 5,000 6,519
- ------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $17,052) $ 19,494
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $448,832) $474,801
Other Assets, Less Liabilities - 0.5% 2,579
- ------------------------------------------------------------------------------
Net Assets - 100.0% $477,380
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS RESEARCH GROWTH AND INCOME FUND
Common Stocks - 95.4%
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
U.S. Stocks - 83.3%
Aerospace - 4.1%
General Dynamics Corp. 100 $ 6,412
Lockheed-Martin Corp. 50 4,206
McDonnell Douglas Corp. 80 4,010
United Technologies Corp. 50 5,638
--------
$ 20,266
- ------------------------------------------------------------------------------
Agricultural Products - 1.0%
Case Corp. 110 $ 5,005
- ------------------------------------------------------------------------------
Apparel and Textiles - 0.8%
Nike, Inc., "B" 35 $ 3,780
- ------------------------------------------------------------------------------
Automotive - 1.5%
Goodrich (B.F.) Co. 190 $ 7,125
- ------------------------------------------------------------------------------
Banks and Credit Companies - 3.2%
Bank of Boston Corp. 110 $ 5,802
Chase Manhattan Corp. 52 3,868
Fleet/Norstar Financial Group, Inc. 150 6,262
--------
$ 15,932
- ------------------------------------------------------------------------------
Business Machines - 0.9%
Gateway 2000, Inc.* 100 $ 4,456
- ------------------------------------------------------------------------------
Business Services - 1.5%
Alco Standard Corp. 100 $ 4,363
DST Systems, Inc.* 100 3,075
--------
$ 7,438
- ------------------------------------------------------------------------------
Chemicals - 5.7%
Air Products & Chemicals, Inc. 100 $ 5,475
du Pont (E. I.) de Nemours & Co. 120 9,855
Grace (W. R.) & Co. 70 4,594
Praxair, Inc. 200 8,225
--------
$ 28,149
- ------------------------------------------------------------------------------
Computer Software - Personal Computers - 2.3%
First Data Corp. 50 $ 3,900
Microsoft Corp.* 60 7,350
--------
$ 11,250
- ------------------------------------------------------------------------------
Computer Software - Systems - 2.1%
Digital Equipment Corp.* 100 $ 3,863
Oracle Systems Corp.* 180 6,345
--------
$ 10,208
- ------------------------------------------------------------------------------
Consumer Goods and Services - 10.3%
Colgate-Palmolive Co. 80 $ 6,500
Estee Lauder Cos., "A"* 100 4,300
Gillette Co. 90 5,737
Philip Morris Cos., Inc. 120 10,770
Procter & Gamble Co. 50 4,444
Revlon, Inc., "A"* 100 2,988
Sherwin-Williams Co. 100 4,375
Tyco International Ltd. 100 4,225
UST, Inc. 240 7,200
--------
$ 50,539
- ------------------------------------------------------------------------------
Electrical Equipment - 0.7%
Honeywell, Inc. 60 $ 3,488
- ------------------------------------------------------------------------------
Electronics - 1.3%
Analog Devices, Inc.* 150 $ 3,619
Atmel Corp.* 100 2,587
--------
$ 6,206
- ------------------------------------------------------------------------------
Entertainment - 0.4%
Showboat, Inc. 100 $ 1,988
- ------------------------------------------------------------------------------
Financial Institutions - 2.4%
Advanta Corp., "B" 100 $ 4,450
Bank United Corp., "A"* 100 2,413
Corestates Financial Corp. 120 4,965
--------
$ 11,828
- ------------------------------------------------------------------------------
Financial Services - 1.0%
Medallion Financial Corp.* 400 $ 5,150
- ------------------------------------------------------------------------------
Food and Beverage Products - 1.4%
Chiquita Brands International, Inc. 200 $ 2,525
McCormick & Co., Inc. 100 2,050
Tyson Foods Inc. 100 2,425
--------
$ 7,000
- ------------------------------------------------------------------------------
Forest and Paper Products - 1.1%
Kimberly-Clark Corp. 70 $ 5,486
- ------------------------------------------------------------------------------
Insurance - 3.9%
Chartwell Realty Corp. 100 $ 2,525
CIGNA Corp. 50 5,806
IPC Holdings Ltd. 100 2,063
LaSalle Reassurance Holdings Ltd. 20 465
Penncorp Financial Group, Inc. 140 4,270
Transamerica Corp. 60 4,087
--------
$ 19,216
- ------------------------------------------------------------------------------
Machinery - 1.1%
Deere & Co., Inc. 130 $ 5,168
- ------------------------------------------------------------------------------
Medical and Health Products - 5.3%
Baxter International, Inc. 195 $ 8,702
Guidant Corp. 100 5,075
Lilly (Eli) & Co. 60 3,435
Rhone-Poulenc Rorer, Inc. 100 7,037
Ventritex, Inc.* 150 2,044
--------
$ 26,293
- ------------------------------------------------------------------------------
Medical and Health Technology and Services - 4.2%
Coventry Corp.* 200 $ 2,637
Pacificare Health Systems, Inc., "A"* 30 2,288
Riscorp, Inc., "A"* 100 1,375
Safeguard Health Enterprises, Inc.* 100 1,850
St. Jude Medical, Inc.* 200 7,175
United Healthcare Corp. 140 5,407
--------
$ 20,732
- ------------------------------------------------------------------------------
Metals and Minerals - 0.6%
Aluminum Company of America 50 $ 3,106
- ------------------------------------------------------------------------------
Oils - 3.7%
Belco Oil & Gas Corp.* 80 $ 2,200
Exxon Corp. 60 4,882
Mobil Corp. 60 6,765
Newfield Exploration Co.* 100 4,462
--------
$ 18,309
- ------------------------------------------------------------------------------
Pharmaceuticals - 0.9%
Pharmacia & Upjohn, Inc. 100 $ 4,200
- ------------------------------------------------------------------------------
Printing and Publishing - 2.0%
Gannett Co., Inc. 80 $ 5,360
Scripps (E.W.) Co., "A" 100 4,450
--------
$ 9,810
- ------------------------------------------------------------------------------
Railroads - 2.2%
Burlington Northern Santa Fe 60 $ 4,800
CSX Corp. 120 6,075
--------
$ 10,875
- ------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.2%
American General Hospitality Corp.* 250 $ 4,406
Equity Inns, Inc. 300 3,750
Public Storage, Inc. 200 4,300
Storage Trust Reality 200 4,375
Winston Hotels 300 3,712
--------
$ 20,543
- ------------------------------------------------------------------------------
Restaurants and Lodging - 2.1%
HFS, Inc.* 100 $ 5,988
Host Marriott Corp. 300 4,125
--------
$ 10,113
- ------------------------------------------------------------------------------
Stores - 2.8%
CompUSA, Inc.* 100 $ 4,012
Lowes Co., Inc. 150 5,419
Sears, Roebuck & Co. 100 4,400
--------
$ 13,831
- ------------------------------------------------------------------------------
Supermarkets - 0.7%
Safeway, Inc.* 100 $ 3,625
- ------------------------------------------------------------------------------
Telecommunications - 1.5%
Glenayre Technologies, Inc.* 100 $ 3,675
Lucent Technologies, Inc. 100 3,688
--------
$ 7,363
- ------------------------------------------------------------------------------
Utilities - Electric - 1.7%
CMS Energy Corp. 100 $ 2,987
Illinova Corp. 100 2,613
Pinnacle West Capital Corp. 100 2,875
--------
$ 8,475
- ------------------------------------------------------------------------------
Utilities - Gas - 1.9%
Coastal Corp. 150 $ 5,944
Panenergy Corp. 100 3,313
--------
$ 9,257
- ------------------------------------------------------------------------------
Utilities - Telephone - 2.8%
BellSouth Corp. 100 $ 3,625
GTE Corp. 100 3,937
MCI Communications Corp. 250 6,281
--------
$ 13,843
- ------------------------------------------------------------------------------
Total U.S. Stocks $410,053
- ------------------------------------------------------------------------------
Foreign Stocks - 12.1%
Denmark - 0.5%
ISS International Service System, "B"
(Special Products and Services) 100 $ 2,605
- ------------------------------------------------------------------------------
Finland - 0.8%
Huhtamaki Oy (Conglomerates) 100 $ 3,846
- ------------------------------------------------------------------------------
France - 0.3%
Union des Assurances Federales S.A.
(Broadcasting) 15 $ 1,720
- ------------------------------------------------------------------------------
Hong Kong - 3.3%
Cafe De Coral Holding (Electrical Equipment) 18,000 $ 5,005
Giordano International Ltd. (Financial Institutions) 2,000 1,655
Liu Chong Hing Bank (Financial Institutions) 4,000 5,639
Wharf Holdings (Real Estate) 1,000 3,777
--------
$ 16,076
- ------------------------------------------------------------------------------
Italy - 0.3%
Telecom Italia S.p.A. - RNC (Utilities - Telephone) 1,300 $ 1,584
- ------------------------------------------------------------------------------
Philippines - 0.2%
Pilipino Telephone (Telecommunications) 900 $ 1,187
- ------------------------------------------------------------------------------
Singapore - 0.7%
Hong Leong Finance (Financial Services)+ 1,000 $ 3,370
- ------------------------------------------------------------------------------
Sweden - 2.2%
Astra AB, Free Shares, "B" (Pharmaceuticals) 100 $ 4,138
Ericsson AB (Telecommunications) 100 2,333
Sparbanken Sverige AB (Banking) 350 4,360
--------
$ 10,831
- ------------------------------------------------------------------------------
Switzerland - 1.3%
Ciba Geigy AG (Medical and Health Products) 5 $ 6,307
- ------------------------------------------------------------------------------
United Kingdom - 2.5%
Jarvis Hotels PLC (Lodging)*+ 1,300 $ 3,288
Kwik-Fit Holdings PLC (Auto Repair Centers) 700 2,765
Lloyds TSB Group PLC (Finance) 400 2,338
PowerGen - 195 (Utilities - Electric) 500 3,950
--------
$ 12,341
- ------------------------------------------------------------------------------
Total Foreign Stocks $ 59,867
- ------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $463,265) $469,920
- ------------------------------------------------------------------------------
Short Term Obligation - 4.1%
- ------------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- ------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 9/03/96
at Amortized Cost $ 20 $ 19,994
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $483,259) $489,914
Other Assets, Less Liabilities - 0.5% 2,399
- ------------------------------------------------------------------------------
Net Assets - 100.0% $492,313
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS CORE GROWTH FUND
Common Stocks - 85.4%
- ------------------------------------------------------------------------------
Issuer Shares Value
- ------------------------------------------------------------------------------
U.S. Stocks - 81.9%
Aerospace - 1.2%
United Technologies Corp. 75 $ 8,456
- ------------------------------------------------------------------------------
Automotive - 2.1%
Goodrich (B.F.) Co. 200 $ 7,500
Harley-Davidson, Inc. 175 7,175
--------
$ 14,675
- ------------------------------------------------------------------------------
Business Machines - 2.5%
Gateway 2000, Inc.* 200 $ 8,913
Sun Microsystems, Inc.* 150 8,156
--------
$ 17,069
- ------------------------------------------------------------------------------
Business Services - 10.9%
Alco Standard Corp. 225 $ 9,816
Barret Business Services, Inc.* 400 7,900
Ceridian Corp.* 150 6,394
Computer Sciences Corp.* 150 10,500
CUC International, Inc.* 200 6,875
DST Systems, Inc.* 250 7,688
Loewen Group, Inc. 325 9,587
Registry, Inc.* 100 3,325
RemedyTemp, Inc.* 100 1,875
Technology Solutions Co.* 375 11,062
--------
$ 75,022
- ------------------------------------------------------------------------------
Chemicals - 1.2%
Praxair, Inc. 200 $ 8,225
- ------------------------------------------------------------------------------
Computer Software - Personal Computers - 2.6%
Electronic Arts, Inc.* 250 $ 7,719
First Data Corp. 130 10,140
--------
$ 17,859
- ------------------------------------------------------------------------------
Computer Software - Systems - 6.8%
Adobe Systems, Inc. 200 $ 6,975
BMC Software, Inc.* 150 11,175
Computer Associates International, Inc. 200 10,500
Informix Corp.* 250 5,625
Oracle Systems Corp.* 200 7,050
System Software Associates, Inc. 500 5,250
--------
$ 46,575
- ------------------------------------------------------------------------------
Consumer Goods and Services - 4.6%
Colgate-Palmolive Co. 75 $ 6,094
Philip Morris Cos., Inc. 75 6,731
Schweitzer-Mauduit International, Inc. 300 9,600
Tyco International Ltd. 225 9,506
--------
$ 31,931
- ------------------------------------------------------------------------------
Electronics - 7.9%
Altera Corp.* 200 $ 8,800
Analog Devices, Inc. 400 9,650
Atmel Corp.* 125 3,234
DuPont Photomasks, Inc.* 100 2,300
Intel Corp. 125 9,977
LSI Logic Corp.* 175 3,828
Microchip Technology, Inc.* 200 7,350
Xilinx, Inc.* 250 8,750
--------
$ 53,889
- ------------------------------------------------------------------------------
Entertainment - 1.4%
American Radio Systems Corp., "A"* 25 $ 888
Golden Bear Golf, Inc.* 100 2,025
Jacor Communications, Inc.* 200 6,700
--------
$ 9,613
- ------------------------------------------------------------------------------
Financial Institutions - 2.6%
Beneficial Corp. 100 $ 5,637
Finova Group, Inc. 100 5,500
Green Tree Financial Corp. 200 6,950
--------
$ 18,087
- ------------------------------------------------------------------------------
Food and Beverage Products - 1.8%
Interstate Bakeries Corp. 200 $ 6,050
McCormick & Co., Inc. 300 6,150
--------
$ 12,200
- ------------------------------------------------------------------------------
Forest and Paper Products - 1.1%
Kimberly-Clark Corp. 100 $ 7,838
- ------------------------------------------------------------------------------
Insurance - 1.1%
Equitable of Iowa Cos. 200 $ 7,350
- ------------------------------------------------------------------------------
Machinery - 1.1%
Idex Corp. 200 $ 7,425
- ------------------------------------------------------------------------------
Medical and Health Products - 3.6%
Lilly (Eli) & Co. 100 $ 5,725
Rhone-Poulenc Rorer, Inc. 150 10,556
Ventritex, Inc.* 600 8,175
--------
$ 24,456
- ------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.1%
Coventry Corp.* 600 $ 7,913
Healthsouth Corp.* 300 9,712
Pacificare Health Systems, Inc., "B"* 130 10,465
Safeguard Health Enterprises, Inc.* 300 5,550
St. Jude Medical, Inc.* 150 5,381
United Healthcare Corp. 250 9,656
--------
$ 48,677
- ------------------------------------------------------------------------------
Metals and Minerals - 0.6%
Oregon Metallurgical Corp.* 50 $ 1,488
Titanium Metals Corp.* 100 2,387
--------
$ 3,875
- ------------------------------------------------------------------------------
Oils - 1.0%
Panhandle Eastern Corp. 200 $ 6,625
- ------------------------------------------------------------------------------
Printing and Publishing - 2.4%
Harte-Hanks Communications, Inc. 200 $ 5,100
Scripps (E.W.) Co., "A" 150 6,675
Tribune Co. 70 5,031
--------
$ 16,806
- ------------------------------------------------------------------------------
Railroads - 2.2%
Burlington Northern Santa Fe Railway Co. 75 $ 6,000
Wisconsin Central Transportation Corp.* 250 8,812
--------
$ 14,812
- ------------------------------------------------------------------------------
Restaurants and Lodging - 1.3%
HFS, Inc.* 150 $ 8,981
- ------------------------------------------------------------------------------
Special Products and Services - 0.9%
YES! Entertainment Corp.* 500 $ 6,188
- ------------------------------------------------------------------------------
Stores - 5.9%
AutoZone, Inc.* 200 $ 5,450
Dollar Tree Stores, Inc.* 200 6,400
Gymboree Corp.* 400 11,550
Payless ShoeSource, Inc.* 100 3,512
Sears, Roebuck & Co. 100 4,400
Staples, Inc.* 300 5,925
Talbots, Inc. 100 3,425
--------
$ 40,662
- ------------------------------------------------------------------------------
Supermarkets - 1.6%
Safeway, Inc.* 300 $ 10,875
- ------------------------------------------------------------------------------
Telecommunications - 5.3%
3Com Corp.* 100 $ 4,675
Cable Design Technologies Corp.* 200 7,100
Cabletron Systems, Inc.* 100 6,100
Cisco Systems, Inc.* 200 10,550
U.S. Robotics Corp.* 150 7,875
--------
$ 36,300
- ------------------------------------------------------------------------------
Utilities - Telephone - 1.1%
MCI Communications Corp. 300 $ 7,538
- ------------------------------------------------------------------------------
Total U.S. Stocks $562,009
- ------------------------------------------------------------------------------
Foreign Stocks - 3.5%
Germany - 0.6%
Adidas AG (Consumer Goods and Services) 50 $ 4,298
- ------------------------------------------------------------------------------
Sweden - 1.8%
Astra AB, ADR "A", (Medical and Health Products) 100 $ 4,188
Astra AB, Free Shares, "B" (Medical and Health Products) 100 4,137
Nobel Biocare AB (Medical and Health Products) 200 3,805
--------
$ 12,130
- ------------------------------------------------------------------------------
United Kingdom - 1.1%
Danka Business Systems PLC, ADR (Business Services) 250 $ 7,281
- ------------------------------------------------------------------------------
Total Foreign Stocks $ 23,709
- ------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $567,763) $585,718
- ------------------------------------------------------------------------------
Short Term Obligation - 13.8%
- ------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 9/03/96
at Amortized Cost $ 95 $ 94,973
- ------------------------------------------------------------------------------
Total Investments (Identified Cost, $662,736) $680,691
Other Assets, Less Liabilities - 0.8% 5,459
- ------------------------------------------------------------------------------
Net Assets - 100.0% $686,150
- ------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS AGGRESSIVE GROWTH FUND
Common Stocks - 96.1%
- --------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------
U.S. Stocks - 94.9%
Advertising - 0.1%
Lamar Advertising Co., "A" 100 $ 2,800
Universal Outdoor Holdings, Inc.* 100 3,050
-----------
$ 5,850
- --------------------------------------------------------------------------
Apparel and Textiles - 0.3%
Nike, Inc., "B" 250 $ 27,000
- --------------------------------------------------------------------------
Business Machines - 4.5%
Affiliated Computer Services, Inc., "A"* 500 $ 27,125
Sun Microsystems, Inc.* 7,900 429,562
-----------
$ 456,687
- --------------------------------------------------------------------------
Business Services - 3.2%
Alco Standard Corp. 1,000 $ 43,625
Ceridian Corp.* 1,000 42,625
Computer Sciences Corp.* 500 35,000
CUC International, Inc.* 1,000 34,375
DST Systems, Inc.* 3,000 92,250
First USA Paymentech, Inc.* 100 3,775
Interim Services, Inc. 1,760 71,720
National Processing, Inc. 100 1,713
-----------
$ 325,083
- --------------------------------------------------------------------------
Cellular Telephones - 0.3%
AirTouch Communications, Inc.* 1,000 $ 27,500
- --------------------------------------------------------------------------
Computer Software - Personal Computers - 5.3%
First Data Corp. 1,000 $ 78,000
Microsoft Corp.* 3,750 459,375
-----------
$ 537,375
- --------------------------------------------------------------------------
Computer Software - Systems - 21.1%
Adobe Systems, Inc. 500 $ 17,438
BMC Software, Inc.* 6,900 514,050
Cadence Design Systems, Inc.* 6,000 177,750
CCC Information Services Group, Inc.* 100 1,850
Computer Associates International, Inc. 10,000 525,000
Compuware Corp.* 3,100 133,300
Informix Corp.* 3,000 67,500
Netscape Communications Corp. 1,500 53,062
Oracle Systems Corp.* 9,000 317,250
Softquad International, Inc.* 7,500 35,508
Spyglass, Inc. 3,000 49,875
Sterling Software, Inc. 300 20,362
Sybase, Inc.* 8,000 128,875
Synopsys, Inc.* 1,500 57,000
USCS International, Inc.* 2,000 38,750
-----------
$ 2,137,570
- --------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
Consolidated Cigar Holdings, Inc.* 100 $ 3,150
Revlon, Inc., "A"* 5,000 149,375
Service Corp. International 1,000 56,375
Tyco International Ltd. 1,000 42,250
-----------
$ 251,150
- --------------------------------------------------------------------------
Electronics - 3.5%
Atmel Corp.* 2,000 $ 51,750
Intel Corp. 2,000 159,625
LSI Logic Corp.* 4,500 98,437
Xilinx, Inc.* 1,400 49,000
-----------
$ 358,812
- --------------------------------------------------------------------------
Entertainment - 7.3%
American Radio Systems Corp., "A"* 500 $ 17,750
Chancellor Broadcast Corp., "A"* 100 3,750
Clear Channel Communications, Inc.* 1,300 107,087
Disney (Walt) Co. 500 28,500
Harrah's Entertainment, Inc.* 10,000 190,000
Infinity Broadcasting Corp., "A"* 3,250 88,969
Jacor Communications, Inc.* 1,000 33,500
LIN Television Corp.* 5,000 178,750
Mirage Resorts, Inc.* 2,000 46,500
Renaissance Communications Corp. 1,000 35,250
Viacom, Inc., "B"* 345 10,868
-----------
$ 740,924
- --------------------------------------------------------------------------
Financial Institutions - 4.3%
Associates First Capital Corp., "A" 400 $ 15,800
Federal Home Loan Mortgage Corp. 250 22,094
Franklin Resources, Inc. 6,000 357,000
Hambrecht & Quist Group, Inc.* 100 1,675
MBNA Corp. 1,000 30,375
Merrill Lynch & Co., Inc. 100 6,125
Schwab (Charles) Corp. 250 6,250
-----------
$ 439,319
- --------------------------------------------------------------------------
Food and Beverage Products - 0.1%
PepsiCo, Inc. 500 $ 14,375
- --------------------------------------------------------------------------
Insurance - 0.5%
Equitable of Iowa Cos. 1,500 $ 55,125
- --------------------------------------------------------------------------
Medical and Health Products - 3.5%
Boston Scientific Corp. 1,000 $ 45,875
Guidant Corp. 500 25,375
Johnson & Johnson 1,000 49,250
Pfizer, Inc. 1,000 71,000
Rhone-Poulenc Rorer, Inc. 1,500 105,563
Schering Plough Corp. 1,000 55,875
-----------
$ 352,938
- --------------------------------------------------------------------------
Medical and Health Technology and Services - 7.8%
Cardinal Health, Inc. 500 $ 36,688
Genesis Health Ventures, Inc.* 2,000 51,000
Health Management Associates, Inc., "A"* 2,000 45,500
Healthsouth Corp.* 5,500 178,062
Lincare Holdings, Inc.* 1,500 55,969
Oxford Health Plans, Inc.* 500 22,875
Pacificare Health Systems, Inc., "B"* 3,000 241,500
St. Jude Medical, Inc.* 1,000 35,875
United Healthcare Corp. 2,000 77,250
Vivra, Inc.* 1,500 45,187
-----------
$ 789,906
- --------------------------------------------------------------------------
Oil Services - 0.2%
Schlumberger Ltd. 250 $ 21,094
- --------------------------------------------------------------------------
Pollution Control - 0.2%
Sanifill, Inc.* 500 $ 23,188
- --------------------------------------------------------------------------
Printing and Publishing - 4.0%
Gannett Co., Inc. 5,000 $ 335,000
Tribune Co. 1,000 71,875
-----------
$ 406,875
- --------------------------------------------------------------------------
Restaurants and Lodging - 3.7%
HFS, Inc.* 2,000 $ 119,750
Interstate Hotels Co. 200 4,725
Marriot International, Inc. 1,000 54,875
McDonalds Corp. 250 11,594
Outback Steakhouse, Inc.* 1,000 28,250
Promus Hotel Corp.* 5,100 153,637
-----------
$ 372,831
- --------------------------------------------------------------------------
Stores - 7.7%
AutoZone, Inc.* 1,000 $ 27,250
General Nutrition Cos., Inc.* 4,000 59,000
Gymboree Corp.* 2,000 57,750
Home Depot, Inc. 2,000 106,250
Micro Warehouse, Inc.* 5,500 147,812
Office Depot, Inc.* 7,500 119,062
Officemax, Inc.* 3,750 52,500
Sunglass Hut International, Inc. 500 7,875
Talbots, Inc. 250 8,563
Thrifty Payless Holdings, Inc., "B"* 6,000 96,750
Travis Boats and Motors, Inc.* 10,000 94,688
-----------
$ 777,500
- --------------------------------------------------------------------------
Telecommunications - 12.7%
Bay Networks, Inc.* 500 $ 13,750
Cabletron Systems, Inc.* 5,500 335,500
Cisco Systems, Inc.* 5,000 263,750
Glenayre Technologies, Inc.* 2,500 91,875
Lucent Technologies, Inc. 2,000 73,750
McLeod, Inc., "A"* 200 5,775
MFS Communications, Inc. 500 21,187
Rogers Cantel Mobile Co., "B"* 1,000 20,500
Shiva Corp.* 1,000 50,500
Sterling Commerce, Inc.* 100 3,100
Tellabs, Inc.* 200 12,675
U.S. Robotics Corp.* 7,500 393,750
U.S. Satellite Broadcasting Co., Inc., "A"* 100 2,900
-----------
$ 1,289,012
- --------------------------------------------------------------------------
Utilities - Telephone - 2.1%
MCI Communications Corp. 8,500 $ 213,563
- --------------------------------------------------------------------------
Total U.S. Stocks $ 9,623,677
- --------------------------------------------------------------------------
Foreign Stocks - 1.2%
France
Dassault Systems S.A., ADR (Computer
Software - Systems) 100 $ 3,875
- --------------------------------------------------------------------------
Germany - 1.5%
Sap AG, Preferred (Computer Software - Systems) 750 $ 122,898
Sap Aktiengesellschsft, ADR##
(Computer Software - Systems) 600 32,550
-----------
$ 155,448
- --------------------------------------------------------------------------
Italy - 0.5%
Fila Holdings S.p.A., ADR (Apparel
and Textiles) 500 $ 48,500
- --------------------------------------------------------------------------
Sweden - 0.4%
Astra AB, Free, "B" (Medical and Health Products) 1,000 $ 41,374
- --------------------------------------------------------------------------
Total Foreign Stocks $ 249,197
- --------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $9,587,379) $ 9,872,874
- --------------------------------------------------------------------------
Warrant - 1.9%
- --------------------------------------------------------------------------
Intel Corp. (Electronics) (Identified
Cost, $188,912) 4,500 $ 188,437
- --------------------------------------------------------------------------
Convertible Preferred Stock - 0.3%
- --------------------------------------------------------------------------
American Radio Systems Corp., 7s##
(Entertainment) (Identified Cost, $30,000) 600 $ 31,500
- --------------------------------------------------------------------------
Short Term Obligation - 1.5%
- --------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 9/3/96
at Amortized Cost $150 $ 149,957
- --------------------------------------------------------------------------
Total Investments (Identified Cost, $9,956,248) $10,242,768
Other Assets, Less Liabilities - (1.0)% (98,085)
- --------------------------------------------------------------------------
Net Assets - 100.0% $10,144,683
- --------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1996
MFS SPECIAL OPPORTUNITIES FUND
Common Stocks - 90.0%
- --------------------------------------------------------------------------
Issuer Shares Value
- --------------------------------------------------------------------------
U.S. Stocks - 86.9%
Advertising - 0.1%
Lamar Advertising Co., "A" 100 $ 2,800
- --------------------------------------------------------------------------
Aerospace - 3.8%
B.E. Aerospace, Inc.* 4,000 $ 66,000
Raytheon Co. 300 15,450
Rockwell International Corp. 100 5,200
----------
$ 86,650
- --------------------------------------------------------------------------
Agricultural Products - 0.8%
Case Corp. 400 $ 18,200
- --------------------------------------------------------------------------
Airlines - 0.5%
Midwest Express Holdings, Inc. 400 $ 12,100
- --------------------------------------------------------------------------
Automotive - 1.3%
Goodrich (B.F.) Co. 300 $ 11,250
Harvard Industries, Inc. 2,200 17,050
----------
$ 28,300
- --------------------------------------------------------------------------
Banks and Credit Companies - 0.7%
Wells Fargo & Co. 66 $ 16,418
- --------------------------------------------------------------------------
Building - 5.3%
Eljer Industries, Inc. 3,000 $ 31,125
Nortek, Inc. 3,000 41,250
Walter Industries, Inc. 3,500 46,812
----------
$ 119,187
- --------------------------------------------------------------------------
Business Services - 3.6%
ADT Ltd.* 1,675 $ 32,872
Alco Standard Corp. 1,100 47,987
----------
$ 80,859
- --------------------------------------------------------------------------
Cellular Telephones - 0.6%
Telephone & Data Systems, Inc. 300 $ 12,788
- --------------------------------------------------------------------------
Chemicals - 2.1%
Dexter Corp. 500 $ 14,562
NL Industries, Inc. 3,000 33,000
----------
$ 47,562
- --------------------------------------------------------------------------
Computer Software - Systems - 2.3%
Adobe Systems, Inc. 600 $ 20,925
Cerner Corp. 900 12,600
Sybase, Inc.* 1,100 17,720
----------
$ 51,245
- --------------------------------------------------------------------------
Conglomerates - 1.3%
Insilco Corp. 800 $ 28,800
- --------------------------------------------------------------------------
Consumer Goods and Services - 7.4%
Darling International, Inc. 1,300 $ 34,450
Philip Morris Cos., Inc. 190 17,053
Thermadyne Industries Holdings Corp. 2,000 41,750
Tyco International Ltd. 700 29,575
UST, Inc. 530 15,900
Westpoint Stevens, Inc. 1,100 28,737
----------
$ 167,465
- --------------------------------------------------------------------------
Containers - 1.2%
Atlantis Plastics, Inc. 3,000 $ 16,125
Sea Containers Ltd., "A" 600 11,250
----------
$ 27,375
- --------------------------------------------------------------------------
Defense Electronics - 0.2%
Loral Space & Communications Corp.* 400 $ 5,600
- --------------------------------------------------------------------------
Electrical Equipment - 0.5%
Honeywell, Inc. 200 $ 11,625
- --------------------------------------------------------------------------
Electronics - 1.8%
Altera Corp.* 100 $ 4,400
Analog Devices, Inc. 200 4,825
Atmel Corp.* 400 10,350
Intel Corp. 270 21,549
----------
$ 41,124
- --------------------------------------------------------------------------
Entertainment - 16.8%
American Radio Systems Corp., "A"* 200 $ 7,100
Chancellor Broadcast Corp., "A"* 1,300 48,750
Evergreen Media Corp., "A" 150 4,725
EZ Communications, Inc., "A" 2,000 83,500
Golden Bear Golf, Inc.* 100 2,025
Harrah's Entertainment, Inc.* 2,000 38,000
Harveys Casino Resorts 700 12,075
Jacor Communications, Inc.* 400 13,400
LIN Television Corp.* 700 25,025
New World Communications, "A" 2,000 46,125
Osborn Communications Corp. 3,300 49,500
Showboat, Inc. 400 7,950
Viacom, Inc., "B"* 400 12,600
Young Broadcasting, Inc., "A" 800 27,700
----------
$ 378,475
- --------------------------------------------------------------------------
Financial Institutions - 2.7%
Beneficial Corp. 300 $ 16,912
Federal Home Loan Mortgage Corp. 300 26,512
Union Planters Corp. 500 16,438
----------
$ 59,862
- --------------------------------------------------------------------------
Food and Beverage Products - 0.7%
Interstate Bakeries Corp. 500 $ 15,125
- --------------------------------------------------------------------------
Forest and Paper Products - 1.0%
Kimberly-Clark Corp. 300 $ 23,513
- --------------------------------------------------------------------------
Insurance - 0.5%
PennCorp Financial Group, Inc. 400 $ 12,200
- --------------------------------------------------------------------------
Medical and Health Products - 0.7%
Lilly (Eli) & Co. 100 $ 5,725
Uromed Corp. 900 9,338
----------
$ 15,063
- --------------------------------------------------------------------------
Medical and Health Technology and Services - 2.8%
OrNda Healthcorp., Inc. 800 $ 20,600
Pacificare Health Systems, Inc., "B"* 100 8,050
St. Jude Medical, Inc.* 700 25,112
United Healthcare Corp. 230 8,884
----------
$ 62,646
- --------------------------------------------------------------------------
Oil Services - 1.8%
Mesa, Inc. 6,500 $ 26,812
Pennzoil Co. 200 10,675
Tidewater, Inc. 100 3,838
----------
$ 41,325
- --------------------------------------------------------------------------
Oils - 0.2%
Seacor Holdings, Inc. 100 $ 4,550
- --------------------------------------------------------------------------
Photographic Products - 1.3%
Anacomp, Inc. 1,975 $ 15,677
Eastman Kodak Co. 200 14,500
----------
$ 30,177
- --------------------------------------------------------------------------
Printing and Publishing - 1.5%
Pulitzer Publishing Co. 300 $ 16,275
Scripps (E.W.) Co., "A" 400 17,800
----------
$ 34,075
- --------------------------------------------------------------------------
Railroads - 2.1%
Burlington Northern Santa Fe Railway Co. 200 $ 16,000
Wisconsin Central Transportation Corp.* 900 31,725
----------
$ 47,725
- --------------------------------------------------------------------------
Real Estate Investment Trusts - 0.5%
Equity Inns, Inc. 900 $ 11,250
- --------------------------------------------------------------------------
Restaurants and Lodging - 4.0%
Felcor Suite Hotels, Inc. 500 $ 15,250
Host Marriott Corp. 600 8,250
Promus Hotel Corp.* 2,200 66,275
----------
$ 89,775
- --------------------------------------------------------------------------
Special Products and Services - 2.9%
Gillette Holdings, Inc.+ 531 $ 16,461
IMO Industries, Inc. 8,500 42,500
Stanley Works 200 5,500
----------
$ 64,461
- --------------------------------------------------------------------------
Stores - 6.6%
Carr-Gottstein Foods Co. 7,500 $ 30,937
Carson Pirie Scott & Co. 900 22,725
Gantos, Inc. 15,000 60,937
Office Depot, Inc.* 700 11,113
Penney (J.C.), Inc. 200 10,575
Sears, Roebuck & Co. 300 13,200
----------
$ 149,487
- --------------------------------------------------------------------------
Telecommunications - 5.7%
C-Tec Corp. 1,500 $ 38,625
Cabletron Systems, Inc.* 400 24,400
Granite Broadcasting Corp. 2,800 33,950
Silver King Communications, Inc. 775 20,150
U.S. Robotics Corp.* 240 12,600
----------
$ 129,725
- --------------------------------------------------------------------------
Utilities - Electric - 1.6%
Cinergy Corp. 400 $ 12,000
CMS Energy Corp. 300 8,963
Illinova Corp. 400 10,450
Nipsco Industries, Inc. 100 3,700
----------
$ 35,113
- --------------------------------------------------------------------------
Total U.S. Stocks $1,962,645
- --------------------------------------------------------------------------
Foreign Stocks - 3.1%
Hong Kong - 2.0%
Liu Chong Hing Bank (Financial Institutions) 2,000 $ 2,819
Semi-Tech (Global) Ltd. (Electronics) 21,000 35,444
Wharf Holdings (Real Estate) 2,000 7,553
----------
$ 45,816
- --------------------------------------------------------------------------
New Zealand - 0.6%
Tranz Rail Holdings Ltd., ADR (Railroads) 900 $ 13,500
- --------------------------------------------------------------------------
United Kingdom - 0.5%
British Petroleum PLC, ADR (Oils) 100 $ 11,775
- --------------------------------------------------------------------------
Total Foreign Stocks $ 71,091
- --------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $1,992,527) $2,033,736
- --------------------------------------------------------------------------
Bonds - 5.5%
- --------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- --------------------------------------------------------------------------
Financial Services - 1.3%
Tiphook Finance Corp., 8s, 2000 $ 40 $ 28,000
- --------------------------------------------------------------------------
Industrials - 4.2%
Atlantis Group, Inc., 11s, 2003 $ 20 $ 19,900
CHC Helicopter Corp., 11.5s, 2002 26 25,350
Fleming Cos., Inc., 10.625s, 2001 10 9,500
Grand Union Co., 12s, 2004 20 19,850
Harrah's Jazz Co., 14.25s, 2001 40 20,800
----------
$ 95,400
- --------------------------------------------------------------------------
Total Bonds (Identified Cost, $119,462) $ 123,400
- --------------------------------------------------------------------------
Preferred Stocks - 3.4%
- --------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
Mesa, Inc. (Oil Services) 5,928 $ 30,381
Renaissance Cosmetics, Inc. (Consumer
Goods and Services)+ 20 20,000
Supermarkets General Holdings Corp. (Supermarkets) 1,100 26,400
- --------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $61,497) $ 76,781
- --------------------------------------------------------------------------
Short Term Obligation - 3.5%
- --------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 9/03/96
at Amortized Cost $ 80 $ 79,977
- --------------------------------------------------------------------------
Total Investments (Identified Cost, $2,253,463) $2,313,894
- --------------------------------------------------------------------------
Short Sells - (1.9)%
- --------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
ValuJet, Inc. (Proceeds, $24,501) (3,500) $ (43,750)
- --------------------------------------------------------------------------
Other Assets, Less Liabilities - (0.5)% (11,509)
- --------------------------------------------------------------------------
Net Assets - 100.0% $2,258,635
- --------------------------------------------------------------------------
Portfolio Footnotes:
*Non-income producing security.
+Restricted security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statements of Assets and Liabilities
- ------------------------------------------------------------------------------
Equity Research Core
Income Growth and Growth
August 31, 1996 Fund Income Fund Fund
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost,
$448,832, $483,259 and
$662,736, respectively) $474,801 $489,914 $680,691
Cash 1,140 1,473 --
Foreign currency, at value (identified
cost, $0, $208 and $132,
respectively) -- 211 136
Receivable for investments sold -- -- 27,091
Net receivable for forward foreign
currency exchange contracts sold -- -- 1
Interest and dividends receivable 1,490 760 366
Deferred organization expenses 1,885 1,885 1,885
-------- -------- --------
Total assets $479,316 $494,243 $710,170
-------- -------- --------
Liabilities:
Payable for investments purchased $ -- $ -- $ 19,677
Net payable for forward foreign currency
exchange contracts purchased -- -- 13
Accrued expenses and other liabilities 1,936 1,930 4,330
-------- -------- --------
Total liabilities $ 1,936 $ 1,930 $ 24,020
-------- -------- --------
Net assets $477,380 $492,313 $686,150
======== ======== ========
Net assets consist of:
Paid-in capital $439,287 $453,853 $601,673
Unrealized appreciation on investments and
translation of assets and
liabilities in foreign currencies 25,969 6,658 17,950
Accumulated undistributed net realized
gain on investments and
foreign currency transactions 7,246 30,033 66,540
Accumulated undistributed net investment
income (loss) 4,878 1,769 (13)
-------- -------- --------
Total $477,380 $492,313 $686,150
======== ======== ========
Shares of beneficial interest outstanding 43,125 44,240 55,662
====== ====== ======
Class A shares:
Net asset value and redemption price per
share (net assets / shares of beneficial
interest outstanding) $11.07 $11.13 $12.33
====== ====== ======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Assets and Liabilities - continued
- ------------------------------------------------------------------------------
Aggressive Special
Growth Opportunities
August 31, 1996 Fund Fund
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost,
$9,956,248 and $2,253,463,
respectively) $10,242,768 $2,313,894
Cash 4,808 --
Deposits with banks for securities sold short -- 40,425
Foreign currency, at value (identified cost, $0
and $815, respectively) -- 815
Receivable for Fund shares sold 225 --
Receivable for investments sold 16,199 39,211
Interest and dividends receivable 1,337 4,172
Deferred organization expenses 1,885 1,885
----------- ----------
Total assets $10,267,222 $2,400,402
----------- ----------
Liabilities:
Cash overdraft $ -- $ 16,982
Securities sold short, at value (proceeds, $0
and $24,501, respectively) -- 43,750
Payable for investments purchased 95,587 78,963
Accrued expenses and other liabilities 26,952 2,072
----------- ----------
Total liabilities $ 122,539 $ 141,767
----------- ----------
Net assets $10,144,683 $2,258,635
=========== ==========
Net assets consist of:
Paid-in capital $ 8,696,282 $2,038,950
Unrealized appreciation on investments and
translation of assets and liabilities
in foreign currencies 286,520 41,182
Accumulated undistributed net realized gain on
investments and foreign currency transactions 1,148,697 168,487
Accumulated undistributed net investment income 13,184 10,016
----------- ----------
Total $10,144,683 $2,258,635
=========== ==========
Shares of beneficial interest outstanding 827,742 198,827
======= =======
Class A shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest
outstanding) $12.26 $11.36
====== ======
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Operations
- ------------------------------------------------------------------------------
Equity Research Core
Income Growth and Growth
Period Ended August 31, 1996* Fund Income Fund Fund
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 7,846 $ 5,213 $ 1,918
Interest 1,004 771 2,442
------- ------- -------
Total investment income $ 8,850 $ 5,984 $ 4,360
------- ------- -------
Expenses -
Management fee $ 1,986 $ 2,082 $ 2,361
Shareholder servicing agent fee 397 416 472
Distribution and service fee 1,324 1,388 1,574
Registration fees 665 670 737
Auditing fees 5,000 5,000 5,000
Printing 549 538 586
Legal fees 1,884 1,884 1,884
Amortization of organization expenses 286 286 286
Custodian fee 143 302 160
Postage -- -- 128
Miscellaneous 135 144 283
------- ------- -------
Total expenses $12,369 $12,710 $13,471
Fees paid indirectly (108) (130) (118)
Reduction of expenses by investment
adviser (8,289) (8,417) (8,631)
------- ------- -------
Net expenses $ 3,972 $ 4,163 $ 4,722
------- ------- -------
Net investment income (loss) $ 4,878 $ 1,821 $ (362)
------- ------- -------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 7,246 $30,033 $66,902
Foreign currency transactions -- (52) (13)
------- ------- -------
Net realized gain on investments and
foreign currency transactions $ 7,246 $29,981 $66,889
------- ------- -------
Change in unrealized appreciation on
investments and translation of assets
and liabilities in foreign currencies $25,969 $ 6,658 $17,950
------- ------- -------
Net realized and unrealized gain on
investments and foreign currency $33,215 $36,639 $84,839
------- ------- -------
Increase in net assets from
operations $38,093 $38,460 $84,477
======= ======= =======
*For the period from the commencement of investment operations, January 2,
1996 to August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Operations - continued
- ------------------------------------------------------------------------------
Aggressive Special
Growth Opportunities
Period Ended August 31, 1996* Fund Fund
- ------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 12,981 $ 8,807
Interest 25,327 20,441
---------- --------
Total investment income $ 38,308 $ 29,248
---------- --------
Expenses -
Management fee $ 43,311 $ 9,616
Shareholder servicing agent fee 8,675 1,923
Distribution and service fee 28,914 6,410
Registration fees 6,498 3,779
Auditing fees 5,000 5,000
Postage 577 168
Printing 6,652 5,622
Legal fees 2,284 3,975
Amortization of organization expenses 286 286
Custodian fee 3,210 755
Miscellaneous 895 497
---------- --------
Total expenses $ 106,302 $ 38,031
Fees paid indirectly (343) (350)
Reduction of expenses by investment adviser and
distributor (80,900) (18,449)
---------- --------
Net expenses $ 25,059 $ 19,232
---------- --------
Net investment income $ 13,249 $ 10,016
---------- --------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $1,148,697 $168,487
Foreign currency transactions (65) --
---------- --------
Net realized gain on investments and foreign
currency transactions $1,148,632 $168,487
---------- --------
Change in unrealized appreciation on investments
and translation of assets and liabilities in
foreign currencies $ 286,520 $ 41,182
---------- --------
Net realized and unrealized gain on
investments and foreign currency $1,435,152 $209,669
---------- --------
Increase in net assets from operations $1,448,401 $219,685
========== ========
*For the period from the commencement of investment operations, January 2,
1996 to August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------
Equity Research Core
Income Growth and Growth
Period Ended August 31, 1996* Fund Income Fund Fund
- ------------------------------------------------------------------------------
Increase in net assets:
From operations -
Net investment income (loss) $ 4,878 $ 1,821 $ (362)
Net realized gain on investments and
foreign currency
transactions 7,246 29,981 66,889
Net unrealized gain on investments and
foreign currency
translation 25,969 6,658 17,950
-------- -------- --------
Increase in net assets from operations $ 38,093 $ 38,460 $ 84,477
-------- -------- --------
Fund shares (principal) transactions -
Net proceeds from sale of shares $449,397 $453,853 $605,756
Cost of shares reacquired (10,110) -- (4,083)
-------- -------- --------
Increase in net assets from Fund
shares transactions $439,287 $453,853 $601,673
-------- -------- --------
Total increase in net assets $477,380 $492,313 $686,150
Net assets:
At beginning of period $ -- $ -- $ --
-------- -------- --------
At end of period (including accumulated
undistributed net investment income
(loss) of $4,878, $1,769 and ($13),
respectively) $477,380 $492,313 $686,150
======== ======== ========
*For the period from the commencement of investment operations, January 2,
1996 to August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets - continued
- ------------------------------------------------------------------------------
Aggressive Special
Growth Opportunities
Period Ended August 31, 1996* Fund Fund
- ------------------------------------------------------------------------------
Increase in net assets:
From operations -
Net investment income $ 13,249 $ 10,016
Net realized gain on investments and foreign
currency transactions 1,148,632 168,487
Net unrealized gain on investments and foreign
currency translation 286,520 41,182
----------- ----------
Increase in net assets from operations $ 1,448,401 $ 219,685
----------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 9,192,182 $2,038,964
Cost of shares reacquired (495,900) (14)
----------- ----------
Increase in net assets from Fund shares
transactions $ 8,696,282 $2,038,950
----------- ----------
Total increase in net assets $10,144,683 $2,258,635
Net assets:
At beginning of period $ -- $ --
----------- ----------
At end of period (including accumulated
undistributed net investment
income of $13,184 and $10,016, respectively) $10,144,683 $2,258,635
=========== ==========
*For the period from the commencement of investment operations, January 2,
1996 to August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Equity Research Core Aggressive Special
Income Growth and Growth Growth Opportunities
Period Ended August 31, 1996* Fund Income Fund Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income (loss)(S) $ 0.13 $ 0.05 $ (0.01) $ 0.02 $ 0.06
Net realized and unrealized gain on
investments and foreign currency
transactions 0.94 1.08 2.34 2.24 1.30
------- ------- ------- ------- -------
Total from investment operations $ 1.07 $ 1.13 $ 2.33 $ 2.26 $ 1.36
------- ------- ------- ------- -------
Net asset value - end of period $ 11.07 $ 11.13 $ 12.33 $ 12.26 $ 11.36
======= ======= ======= ======= =======
Total return 10.70%++ 11.30%++ 23.30%++ 22.60%++ 13.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+ 1.50%+ 0.44%+ 1.50%+
Net investment income (loss) 1.83%+ 0.65%+ (0.11)%+ 0.23%+ 0.78%+
Portfolio turnover 56% 58% 204% 104% 108%
Average commission rate $0.0331 $0.0113 $ 0.411 $0.0555 $0.0361
Net assets at end of period (000 omitted) $ 477 $ 492 $ 686 $10,145 $ 2,259
<FN>
*For the period from the commencement of investment operations, January 2, 1996 to August 31, 1996.
+Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
(S)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:
Net investment loss $(0.06) $(0.13) $(0.18) $ (0.05) $ (0.01)
Ratios (to average net assets):
Expenses 4.67%+ 4.58%+ 4.28%+ 1.84%+ 2.97%+
Net investment loss (0.78)%+ (1.86)%+ (2.34)%+ (0.66)%+ (0.16)%+
The reduction of expenses by fees paid indirectly, as a percentage of net assets, amounted to:
(0.03)%+ (0.03)%+ (0.02)%+ -- (0.02)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Series Trust I (the Trust) is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Trust presently consists of eight
Funds, as follows: MFS Managed Sectors Fund, MFS Cash Reserve Fund, MFS World
Asset Allocation Fund, MFS Equity Income Fund* (the Equity Income Fund), MFS
Research Growth and Income Fund* (the Research Growth and Income Fund), MFS Core
Growth Fund* (the Core Growth Fund), MFS Aggressive Growth Fund* (the Aggressive
Growth Fund) and MFS Special Opportunities Fund* (the Special Opportunities
Fund). Each Fund, except MFS Managed Sectors Fund, MFS World Asset Allocation
Fund and the Special Opportunities Fund, is diversified.
The Funds denoted with an asterisk (*) above are included within these financial
statements.
(2) Significant Accounting Policies
General -- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political and economic environment.
Investment Valuations -- Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid prices. Debt securities (other than
short-term obligations which mature in 60 days or less), including listed issues
and forward contracts, are valued on the basis of valuations furnished by
dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses -- Costs incurred by the Funds in connection with
their organization have been deferred and are being amortized on a straight-line
basis over a five-year period beginning on the date of commencement of
operations of each Fund.
Forward Foreign Currency Exchange Contracts -- The Funds may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Funds will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Funds may enter into contracts to deliver or receive
foreign currency they will receive from or require for their normal investment
activities. They may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the Funds may enter into
contracts with the intent of changing the relative exposure of each Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Short Sales -- The Special Opportunities Fund may enter into short sales. A
short sale transaction involves selling a security which the Fund does not own
with the intent of purchasing it later at a lower price. The Fund will realize a
gain if the security price decreases and a loss if the security price 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 can be greater than
losses from the actual purchase of a security. 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. 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, at least
equals the current market value of the security sold short.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
The Special Opportunities Fund can invest up to 100% of its portfolio in
high-yield securities rated below investment grade. Investments in high-yield
securities involve greater degrees of credit and market risk than investments in
higher-rated securities, and tend to be more sensitive to economic conditions.
The Special Opportunities Fund uses the effective interest method for reporting
interest income on payment-in-kind (PIK) bonds, whereby interest income on PIK
bonds is recorded ratably by the Fund at a constant yield to maturity. Legal
fees and other related expenses incurred to preserve and protect the value of a
security owned are added to the cost of the security; other legal fees are
expensed. Capital infusions, which are generally non-recurring, incurred to
protect or enhance the value of high-yield debt securities, are reported as an
addition to the cost basis of the security. Costs that are incurred to negotiate
the terms or conditions of capital infusions or that are expected to result in a
plan of reorganization are reported as realized losses. Ongoing costs incurred
to protect or enhance an investment, or costs incurred to pursue other claims or
legal actions, are reported as operating expenses.
Fees Paid Indirectly -- The Trust's custodian bank calculates its fee based on
each Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by each
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions -- The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. Each Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on each Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
Each Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
During the period ended August 31, 1996, the following amounts were reclassified
due to differences between book and tax accounting for currency transactions.
These changes had no effect on the net assets or net asset value per share.
<TABLE>
<CAPTION>
Research Growth Core Aggressive
and Income Growth Growth
Increase (decrease): Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated undistributed net realized
gains on investments and foreign
currency transactions $52 $(349) $65
Accumulated undistributed net investment
income (loss) (52) 349 (65)
</TABLE>
(3) Transactions with Affiliates
Investment Adviser -- Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate of
0.75% of each Fund's average daily net assets. For the period ended August 31,
1996 the investment adviser did not impose any of its fee, which is reflected as
a reduction of expenses in the Statement of Operations.
Under a temporary expense reimbursement agreement with MFS, MFS has voluntarily
agreed to pay all of each Fund's operating expenses, exclusive of management and
distribution and service fees. Each Fund in turn will pay MFS an expense
reimbursement fee not greater than 1.50% of the average daily net assets of its
Class A shares. To the extent that the expense reimbursement fee exceeds each
Fund's actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At August 31, 1996, the aggregate unreimbursed expenses owed to MFS
by each Fund amounted to:
Equity Research Growth Core Aggressive Special
Income and Income Growth Growth Opportunities
Fund Fund Fund Fund Fund
- -------------------------------------------------------------------------------
$4,582 $4,531 $4,224 $ -- $500
Each Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of each Fund, all of whom receive
remuneration for their services to each Fund from MFS. Certain of the officers
and Trustees of each Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Trustees are
currently not receiving any payments for their services to the Funds.
Distributor -- MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales of Class A shares of the Funds for the period
ended August 31, 1996.
The Trustees have adopted a distribution plan for Class A shares of each Fund
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that each Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of each Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of each Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.25% per annum of each Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by each Fund. Distribution and
service fees under the Class A distribution plan are currently being waived.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. There were
no contingent deferred sales charges imposed during the period ended August 31,
1996 on Class A shares of each Fund.
Shareholder Servicing Agent -- MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each Fund at an effective annual
rate of up to 0.15% attributable to Class A shares. MFSC is currently waiving
its fee for an indefinite period.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
<TABLE>
<CAPTION>
Research
Equity Growth and Core Aggressive Special
Income Income Growth Growth Opportunities
Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------
Purchases
<S> <C> <C> <C> <C> <C>
U.S. government securities $ -- $ -- $ -- $ -- $ 18,788
======== ======== ========== =========== ==========
Investments (non-U.S.
government securities) $660,739 $670,061 $1,355,824 $17,675,238 $3,989,576
======== ======== ========== =========== ==========
Sales
U.S. government securities -- -- -- -- $ 18,360
======== ======== ========== =========== ==========
Investments (non-U.S.
government securities) $218,619 $236,830 $ 854,960 $ 9,017,486 $2,012,685
======== ======== ========== =========== ==========
</TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Funds, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
Research
Equity Growth and Core Aggressive Special
Income Income Growth Growth Opportunities
Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate cost $448,974 $483,305 $666,084 $10,029,011 $2,255,731
======== ======== ======== =========== ==========
Gross unrealized
appreciation $ 33,745 $ 23,919 $ 29,764 $ 798,892 $ 187,895
Gross unrealized
depreciation (7,918) (17,310) (15,157) (585,135) (129,732)
-------- -------- -------- ----------- ----------
Net unrealized
appreciation $ 25,827 $ 6,609 $ 14,607 $ 213,757 $ 58,163
======== ======== ======== =========== ==========
</TABLE>
(5) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Research Growth and
Equity Income Fund Income Fund Core Growth Fund
Period Ended ------------------- ------------------ ------------------
August 31, 1996* Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 44,072 $449,397 44,240 $453,853 56,000 $605,756
Shares reacquired (947) (10,110) -- -- (338) (4,083)
------ -------- ------ -------- ------ --------
Net increase 43,125 $439,287 44,240 $453,853 55,662 $601,673
====== ======== ====== ======== ====== ========
</TABLE>
Aggressive Special
Growth Fund Opportunities Fund
--------------------- ---------------------
Period Ended August 31, 1996* Shares Amount Shares Amount
- ------------------------------------------------------------------------------
Shares sold 868,195 $9,192,182 198,828 $2,038,964
Shares reacquired (40,453) (495,900) (1) (14)
------- ---------- ------- ----------
Net increase 827,742 $8,696,282 198,827 $2,038,950
======= ========== ======= ==========
*For the period from the commencement of investment operations, January 2, 1996
to August 31, 1996.
(6) Line of Credit
The Trust entered into an agreement which enables each of the Funds to
participate with other funds managed by MFS in an unsecured line of credit with
a bank which permits borrowings up to $350 million, collectively. Borrowings may
be made to temporarily finance the repurchase of Fund shares. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. In addition, a commitment fee, based on the average daily unused
portion of the line of credit, is allocated among the participating funds at the
end of each quarter. The commitment fee allocated to each of the Funds for the
period ended August 31, 1996 ranged from $3 to $74.
(7) Financial Instruments
The Funds trade financial instruments with off-balance sheet risk in the normal
course of their investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange contracts
and futures contracts. The notional or contractual amounts of these instruments
represent the investment each Fund has in particular classes of financial
instruments and do not necessarily represent the amounts potentially subject to
risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
Core Growth Fund
<TABLE>
<CAPTION>
Contracts to In Net Unrealized
Settlement Deliver/ Exchange Contracts Appreciation
Transactiontion Date Receive For at Value (Depreciation)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sell 9/04/96 SEK 42,728 $6,448 $6,453 $ 1
Buy 9/03/96 DEM 6,354 $4,305 $4,292 $(13)
====== ====== ====
DEM = German Marks
SEK = Swedish Kronor
</TABLE>
At August 31, 1996, the Core Growth Fund had sufficient cash and/or securities
to cover any commitments under these contracts.
(8) Restricted Securities
The Funds may invest not more than 15% of each Fund's net assets in securities
which are subject to legal or contractual restrictions on resale. At August 31,
1996, the Research Growth and Income Fund and the Special Opportunities Fund
owned the following restricted securities (consisting 1.4% and 1.6% of net
assets, respectively). The Research Growth and Income Fund and the Special
Opportunities Fund do not have the right to demand that such securities be
registered. The value of these securities is determined by valuations supplied
by a pricing service or brokers or, if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
Date of
Description Acquisition Shares Cost Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research Growth and Jarvis Hotels 6/21/96 - 7/02/96 1,300 $ 3,557 $ 3,288
Income Fund Hong Leong Finance 1/15/96 1,000 3,847 3,370
-------
$ 6,658
=======
Special Opportunities Gillette Holdings, Inc. 1/05/96 531 $10,221 $16,461
Fund Renaissance Cosmetics, Inc. 8/08/96 20 20,000 20,000
------
$36,461
=======
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust I and Shareholders of MFS Equity Income
Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund, MFS Aggressive
Growth Fund and MFS Special Opportunities Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Equity Income Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund,
MFS Aggressive Growth Fund and MFS Special Opportunities Fund, (the Funds) (five
of the portfolios constituting MFS Series Trust I) including the schedules of
portfolio investments, as of August 31, 1996, and the related statements of
operations and the statements of changes in net assets and the financial
highlights for the period from January 2, 1996 (commencement of operations) to
August 31, 1996. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. As audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1996 by correspondence with the custodian and brokers or by other
appropriate auditing procedures where replies form brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Equity Income Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund,
MFS Aggressive Growth Fund and MFS Special Opportunities Fund at August 31,
1996, and the results of their operations, the changes in their net assets and
financial highlights for the period from January 2, 1996 (commencement of
operations) to August 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 4, 1996
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) EQUITY INCOME FUND
MFS(R) RESEARCH GROWTH AND INCOME FUND
MFS(R) CORE GROWTH FUND
MFS(R) AGGRESSIVE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
500 Boylston Street
Boston, MA 02116
[logo] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C)1996 MFS Fund Distributors, Inc., 500 Boylston Street Boston, MA 02110
INC-3-4/10/96/390
<PAGE> 266
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
SUPPLEMENT TO THE JANUARY 1, 1997 PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUNDS'
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1997, AND CONTAINS A DESCRIPTION OF CLASS P SHARES.
CLASS P SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN RETIREMENT
PLANS ESTABLISHED FOR THE BENEFIT OF EMPLOYEES OF MASSACHUSETTS FINANCIAL
SERVICES COMPANY ("MFS"), THE FUNDS' INVESTMENT ADVISER, AND EMPLOYEES OF MFS'
AFFILIATES ("MFS RETIREMENT PLANS"). CLASS P SHARES MAY NOT BE OFFERED OR SOLD
OUTSIDE OF THE COMMONWEALTH OF MASSACHUSETTS, AND THIS SUPPLEMENT DOES NOT
CONSTITUTE AN OFFER OF CLASS P SHARES TO ANY PERSON WHO RESIDES OUTSIDE OF THE
COMMONWEALTH OF MASSACHUSETTS.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS P
---------------------------------------------------------------------------
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
------- ------ ---------- -------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge
Imposed on Purchases of Fund
Shares (as a percentage of
offering price).......................... None None None None
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price or redemption
proceeds, as applicable)................. None None None None
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- ---- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Initial Sales Charge
Imposed on Purchases of Fund
Shares (as a percentage of
offering price)....................... None None None None None
Maximum Contingent Deferred
Sales Charge (as a percentage
of original purchase price or redemption
proceeds, as applicable).............. None None None None None
</TABLE>
-1-
<PAGE> 267
<TABLE>
<CAPTION>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
------ ------ ---------- -------------
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<S> <C> <C> <C> <C>
Management Fees (after fee
reduction)(1)................. 0.00% 0.00% 0.75% 0.00%
Rule 12b-1 Fees.................. None None None None
Other Expenses (after fee
reduction)(2)(3).............. 1.50% 1.50% 0.59% 1.50%
---- ---- ---- ----
Total Operating Expenses (after
fee reduction)(4)............. 1.50% 1.50% 1.34% 1.50%
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- ---- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee
reduction)(1).............. 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees............... None None None None None
Other Expenses (after fee
reduction)(2)(3)........... 1.50% 1.50% 1.50% 1.50% 1.75%
---- ---- ---- ---- ----
Total Operating Expenses (after
fee reduction)(4).......... 1.50% 1.50% 1.50% 1.50% 1.75%
</TABLE>
- ---------------------------
(1) 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 as follows:
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL
INCOME GROWTH OPPORTUNITIES
FUND FUND FUND
------ ------ -------------
<S> <C> <C>
0.75% 0.75% 0.75%
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
- ----------- ---- --------- ---------- -------------
<S> <C> <C> <C> <C>
0.65% 0.65% 0.75% 0.75% 1.00%
</TABLE>
- ---------------
(2) "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 4, the
Adviser is bearing certain expenses of Class P
-2-
<PAGE> 268
shares 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>
EQUITY CORE SPECIAL
INCOME GROWTH OPPORTUNITIES
FUND FUND FUND
------ ------ -------------
<S> <C> <C>
3.42% 3.03% 1.72%
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
- ----------- ---- --------- ---------- -------------
<S> <C> <C> <C> <C>
0.90% 0.90% 0.90% 0.90% 0.96%
</TABLE>
- ---------------
(3) 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."
(4) 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 P 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 P 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 P 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>
EQUITY CORE SPECIAL AGGRESSIVE
INCOME GROWTH OPPORTUNITIES GROWTH
FUND FUND FUND FUND
------ ------ ------------- ----------
<S> <C> <C> <C>
4.67% 4.28% 2.97% 1.84%
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
- ----------- ---- --------- ---------- -------------
<S> <C> <C> <C> <C>
2.05% 2.05% 2.15% 2.15% 2.15%
</TABLE>
-3-
<PAGE> 269
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 (b)
redemption at the end of each of the time periods indicated (unless otherwise
noted):
<TABLE>
<CAPTION>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
PERIOD FUND FUND FUND FUND
------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
1 year.............. $15 $15 $15 $15
3 years............. 47 47 47 47
</TABLE>
<TABLE>
<CAPTION>
SCIENCE
CONVERTIBLE BLUE NEW AND RESEARCH
SECURITIES CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 year........ $62 $62 $62 $62 $ 64
3 years....... 93 93 93 93 100
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Funds
will bear directly or indirectly. A more complete description of each Fund's
management fee is set forth under the caption "Management of the Funds" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUNDS; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
THE FUNDS
While each Fund has four classes of shares (Class A, Class B, Class C
and Class P shares), Class A and Class P shares are the only classes presently
available for sale. Class P shares are available for purchase only by the MFS
Retirement Plans and are described in this Supplement. Class A shares, Class B
shares and Class C shares are described in the Funds' Prospectus and Class A
shares are available for purchase by certain retirement plans established for
the benefit of employees of MFS and by such employees 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.
Class A shares are offered at net asset value plus an initial sales
charge up to a maximum of 4.75% of the offering price (or a contingent deferred
sales charge (a "CDSC") upon redemption of 1.00% during the first year in the
case of purchases of $1 million or more and certain purchases by retirement
plans), and are subject to an annual distribution fee and service fee up to a
maximum of 0.50% per annum. Class B shares are offered at net asset value
without an initial sales charge but are subject to a CDSC upon redemption
(declining from 4.00% during the first year to 0% after six years) and an annual
distribution fee and service fee up to a maximum of 1.00% per annum; Class B
shares 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 P shares are offered at net asset value without an initial sales charge or
CDSC and are not subject to a distribution or service fee. Class C and Class P
shares do not convert to any other class of shares of the Funds.
INFORMATION CONCERNING CLASS P SHARES OF THE FUNDS
As noted above, Class P shares are offered at net asset value without
an initial sales charge or a CDSC and are not subject to a distribution fee or
service fee. Class P shares are offered only to MFS Retirement Plans.
-4-
<PAGE> 270
MFS Retirement Plans may exchange Class P shares of the Funds for Class
P shares of any other Fund available for purchase by such Plans at their net
asset value (if available for sale), and may redeem Class P shares of the Funds
at net asset value. Distributions paid by the Funds with respect to Class P
shares generally will be greater than those paid with respect to Class A, Class
B and Class C shares because expenses attributable to Class A, Class B and Class
C shares generally will be higher.
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 Fund,
the Core Growth Fund, the Aggressive Growth Fund and the Special Opportunities
Fund such that each Fund's aggregate operating expenses do not exceed, on an
annualized basis, 1.50% of the average daily net assets with respect to Class P
shares. Such payments by MFS are subject to reimbursement by the relevant 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, on an annualized basis, 1.50% of the average daily net assets
with respect to Class P shares. 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 P 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.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1997
<PAGE> 271
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 PROSPECTUS
MFS(R) SCIENCE AND TECHNOLOGY FUND JANUARY 1, 1997
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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary................................................................................. 4
2. The Funds....................................................................................... 8
3. Condensed Financial Information................................................................. 10
4. Investment Objectives and Policies.............................................................. 10
Equity Income Fund.............................................................................. 11
Core Growth Fund................................................................................ 11
Aggressive Growth Fund.......................................................................... 11
Special Opportunities Fund...................................................................... 12
Convertible Securities Fund..................................................................... 12
Blue Chip Fund.................................................................................. 13
New Discovery Fund.............................................................................. 13
Science and Technology Fund..................................................................... 14
Research International Fund..................................................................... 14
5. Investment Techniques........................................................................... 15
6. Additional Risk Factors......................................................................... 23
7. Management of the Funds......................................................................... 26
8. Information Concerning Shares of the Funds...................................................... 29
Purchases....................................................................................... 29
Exchanges....................................................................................... 34
Redemptions and Repurchases..................................................................... 35
Distribution Plan............................................................................... 37
Distributions................................................................................... 38
Tax Status...................................................................................... 39
Net Asset Value................................................................................. 39
Expenses........................................................................................ 39
Description of Shares, Voting Rights and Liabilities............................................ 40
Performance Information......................................................................... 41
9. Shareholder Services............................................................................ 41
APPENDIX A -- Waivers of Sales Charges.......................................................... A-1
APPENDIX B -- Description of Bond Ratings....................................................... B-1
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
<PAGE> 272
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).
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 to maximize 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
2
<PAGE> 273
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 38 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).
3
<PAGE> 274
1. EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS A CLASS B CLASS C
--------- ------- -------
<S> <C> <C> <C>
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a
percentage of offering price)........... 4.75% 0.00% 0.00%
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase
price or redemption proceeds, as
applicable)............................. See Below(1) 4.00% 1.00%
</TABLE>
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
CLASS A SHARES
<TABLE>
<CAPTION>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee
reduction)(2)........................... 0.00% 0.00% 0.75% 0.00%
Rule 12b-1 Fees (after fee
reduction)(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>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Management Fees (after fee
reduction)(2)........................... 0.00% 0.00% 0.00% 0.00% 0.00%
Rule 12b-1 Fees (after fee
reduction)(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>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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>
4
<PAGE> 275
CLASS C SHARES
<TABLE>
<CAPTION>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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 as follows:
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL CONVERTIBLE
INCOME GROWTH OPPORTUNITIES SECURITIES
FUND FUND FUND FUND
- --------- --------- ------------- -------------
<S> <C> <C> <C>
0.75% 0.75% 0.75% 0.65%
</TABLE>
<TABLE>
<CAPTION>
NEW SCIENCE AND RESEARCH
BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND
- --------- --------- ------------- -------------
<S> <C> <C> <C>
0.65% 0.75% 0.75% 1.00%
</TABLE>
(3) Each Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.50% per annum of the average daily net assets attributable to Class A
shares. Distribution and service fees under the Class A Distribution Plan
are currently being waived on a voluntary basis and, while they may be
imposed at the discretion of MFD at any time, MFD currently intends to waive
these fees during the Funds' current fiscal year. Distribution expenses paid
under the Plan, together with the initial sales charge, may cause long-term
shareholders to pay more than the maximum sales charge that would have been
permissible if imposed entirely as an initial sales charge. See
"Distribution Plan" below.
(4) Each Fund's Distribution Plan provides that it will pay distribution/service
fees aggregating up to (but not necessarily all of) 1.00% per annum of the
average daily net assets attributable to Class B shares and Class C shares,
respectively. Distribution expenses paid under the Distribution Plans with
respect to Class B or Class C shares, together with any CDSC payable upon
redemption of Class B and Class C shares, may cause long-term shareholders
to pay more than the maximum sales charge that would have been permissible
if imposed entirely as an initial sales charge. See "Distribution Plan"
below.
(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
5
<PAGE> 276
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>
EQUITY CORE SPECIAL
INCOME GROWTH OPPORTUNITIES
FUND FUND FUND
--------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Class A........................... 3.36% 3.36% 3.36% 3.36% 3.36%
Class B........................... 3.43% 3.43% 3.43% 3.43% 3.43%
Class C........................... 3.36% 3.36% 3.36% 3.36% 3.36%
</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 and with the exception of
the Research International Fund, "Total Operating Expenses" will not exceed,
on an annualized basis, 1.50% of each Fund's average daily net assets with
respect to Class A shares, 2.57% of each Fund's average daily net assets
with respect to Class B shares, and 2.50% of each 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 (August 31, 2007 for the Blue Chip
Fund, the Convertible Securities Fund, the New Discovery Fund and the
Science and Technology Fund). "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>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
--------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Class A........................... 4.67% 4.28% 1.84% 2.97%
Class B........................... 5.24% 4.85% N/A 3.54%
Class C........................... 5.17% 4.78% N/A 3.47%
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND FUND
----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Class A........................... 4.51% 4.51% 4.61% 4.61% 4.86%
Class B........................... 5.18% 5.18% 5.18% 5.18% 5.43%
Class C........................... 5.11% 5.11% 5.11% 5.11% 5.36%
</TABLE>
(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."
6
<PAGE> 277
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>
EQUITY CORE SPECIAL
INCOME GROWTH AGGRESSIVE OPPORTUNITIES
PERIOD FUND FUND GROWTH FUND FUND
------ ------ ------ ----------- -------------
<S> <C> <C> <C> <C>
1 year..................... $62 $62 $61 $62
3 years.................... 93 93 88 93
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
------ ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $62 $62 $62 $62 $ 64
3 years.................... 93 93 93 93 100
</TABLE>
CLASS B SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
PERIOD FUND FUND FUND FUND
------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C>
1 year..................... $ 66 $ 66 $ 64 $ 66
3 years.................... 110 110 105 110
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
------ ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $ 66 $ 66 $ 66 $ 66 $ 69
3 years.................... 110 110 110 110 117
</TABLE>
CLASS B SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL
INCOME GROWTH AGGRESSIVE OPPORTUNITIES
PERIOD FUND FUND GROWTH FUND FUND
------ ------ ------ ----------- -------------
<S> <C> <C> <C> <C>
1 year..................... $26 $26 $24 $26
3 years.................... 80 80 75 80
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
------ ----------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $26 $26 $26 $26 $29
3 years.................... 80 80 80 80 87
</TABLE>
7
<PAGE> 278
CLASS C SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL
INCOME GROWTH AGGRESSIVE OPPORTUNITIES
PERIOD FUND FUND GROWTH FUND FUND
--------------------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $35 $35 $34 $35
3 years.................... 78 78 73 78
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
--------------------------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $35 $35 $35 $35 $38
3 years.................... 78 78 78 78 85
</TABLE>
CLASS C SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL
INCOME GROWTH AGGRESSIVE OPPORTUNITIES
PERIOD FUND FUND GROWTH FUND FUND
--------------------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 year..................... $25 $25 $24 $25
3 years.................... 78 78 73 78
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE NEW SCIENCE AND RESEARCH
SECURITIES BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
PERIOD FUND FUND FUND FUND FUND
--------------------------- ----------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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 Plan."
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 FUND
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
8
<PAGE> 279
the first year and an annual distribution fee and service fee up to a maximum of
1.00% per annum. Class C shares do not convert to any other class of shares of a
Fund. In addition, the Funds offer an additional class of shares, Class I
shares, exclusively to certain institutional investors. Class I shares are made
available by means of a separate Prospectus supplement provided to institutional
investors eligible to purchase Class I shares and are offered at net asset value
without an initial sales charge or CDSC upon redemption and without an annual
distribution and service fee.
The Trust's Board of Trustees provides broad supervision over the affairs of
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.
9
<PAGE> 280
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>
CLASS A
----------------------------------------------------------
PERIOD ENDED AUGUST 31, 1996*
----------------------------------------------------------
EQUITY CORE AGGRESSIVE SPECIAL
INCOME GROWTH GROWTH OPPORTUNITIES
FUND FUND FUND FUND
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
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>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
++ 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>
<TABLE>
<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>
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.
10
<PAGE> 281
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
11
<PAGE> 282
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.
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 to maximize 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
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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.
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 having a market
capitalization of at least $1 billion unless the company's stock is included in
the S&P 500 or the Dow Jones Industrial Average or is traded on the New York
Stock Exchange, 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
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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.
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 equity 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.
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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.
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
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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 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
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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.
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
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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
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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 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.
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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.
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
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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.
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.
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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
nongovernmental 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.
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
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"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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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
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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
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
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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.
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
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<PAGE> 297
entitled to receive a management fee, computed and paid monthly, in an amount
listed below per annum of the average daily net assets of such Fund:
<TABLE>
<CAPTION>
EQUITY CORE SPECIAL CONVERTIBLE
INCOME GROWTH OPPORTUNITIES SECURITIES
FUND FUND FUND FUND
- --------- --------- ------------- -------------
<S> <C> <C> <C>
0.75% 0.75% 0.75% 0.65%
</TABLE>
<TABLE>
<CAPTION>
NEW SCIENCE AND RESEARCH
BLUE CHIP DISCOVERY TECHNOLOGY INTERNATIONAL
FUND FUND FUND FUND
- --------- --------- ------------- -------------
<S> <C> <C> <C>
0.65% 0.75% 0.75% 1.00%
</TABLE>
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.
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER(S)
- ---------------------------- --------------------------------------------------------------------------
<S> <C>
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 as a
portfolio manager 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 as
a portfolio manager 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.
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 S. Irfan 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.
</TABLE>
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
27
<PAGE> 298
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 $52.3
billion on behalf of approximately 2.2 million investor accounts as of November
29, 1996. As of such date, the MFS organization managed approximately $20.3
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $28.1 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 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 November 29, 1996, FCM
managed approximately U.S. $43.6 billion of assets in securities. The Adviser
has entered into a sub-advisory agreement with FCM dated December 30, 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
28
<PAGE> 299
average daily net assets on an annualized basis. FCM is currently waiving its
right to receive management fees. The Adviser and FCM have agreed to cooperate
in distributing, advising and managing investment products throughout the world.
In this arrangement, they anticipate that certain expenses and revenues relating
to their cooperative activities, including investment advisory fees received
from the Research International Fund and certain expenses incurred by MFS, FCM
and their affiliates attributable to their services to the Research
International Fund, will be shared.
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 November 29, 1996, FCEM managed
approximately U.S. $4.3 billion of assets invested in emerging markets. FCM has
entered into a sub-advisory agreement with FCEM dated December 30, 1996. For its
service, the FCM pays FCEM an annual management fee, computed and paid monthly,
in an amount equal to 0.12% 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
Class A, Class B and Class C 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.
This Prospectus offers Class A, Class B and Class 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 follows:
SALES CHARGE* AS PERCENTAGE OF:
<TABLE>
<CAPTION>
DEALER ALLOWANCE
OFFERING NET AMOUNT AS A PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------- -------- ---------- --------------------
<S> <C> <C> <C>
Less than $100,000............................................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000................................ 4.00 4.17 3.20
$250,000 but less than $500,000................................ 2.95 3.04 2.25
$500,000 but less than $1,000,000.............................. 2.20 2.25 1.70
$1,000,000 or more............................................. None** None** See Below**
</TABLE>
- ---------------
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
29
<PAGE> 300
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 such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
----------------------------------- -------------------------------------
<S> <C>
1.00%.............................. On the first $2,000,000, plus
0.80%.............................. Over $2,000,000 to $3,000,000, plus
0.50%.............................. Over $3,000,000 to $50,000,000, plus
0.25%.............................. Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
30
<PAGE> 301
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:
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED SALES
AFTER PURCHASE CHARGE
---------------------------------------------------- ---------------
<S> <C>
First............................................... 4%
Second.............................................. 4%
Third............................................... 3%
Fourth.............................................. 3%
Fifth............................................... 2%
Sixth............................................... 1%
Seventh and following............................... 0%
</TABLE>
The CDSC imposed is assessed against the lesser of the value of the shares
redeemed (exclusive of reinvested dividends and capital gain distributions) or
the total cost of such shares. No CDSC is assessed against shares acquired
through the automatic reinvestment of dividends or capital gain distributions.
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
Distribution Plan (see "Distribution Plan" below) at a rate equal to 0.25% of
the purchase price of such shares. Therefore, the total amount paid to a dealer
upon the sale of Class B shares is 4% of the purchase price of the shares
(commission rate of 3.75% plus a service fee equal to 0.25% of the purchase
price).
Class B shares purchased by a retirement plan whose sponsoring organization
subscribes to the MFS Participant Recordkeeping System and which has established
its account with the Shareholder Servicing Agent on or after July 1, 1996, will
be subject to the CDSC described above, only under limited circumstances, as
explained below under "Waivers of CDSC." With respect to such purchases, MFD
pays an amount to dealers equal to 3.00% of the amount purchased through such
dealers (rather than the 4.00% payment described above), which is comprised of a
commission of 2.75% plus the advancement of the first year service fee equal to
0.25% of the purchase price payable under each Fund's Distribution Plan. As
discussed above, such retirement plans are eligible to purchase Class A shares
of the Fund at net asset value without an initial sales charge but subject to a
1% CDSC if the plan has, at the time of purchase, a market value of $500,000 or
more invested in shares of any class or classes of the MFS Funds. IN THIS EVENT,
THE PLAN OR ITS SPONSORING ORGANIZATION SHOULD INFORM THE SHAREHOLDER SERVICING
AGENT THAT THE PLAN IS
31
<PAGE> 302
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 each Fund's Distribution
Plan. See "Distribution Plan" below. However, for purposes of conversion to
Class A shares, all shares in a shareholder's account that were purchased
through the reinvestment of dividends and distributions paid in respect of Class
B shares (and which have not converted to Class A shares as provided in the
following sentence) will be held in a separate sub-account. Each time any Class
B shares in the shareholder's account (other than those in the sub-account)
convert to Class A shares, a portion of the Class B shares then in the
sub-account will also convert to Class A shares. The portion will be determined
by the ratio that the shareholder's Class B shares not acquired through
reinvestment of dividends and distributions that are converting to Class A
shares bear to the shareholder's total Class B shares not acquired through
reinvestment. The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversion will not constitute a taxable event for
federal tax purposes. There can be no assurance that such ruling or opinion will
be available, and the conversion of Class B shares to Class A shares will not
occur if such ruling or opinion is not available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
CLASS C SHARES: Class C shares are offered at net asset value without an initial
sales charge but are subject to a CDSC upon redemption of 1.00% during the first
year. Class C shares do not convert to any other class of shares. 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 each Fund's Distribution Plan to
MFD for the first year after purchase (see "Distribution Plan" below).
Class C shares are not currently available for purchase by any retirement plan
qualified under Sections 401(a) or 403(b) of the 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.
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
32
<PAGE> 303
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
restrict or to reject any specific purchase or exchange request.
The Funds are not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Funds define a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of a Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of a Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Funds and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. Other funds in the MFS Funds may have different and/or more or less
restrictive policies with respect to market timers than the Funds. These
policies are disclosed in the prospectuses of these other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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.
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<PAGE> 304
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 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 Funds 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.
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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 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
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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.
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
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$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 PLAN
The Trustees have adopted a Distribution Plan 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 Plan"), after having concluded that there is a reasonable
likelihood that the Plan 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 CLASS OF SHARES: There are features of the Distribution
Plan that are common to each Class of shares, as described below.
SERVICE FEES. The 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 the Distribution Plan for which there is no
dealer of record or for which qualification standards have not been met as
partial consideration for personal services and/or account maintenance services
performed by MFD or its affiliates to shareholder accounts.
DISTRIBUTION FEES. The Distribution Plan provides that 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 Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under each Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan are severable with respect to each class of
shares offered by the Fund.
FEATURES UNIQUE TO CLASS OF SHARES: These are certain features of the
Distribution Plan that are unique to each class of shares, as described below.
CLASS A SHARES. Class A shares are generally offered pursuant to an initial
sales charge, a substantial portion of which is paid to or retained by the
dealer making the sale (the remainder of which is paid to MFD). See
"Purchases -- Class A Shares" above. In
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addition to the initial sales charge, the dealer also generally receives the
ongoing 0.25% per annum service fee, as discussed above.
The distribution fee paid to MFD under the Distribution Plan is equal, on an
annual basis, to 0.25% of 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 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 SHARES. Class B shares are offered at net asset value without an initial
sales charge but subject to a CDSC. See "Purchases -- Class B Shares" above. MFD
will advance to dealers the first year service fee described above at a rate
equal to 0.25% of the purchase price of such shares and, as compensation
therefor, MFD may retain the service fee paid by 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 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 SHARES. 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 Distribution Plan (which MFD in turn pays to dealers), as
discussed above, and a distribution fee paid to MFD (which MFD also in turn pays
to dealers) under the Distribution Plan equal, on an annual basis, to 0.75% of 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.
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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 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
the portion taxable as ordinary income, the portion taxable as long-term capital
gains, the portion, if any, representing a return of capital (which is generally
free of current taxes but results in a basis reduction) and the amount, if any,
of federal income tax withheld.
Fund distributions will reduce 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
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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 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 institutional investors, entitled Class I 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 the Distribution Plan or on any other
matter that affects solely that class of shares, but will otherwise vote
together with all other classes of shares of the series on all other matters.
The Trust does not intend to hold annual shareholder meetings. The Trust's
Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
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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 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.
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ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive information regarding
the tax status of reportable dividends and distributions for that year (see "Tax
Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional shares.
This option will be assigned if no other option is specified;
-- Dividends (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.
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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of
any MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known
as the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call
MFS and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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
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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 on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first day of the month. Required forms are available from the Shareholder
Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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 Plan; 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;
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- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by 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.
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2. WRAP ACCOUNT INVESTMENTS
- Shares acquired by investments through certain dealers which have entered
into an agreement with MFD which includes a requirement that such shares
be sold for the sole benefit of clients participating in a "wrap" account
or a similar program under which such clients pay a fee to such dealer.
3. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
4. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans whose third party administrators or
dealers have entered into an administrative services agreement with MFD
or one of its affiliates to perform certain administrative services,
subject to certain operational and minimum size requirements specified
from time to time by MFD or one or more of its affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
IRAS
- Distributions made on or after the IRA owner has attained the age of
59 1/2 years old; and
- Tax-free returns of excess IRA contributions.
401(A) PLANS
- Distributions made on or after the 401(a) Plan participant has attained
the age of 59 1/2 years old; and
- Certain involuntary redemptions and redemptions in connection with
certain automatic withdrawals from a 401(a) Plan.
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
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.
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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.
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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.
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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
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.
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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 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.
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MFS[Registered Trademark] EQUITY INCOME FUND
MFS[Registered Trademark] CORE GROWTH FUND
MFS[Registered Trademark] AGGRESSIVE GROWTH FUND
MFS[Registered Trademark] SPECIAL OPPORTUNITIES FUND STATEMENT OF
MFS[Registered Trademark] CONVERTIBLE SECURITIES FUND ADDITIONAL INORMATION
MFS[Registered Trademark] BLUE CHIP FUND January 1, 1997
MFS[Registered Trademark] NEW DISCOVERY FUND
MFS[Registered Trademark] SCIENCE AND TECHNOLOGY FUND
MFS[Registered Trademark] RESEARCH INTERNATIONAL FUND
(Members of the MFS Family of Funds[Registered Trademark])
Each a series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
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1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
3. Management of the Funds............................................................... 19
Trustees.............................................................................. 19
Officers.............................................................................. 19
Investment Adviser.................................................................... 20
Sub-Investment Advisers............................................................... 21
Custodian............................................................................. 21
Shareholder Servicing Agent........................................................... 22
Distributor........................................................................... 22
4. Portfolio Transactions and Brokerage Commissions...................................... 23
5. Shareholder Services.................................................................. 24
Investment and Withdrawal Programs.................................................... 24
Exchange Privilege.................................................................... 26
Tax-Deferred Retirement Plans......................................................... 27
6. Tax Status............................................................................ 27
7. Distribution Plan..................................................................... 29
8. Determination of Net Asset Value and Performance...................................... 30
9. Description of Shares, Voting Rights and Liabilities.................................. 32
10. Independent Auditors and Financial Statements......................................... 33
</TABLE>
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> 322
1. DEFINITIONS
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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 Fund -- MFS(R) Aggressive Growth
Fund, a diversified series
of the Trust.
Special Opportunities -- MFS(R) Special
Fund Opportunities Fund, a
non-diversified series of
the Trust.
Convertible Securities -- MFS(R) Convertible
Fund Securities Fund, a
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 Technology -- MFS(R) Science and
Fund Technology Fund, a
diversified series of the
Trust.
Research International -- MFS(R) Research
Fund International Fund, a
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 the "Adviser" -- Massachusetts Financial
Services 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.
</TABLE>
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 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,
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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. The Funds record
these transactions as sale and purchase transactions, rather than as borrowing
transactions. During the roll period, a Fund foregoes principal and interest
paid on the
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mortgage-backed 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
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interest (the interest-only or "IO" class) while the other class will receive
all of the principal (the principal-only or "PO" class). The yield to maturity
on an IO is extremely sensitive to the rate of principal payments, including
prepayments on the related underlying Mortgage Assets, and a rapid rate of
principal payments may have a material adverse effect on such security's yield
to maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, 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 nonpayment 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 ("FHLMC"), which are supported only by the discretionary
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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 decline in the market value of that security. To complete such
a transaction, the Fund must borrow the security
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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 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.
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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-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.
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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 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
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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
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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 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
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the 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.
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Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. Foreign currency options written by 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
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holdings or any increase in the cost of the instruments to be acquired.
Where the price of the underlying obligation moves sufficiently in favor of the
holder to warrant exercise of the option, however, and the option is exercised,
the Fund will incur a loss which may only be partially offset by the amount of
the premium it received. Moreover, by writing an option, 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
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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 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
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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.
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 nonhedging 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.
------------------------------------
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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.
------------------------------------
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 33 1/3 of its total 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 15% 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 10% 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; currently, each Fund does not intend to
invest more than 5% of its net assets in such securities;
(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-
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<PAGE> 339
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 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 ages and
principal occupations during the past five years. (Their titles may have varied
during that period.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge Trust
Company, Director
MARSHALL N. COHAN (born 11/14/26)
Private Investor
Address: 2524 Bedford Mews Drive, Wellington, Florida
LAWRENCE H. COHN, M.D. (born 3/11/37)
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 (born 6/15/27)
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 (born 4/27/28)
Private Investor; Rockefeller Financial Services, Inc. (investment advisers),
Director
Address: 30 Rockefeller Plaza, Room 5600, New York, New York
WALTER E. ROBB, III (born 7/9/27)
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* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President and
Secretary
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President
J. DALE SHERRATT (born 9/23/38)
Insight Resources, Inc. (acquisition planning specialists), President
Address: One Liberty Square, Boston, Massachusetts
WARD SMITH (born 9/13/30)
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 (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
JAMES O. YOST,* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
JAMES R. BORDEWICK, JR.,* Assistant Secretary (born 3/6/59)
Massachusetts Financial Services Company, Senior Vice President and Associate
General Counsel
- ---------------
* "Interested persons" (as defined in the 1940 Act) of the Adviser, whose
address is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee and officer holds comparable positions with certain affiliates of
MFS or with certain other funds of which MFS or a subsidiary is the investment
adviser or distributor. Mr. Brodkin, the Chairman of MFD, Messrs. Shames and
Scott, Directors of MFD, and Mr. Cavan, the Secretary of MFD, hold similar
positions with certain other MFS affiliates. Mr. Bailey is a Director of Sun
Life Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)"), the
corporate parent of MFS.
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<PAGE> 340
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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT TOTAL
TRUSTEE BENEFIT TRUSTEE
FEES ACCRUED ESTIMATED FEES
FROM AS PART CREDITED FROM
EACH OF FUND YEARS OF FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
<S> <C> <C> <C> <C>
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 H. Cohn 0 0 16 135,874
Sir J. 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 non-interested Trustees served as Trustees of 36
funds within the MFS fund complex (having aggregate net assets at December
31, 1995, of approximately $12.5 billion) while Mr. Bailey served as Trustee
of 73 funds within the MFS fund complex (having aggregate net assets at
December 31, 1995, of approximately $31.7 billion).
As of November 29, 1996, the Trustees and officers as a group owned 2.3% of the
Class A shares of the Special Opportunities Fund and less than 1% of each other
Fund's shares, not including approximately 682,253 shares of the Aggressive
Growth Fund, 35,280 shares of the Core Growth Fund, 40,670 shares of the Equity
Income Fund and 141,466 shares of the Special Opportunities Fund (which
represent approximately 80.6%, 56%, 66.8% and 69.3% 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 November 29, 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 81.59%, 55.95%, 66.81% and
69.28% of the outstanding Class A shares of the Aggressive Growth Fund, the Core
Growth Fund, the Equity Income Fund and the Special Opportunities Fund,
respectively.
As of November 29, 1996, Massachusetts Financial Services Company, c/o Robert
Blake, 500 Boylston Street, Boston, MA 02116-3740 was the record owner of
approximately 32.17% of the outstanding Class A shares of the Core Growth Fund.
As of November 29, 1996, Shirley Shames, Boston, MA, was the record owner of
approximately 27.87% of the outstanding Class A shares of the Equity Income
Fund.
As of November 29, 1996, Robert J. Manning and Donna Manning, JTWROS,
Swampscott, MA, were the record owners of approximately 17.48%, 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 November 29, 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 30, 1996, with respect to the remaining
funds (the "Advisory Agreements"). The Adviser provides each Fund with overall
investment advi-
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sory 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, 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 subadviser pursuant to a
Sub-Advisory Agreement dated December 30, 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 subadviser pursuant to
a separate Sub-Advisory Agreement dated December 30, 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 0.12% of the average
daily net assets of the Fund.
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, deter-
21
<PAGE> 342
mining 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 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, CLASS C SHARES AND CLASS I SHARES: MFD acts as agent in selling
Class B, Class C shares and Class I shares of each Fund to dealers. The public
offering price of Class B, Class C and Class I shares is their net asset value
next computed after the sale (see "Purchases" in the Prospectus and the
Prospectus supplement pursuant to which Class I shares are offered).
GENERAL: Neither MFD nor dealers are permitted to delay placing orders to
benefit themselves by a price change. On occasion, MFD may obtain brokers loans
from various banks, including the custodian banks for the MFS Funds, to
facilitate the settlement of sales of shares of 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 $39,100 of commission business from the MFS Funds to the
Pershing Division of Donaldson Lufkin & Jenrette as consideration for the annual
renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between 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
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("SOF") paid total brokerage commissions on total transactions as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
COMMISSIONS TRANSACTIONS
----------- ------------
<S> <C> <C>
EIF $ 783 $ 713,627
CGF $ 1,544 $ 1,398,932
AGF $19,205 $13,710,580
SOF $ 3,451 $ 2,016,503
</TABLE>
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 current offering price value of
$75,000 and purchases an addi-
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<PAGE> 345
tional $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.
INVESTMENT AND WITHDRAWAL BY TELEPHONE (AUTOBUY PRIVILEGE): Shareholders of any
MFS Fund may purchase shares of any MFS Fund by telephone, a privilege known as
the "Autobuy Privilege." The Autobuy Privilege allows shareholders to call MFS
and have money transferred from a checking or savings account into their MFS
account. Once enrolled, a shareholder can initiate a transaction ($50
minimum/$100,000 maximum) by calling MFS before 4:00 (eastern time). The share
price and trade date will be effective on the same day that the Autobuy
Privilege request is received. The Autobuy Privilege is available for any class
of shares of any MFS Fund made available to the general public.
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 six different
funds effective on the seventh day of each month or of every third month,
depending whether monthly or quarterly exchanges are elected by the shareholder.
If the seventh day of the month
25
<PAGE> 346
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 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
and if purchaser is eligible to purchase the Class of shares) at net asset
value. Exchanges will be made only after instructions in writing or by telephone
(an "Exchange Request") are received for an established account by the
Shareholder Servicing Agent.
Each Exchange Request must be in proper form (i.e., if in writing -- signed by
the record owner(s) exactly as the shares are registered; if by
telephone -- proper account identification is given by the dealer or shareholder
of record), and each exchange must involve either shares having an aggregate
value of at least $1,000 ($50 in the case of retirement plan participants whose
sponsoring organizations subscribe to MFS FUNDamental 401(k) Plan or another
similar 401(k) recordkeeping system made available by the Shareholder Servicing
Agent) or all the shares in the account. Each exchange involves the redemption
of the shares of the Fund to be exchanged and the purchase at net asset value
(i.e., without a sales charge) of shares of the same class of the other MFS
Fund. Any gain or loss on the redemption of the shares exchanged is reportable
on the shareholder's federal income tax return, unless both the shares received
and the shares surrendered in the exchange are held in a tax-deferred retirement
plan or other tax-exempt account. No more than five exchanges may be made in any
one Exchange Request by telephone. If the Exchange Request is received by the
Shareholder Servicing Agent prior to the close of regular trading on the
Exchange the exchange usually will occur on that day if all the requirements set
forth above have been complied with at that time. However, payment of the
redemption proceeds by 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.
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No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
Class A Shares of MFS Cash Reserve Fund for shares acquired through direct
purchase and dividends reinvested prior to June 1, 1992) have the right to
exchange their shares for shares of 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 longterm 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
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<PAGE> 348
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 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
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<PAGE> 349
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 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 PLAN
The Trustees have adopted a Distribution Plan for each Fund (the "Distribution
Plan") pursuant to Section 12(b) of the 1940 Act and Rule 12b-1 thereunder (the
"Rule") after having concluded that there is a reasonable likelihood that the
Distribution Plan would benefit each Fund and each respective class of
shareholders. The provisions of the Distribution Plan are severable with respect
to each Class of shares offered by each Fund. The Distribution Plan is 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 Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES: With respect to Class A shares, no service fees will be paid: (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 Class B shares, except in the case of the first year service
fee, no service fees will be paid to any securities dealer who is the holder or
dealer of record for investors who own Class B shares having an aggregate net
asset value of less than $750,000 or such other amount as may be determined by
MFD from time to time. MFD, however, may waive this minimum amount requirement
from time to time. Dealers may from time to time be required to meet certain
other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to 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
Distribution Plan were not imposed.
GENERAL: The Distribution Plan 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"). The Distribution Plan also
requires that the Fund and MFD each shall provide the Trustees, and the Trustees
shall review, at least quarterly, a written report of the amounts expended (and
purposes therefor) under such Plan. The Distribution Plan may be terminated at
any time by vote of a majority of the Distribution Plan Qualified Trustees or by
vote of the holders of a majority of the respective class of the Fund's shares
(as defined in "Investment Restrictions"). All agreements relating to any of the
Distribution Plan entered into between the Fund or MFD and other organizations
must be approved by the Board of Trustees, including a majority of the
Distribution Plan Qualified Trustees. Agreements under the Distribution Plan
must be in writing, will be terminated automatically if assigned, and may be
terminated at any time without payment of any penalty, by vote of a majority of
the Distribution Plan Qualified Trustees or by vote of the holders of a majority
of the respective class of a Fund's shares. The Distribution Plan may not be
amended to increase materially the amount of permitted distribution expenses
without the approval of a majority of the respective class of the Fund's
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<PAGE> 350
shares (as defined in "Investment Restrictions") or may not be materially
amended in any case without a vote of the Trustees and a majority of the
Distribution Plan Qualified Trustees. The selection and nomination of
Distribution Plan Qualified Trustees shall be committed to the discretion of the
non-interested Trustees then in office. No Trustee who is not an "interested
person" has any financial interest in the Distribution Plan or in any related
agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of each Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day,
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:
<TABLE>
<CAPTION>
INCLUDING WITHOUT
EFFECT OF EFFECT OF
SALES SALES
CHARGE CHARGE
--------- ---------
<S> <C> <C>
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%
</TABLE>
Class B and C shares were not available for sale during this period.
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<PAGE> 351
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.
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:
<TABLE>
<CAPTION>
ACTUAL 30-DAY
30-DAY YIELD YIELD
(INCLUDING (WITHOUT
ANY WAIVERS) ANY WAIVERS)
------------ ------------
<S> <C> <C>
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%
</TABLE>
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.
31
<PAGE> 352
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
From time to time the Fund may also discuss or quote the views of its
distributor, its investment adviser and other financial planning, legal, tax,
accounting, insurance, estate planning and other professionals, or from surveys,
regarding individual and family financial planning. Such views may include
information regarding: retirement planning; tax management strategies; estate
planning; general investment techniques (e.g., asset allocation and disciplined
saving and investing); business succession; ideas and information provided
through the MFS Heritage Planning(SM) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); 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.
<TABLE>
<S> <C>
-- 1924 -- Massachusetts Investors Trust is
established as the first open-end mutual fund
in America.
-- 1924 -- Massachusetts Investors Trust is the
first mutual fund to make full public
disclosure of its operations in shareholder
reports.
-- 1932 -- One of the first internal research
departments is established to provide
in-house analytical capability for an
investment management firm.
-- 1933 -- Massachusetts Investors Trust is the
first mutual fund to register under the
Securities Act of 1933 ("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.
</TABLE>
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of 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 I
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
32
<PAGE> 353
aggregate not less than 10% of the outstanding voting securities of the Trust.
No material amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the Trust's outstanding shares (as defined in
"Investment Restrictions"). The Trust or any series of the Trust may be
terminated (i) upon the merger or consolidation of the Trust or any series of
the Trust with another organization or upon the sale of all or substantially all
of its assets (or all or substantially all of the assets belonging to any series
of the Trust), if approved by the vote of the holders of two-thirds of the
Trust's or the affected series' outstanding shares voting as a single class, or
of the affected series of the Trust, except that if the Trustees recommend such
merger, consolidation or sale, the approval by vote of the holders of a majority
of the Trust's or the affected series' outstanding shares will be sufficient, or
(ii) upon liquidation and distribution of the assets of a Fund, if approved by
the vote of the holders of two-thirds of its outstanding shares of the Trust, or
(iii) by the Trustees by written notice to its shareholders. If not so
terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust and its shareholders and the Trustees, officers, employees and agents of
the Trust covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will 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.
33
<PAGE> 354
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
LOGO
<PAGE> 355
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
MFS MANAGED SECTORS FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION
STATEMENT:
For the two years ended August 31, 1996,
for the nine months ended August 31, 1994
and for the seven years ended November 30,
1993:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION
STATEMENT:
At August 31, 1996:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended August 31, 1996:
Statement of Changes in Net Assets*
For the year ended August 31, 1996:
Statement of Operations*
MFS CASH RESERVE FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION
STATEMENT:
For the two years ended August 31, 1996,
the nine months ended August 31, 1994 and
for seven years ended November 30, 1993:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION
STATEMENT:
At August 31, 1996:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the two years ended August 31, 1996:
Statement of Changes in Net Assets**
For the year ended August 31, 1996:
Statement of Operations**
<PAGE> 356
MFS WORLD ASSET ALLOCATION FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION
STATEMENT:
For the three years ended August
31, 1996:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION
STATEMENT:
At August 31, 1996:
Portfolio of Investments***
Statement of Assets and Liabilities***
For the years ended August 31, 1996 and August
31, 1995:
Statement of Changes in Net Assets***
For the year ended August 31, 1996:
Statement of Operations***
MFS AGGRESSIVE GROWTH FUND, MFS RESEARCH GROWTH AND INCOME FUND, MFS CORE GROWTH
FUND, MFS EQUITY INCOME FUND AND MFS SPECIAL OPPORTUNITIES FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION
STATEMENT:
For the period ended August 31, 1996:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION
STATEMENT:
At August 31, 1996:
Portfolio of Investments****
Statement of Assets and Liabilities****
For the period ended August 31, 1996:
Statement of Changes in Net Assets****
For the period ended August 31, 1996:
Statement of Operations****
* Incorporated by reference to the MFS Managed Sectors Fund's Annual Report
to Shareholders dated August 31, 1996, filed with the SEC on November 7,
1996.
** Incorporated by reference to the MFS Cash Reserve Fund's Annual Report to
Shareholders dated August 31, 1996, filed with the SEC on November 6,
1996.
*** Incorporated by reference to the MFS World Asset Allocation Fund's Annual
Report to shareholders dated August 31, 1996, filed with the SEC on
November 5, 1996.
**** Incorporated by reference to the Annual Report to Shareholders for MFS
Aggressive Growth Fund, MFS Research Growth and Income Fund, MFS Core
Growth Fund, MFS Equity Income Fund and MFS Special Opportunities Fund,
filed with the SEC on November 4, 1996.
<PAGE> 357
(b) EXHIBITS:
1 (a) Amended and Restated Declaration of Trust,
dated January 6, 1995. (5)
(b) Amendment to Declaration of Trust, dated
October 12, 1995. (7)
(c) Amendment to Declaration of Trust, dated
February 21, 1996. (10)
(d) Amendment to Declaration of Trust, dated
June 12, 1996. (11)
(e) Amendment to Declaration of Trust, dated
October 9, 1996. (12)
2 Amended and Restated By-Laws dated December
14, 1994. (5)
3 Not Applicable.
4 Form of Share Certificate for Classes of
shares. (11)
5 (a) Investment Advisory Agreement for MFS(R)
Cash Reserve Fund, dated September 1, 1993.
(7)
(b) Investment Advisory Agreement for MFS(R)
Managed Sectors Fund, dated September 1,
1993. (7)
(c) Investment Advisory Agreement for MFS(R)
World Asset Allocation Fund, dated June 2,
1994. (7)
(d) Investment Advisory Agreement for MFS(R)
Equity Income Fund, dated January 2, 1996.
(10)
(e) Form of Amendment to Investment Advisory
Agreement for MFS(R) Research Growth and
Income Fund, dated January 2, 1997; filed
herewith.
(f) Investment Advisory Agreement for MFS(R)
Core Growth Fund, dated January 2, 1996.
(10)
(g) Investment Advisory Agreement for MFS(R)
Aggressive Growth Fund, dated January 2,
1996. (10)
(h) Investment Advisory Agreement for MFS(R)
Special Opportunities Fund, dated January
2, 1996. (10)
(i) Form of Investment Advisory Agreement for
MFS(R) Convertible Securities Fund; filed
herewith.
<PAGE> 358
(j) Form of Investment Advisory Agreement for
MFS(R) Blue Chip Fund; filed herewith.
(k) Form of Investment Advisory Agreement for
MFS(R) New Discovery Fund; filed herewith.
(l) Form of Investment Advisory Agreement for
MFS(R) Science and Technology Fund; filed
herewith.
(m) Form of Investment Advisory Agreement for
MFS(R) Research International Fund; filed
herewith.
(n) Form of Sub-Advisory Agreement for MFS(R)
Research International Fund by and between
Massachusetts Financial Services Company
and Foreign & Colonial Management Ltd.
dated December 30, 1996; filed herewith.
(o) Form of Sub-Advisory Agreement for MFS(R)
Research International Fund by and between
Foreign & Colonial Management Ltd. and
Foreign & Colonial Emerging Markets
Limited, dated December 30, 1996; filed
herewith.
6 (a) Distribution Agreement, dated January 1,
1995. (5)
(b) Dealer Agreement between MFS Fund
Distributors, Inc., ("MFD") and a dealer,
dated December 28, 1994 and the Mutual Fund
Agreement between MFD and a bank or NASD
affiliate, dated December 28, 1994. (1)
7 Retirement Plan for Non-Interested Person
Trustees, dated January 1, 1991. (7)
8 (a) Custodian Agreement, dated January 28,
1988. (7)
(b) Amendment No. 1 to the Custodian Agreement,
dated February 29, 1988 and October 1,
1989, respectively. (7)
(c) Amendment No. 2 to the Custodian Agreement,
dated October 9, 1991. (7)
(d) Custodian Agreement between Investors Bank
& Trust and MFS(R) World Asset Allocation
Fund dated June 2, 1994. (7)
<PAGE> 359
9 (a) Shareholder Servicing Agent Agreement,
dated September 10, 1986. (7)
(b) Amendment to Shareholder Servicing Agent
Agreement to include Class P shares, dated
September 3, 1996; filed herewith.
(c) Exchange Privilege Agreement, dated
September 1, 1995. (8)
(d) Loan Agreement by and among MFS Borrowers
and The First National Bank of Boston dated
as of September 29, 1989, as amended
through and including the second Amendment
dated April 21, 1994. (3)
(e) Dividend Disbursing Agent Agreement dated
September 10, 1986. (7)
10 Consent and Opinion of Counsel filed with
the Registrant's Rule 24f-2 Notice for the
fiscal year ended August 31, 1996 on
October 28, 1996.
11 (a) Consent of Deloitte & Touche LLP for
MFS Managed Sectors Fund and MFS Cash
Reserve Fund; filed herewith.
(b) Consent of Ernst & Young LLP for MFS World
Asset Allocation Fund; filed herewith.
(c) Consent of Ernst & Young LLP for MFS
Aggressive Growth Fund, MFS Equity Income
Fund, MFS Core Growth Fund, MFS Special
Opportunities Fund and MFS Research Growth
and Income Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account
Disclosure Statement as currently in
effect. (4)
(b) Forms for MFS 403(b) Custodial Account
Agreement as currently in effect. (4)
(c) Forms for MFS Prototype Paired Defined
Contribution Plans as Trust Agreement as
currently in effect. (4)
15 Master Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of
1940 effective January 1, 1997; filed
herewith.
<PAGE> 360
16 Schedule for Computation of Performance
Quotations - Yield Calculation, Average
Annual and Aggregate Total Return and
Current Distribution Rate. (1)
17 Financial Data Schedules for each class of
each series for MFS Managed Sectors Fund,
MFS Cash Reserve Fund and MFS World Asset
Allocation Fund and Class A Shares only for
MFS Aggressive Growth Fund, MFS Core Growth
Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund and MFS Research Growth
and Income Fund; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the
Investment Company Act of 1940. (11)
Power of Attorney, dated August 11, 1994. (7)
(1) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 26 filed with the SEC via EDGAR
on February 22, 1995.
(2) Incorporated by reference to MFS Municipal Series Trust (File Nos. 2-92915
and 811-4096) Post-Effective Amendment No. 28 filed with the SEC via EDGAR
on July 28, 1995.
(3) Incorporated by reference to Amendment No. 8 on Form N-2 for MFS Municipal
Income Trust (File No. 811-4841) filed with the SEC via EDGAR on February
28, 1995.
(4) Incorporated by reference to MFS Series Trust IX (File Nos. 2-50409 and
811-2464) Post-Effective Amendment No. 32 filed with the SEC via EDGAR on
August 28, 1995.
(5) Incorporated by reference to the Registrant's Post-Effective Amendment No.
20 filed with the SEC via EDGAR on March 30, 1995.
(6) Incorporated by reference to MFS Series Trust II (File Nos. 33-7637 and
811-4775) Post-Effective Amendment No. 17 filed with the SEC via EDGAR on
October 13, 1995.
(7) Incorporated by reference to the Registrant's Post-Effective Amendment No.
21 filed with the SEC via EDGAR on October 17, 1995.
(8) Incorporated by reference to MFS Series Trust X (File Nos. 33-1657 and
811-4492) Post-Effective Amendment No. 13 filed with the SEC via EDGAR on
November 28, 1995.
(9) Incorporated by reference to Registrant's Post-Effective Amendment No. 22
filed with the SEC via EDGAR on December 29, 1995.
(10) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
filed with the SEC via EDGAR on March 29, 1996.
(11) Incorporated by reference to Registrant's Post-Effective Amendment No. 25
filed with the SEC via EDGAR on August 27, 1996.
(12) Incorporated by reference to Registrant's Post-Effective Amendment No. 26
filed with the SEC via EDGAR on October 15, 1996.
<PAGE> 361
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS MANAGED SECTORS FUND
<TABLE>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
<S> <C>
Class A Shares of Beneficial Interest 21,634
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 13,983
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS CASH RESERVE FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 3,243
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 18,226
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 436
(without par value) (as of November 29, 1996)
FOR MFS WORLD ASSET ALLOCATION FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 6,967
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 8,928
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 1,545
(without par value) (as of November 29, 1996)
</TABLE>
<PAGE> 362
<TABLE>
<S> <C>
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS EQUITY INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 13
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS RESEARCH GROWTH AND INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 10
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS CORE GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 19
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
</TABLE>
<PAGE> 363
<TABLE>
<S> <C>
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS AGGRESSIVE GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 154
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
FOR MFS SPECIAL OPPORTUNITIES FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 21
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
</TABLE>
<PAGE> 364
<TABLE>
<CAPTION>
MFS(R) CONVERTIBLE SECURITIES FUND
----------------------------------
<S> <C>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
MFS(R) BLUE CHIP FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29 , 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
MFS(R) NEW DISCOVERY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
MFS(R) SCIENCE AND TECHNOLOGY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
</TABLE>
<PAGE> 365
<TABLE>
<S> <C>
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
<CAPTION>
MFS(R) RESEARCH INTERNATIONAL FUND
----------------------------------
<S> <C>
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
Class P Shares of Beneficial Interest 0
(without par value) (as of November 29, 1996)
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is hereby made to (a) Article V of the Trust's
Declaration of Trust, incorporated by reference to the Registrant's
Post-Effective Amendment No. 20 filed with the SEC via EDGAR on March 30, 1995
and (b) Section 8 of the Shareholder Servicing Agent Agreement, incorporated by
reference to Registrant's Post-Effective Amendment No. 21 filed with the SEC via
EDGAR on October 17, 1995.
The Trustees and officers of the Registrant and the personnel
of the Registrant's investment adviser and principal underwriter are insured
under an errors and omissions liability
<PAGE> 366
insurance policy. The Registrant and its officers are also insured under the
fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940,
as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
MFS serves as investment adviser to the following open-end
Funds comprising the MFS Family of Funds: Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Growth Opportunities Fund, MFS
Government Securities Fund, MFS Government Limited Maturity Fund, MFS Series
Trust I (which has eight series: MFS Managed Sectors Fund, MFS Cash Reserve
Fund, MFS World Asset Allocation Fund, MFS Aggressive Growth Fund, MFS Research
Growth and Income Fund, MFS Core Growth Fund, MFS Equity Income Fund and MFS
Special Opportunities Fund), MFS Series Trust II (which has four series: MFS
Emerging Growth Fund, MFS Capital Growth Fund, MFS Intermediate Income Fund and
MFS Gold & Natural Resources Fund), MFS Series Trust III (which has two series:
MFS High Income Fund and MFS Municipal High Income Fund), MFS Series Trust IV
(which has four series: MFS Money Market Fund, MFS Government Money Market Fund,
MFS Municipal Bond Fund and MFS OTC Fund), MFS Series Trust V (which has two
series: MFS Total Return Fund and MFS Research Fund), MFS Series Trust VI (which
has three series: MFS World Total Return Fund, MFS Utilities Fund and MFS World
Equity Fund), MFS Series Trust VII (which has two series: MFS World Governments
Fund and MFS Value Fund), MFS Series Trust VIII (which has two series: MFS
Strategic Income Fund and MFS World Growth Fund), MFS Series Trust IX (which has
three series: MFS Bond Fund, MFS Limited Maturity Fund and MFS Municipal Limited
Maturity Fund), MFS Series Trust X (which has four series: MFS Government
Mortgage Fund, MFS/Foreign & Colonial Emerging Markets Equity Fund, MFS/Foreign
& Colonial International Growth Fund and MFS/Foreign & Colonial International
Growth and Income Fund), and MFS Municipal Series Trust (which has 16 series:
MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond Fund, MFS
California Municipal Bond Fund, MFS Florida Municipal Bond Fund, MFS Georgia
Municipal Bond Fund, MFS Maryland Municipal Bond Fund, MFS Massachusetts
Municipal Bond Fund, MFS Mississippi Municipal Bond Fund, MFS New York Municipal
Bond Fund, MFS North Carolina Municipal Bond Fund, MFS Pennsylvania Municipal
Bond Fund, MFS South Carolina Municipal Bond Fund, MFS Tennessee Municipal Bond
Fund, MFS Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond Fund
and MFS Municipal Income Fund) (the "MFS Funds"). The principal business address
of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
MFS also serves as investment adviser of the following
no-load, open-end Funds: MFS Institutional Trust ("MFSIT") (which has seven
series), MFS Variable Insurance Trust ("MVI") (which has twelve series) and MFS
Union Standard Trust ("UST") (which has two series). The principal business
address of each of the aforementioned Funds is 500 Boylston Street, Boston,
Massachusetts 02116.
In addition, MFS serves as investment adviser to the following
closed-end Funds: MFS Municipal Income Trust, MFS Multimarket Income Trust, MFS
Government Markets Income Trust, MFS Intermediate Income Trust, MFS Charter
Income Trust and MFS Special Value Trust (the "MFS Closed-End Funds"). The
principal business address of each of the aforementioned Funds is 500 Boylston
Street, Boston, Massachusetts 02116.
<PAGE> 367
Lastly, MFS serves as investment adviser to MFS/Sun Life
Series Trust ("MFS/SL"), Sun Growth Variable Annuity Funds, Inc. ("SGVAF"),
Money Market Variable Account, High Yield Variable Account, Capital Appreciation
Variable Account, Government Securities Variable Account, World Governments
Variable Account, Total Return Variable Account and Managed Sectors Variable
Account. The principal business address of each is One Sun Life Executive Park,
Wellesley Hills, Massachusetts 02181.
MFS International Ltd. ("MIL"), a limited liability company
organized under the laws of Bermuda and a subsidiary of MFS, whose principal
business address is Cedar House, 41 Cedar Avenue, Hamilton HM12 Bermuda, serves
as investment adviser to and distributor for MFS American Fund (which has five
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-Global Governments Fund, MFS American
Funds - U.S. Dollar Reserve Fund and MFS American Funds-Charter Income Fund)
(the "MIL Funds"). The MIL Funds are organized in Luxembourg and qualify as an
undertaking for collective investments in transferable securities (UCITS). The
principal business address of the MIL Funds is 47, Boulevard Royal, L-2449
Luxembourg.
MIL also serves as investment adviser to and distributor for
MFS Meridian U.S. Government Bond Fund, MFS Meridian Charter Income Fund, MFS
Meridian Global Government Fund, MFS Meridian U.S. Emerging Growth Fund, MFS
Meridian Global Equity Fund, MFS Meridian Limited Maturity Fund, MFS Meridian
World Growth Fund, MFS Meridian Money Market Fund, MFS Meridian World Total
Return Fund, MFS Meridian U.S. Equity Fund, MFS Meridian Research Fund and MFS
Emerging Markets Debt Fund (collectively the "MFS Meridian Funds"). Each of the
MFS Meridian Funds is organized as an exempt company under the laws of the
Cayman Islands. The principal business address of each of the MFS Meridian Funds
is P.O. Box 309, Grand Cayman, Cayman Islands, British West Indies.
MFS International (U.K.) Ltd. ("MIL-UK"), a private limited
company registered with the Registrar of Companies for England and Wales whose
current address is 4 John Carpenter Street, London, England ED4Y 0NH, is
involved primarily in marketing and investment research activities with respect
to private clients and the MIL Funds and the MFS Meridian Funds.
MFS Fund Distributors, Inc. ("MFD"), a wholly owned subsidiary
of MFS, serves as distributor for the MFS Funds, MVI, UST and MFSIT.
Clarendon Insurance Agency, Inc. ("CIAI"), a wholly owned
subsidiary of MFS, serves as distributor for certain life insurance and annuity
contracts issued by Sun Life Assurance Company of Canada (U.S.).
MFS Service Center, Inc. ("MFSC"), a wholly owned subsidiary
of MFS, serves as shareholder servicing agent to the MFS Funds, the MFS
Closed-End Funds, MFSIT, MVI and UST.
MFS Institutional Advisors, Inc. ("MFIA"), a wholly owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS Retirement Services, Inc. ("RSI"), a wholly owned
subsidiary of MFS, markets MFS products to retirement plans and provides
administrative and record keeping services for retirement plans.
<PAGE> 368
MFS
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames,
Arnold D. Scott, Donald A. Stewart and John D. McNeil. Mr. Brodkin is the
Chairman, Mr. Shames is the President, Mr. Scott is a Senior Executive Vice
President and Secretary, Bruce C. Avery, William S. Harris, William W. Scott,
Jr., and Patricia A. Zlotin are Executive Vice Presidents, Stephen E. Cavan is a
Senior Vice President, General Counsel and an Assistant Secretary, Joseph W.
Dello Russo is a Senior Vice President, Chief Financial Officer and Treasurer,
Robert T. Burns is a Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and Assistant
Treasurer of MFS.
MASSACHUSETTS INVESTORS TRUST
MASSACHUSETTS INVESTORS GROWTH STOCK FUND
MFS GROWTH OPPORTUNITIES FUND
MFS GOVERNMENT SECURITIES FUND
MFS SERIES TRUST I
MFS SERIES TRUST V
MFS SERIES TRUST VI
MFS SERIES TRUST X
MFS GOVERNMENT LIMITED MATURITY FUND
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice
President of MFS, is the Assistant Treasurer, James R. Bordewick, Jr., Vice
President and Associate General Counsel of MFS, is the Assistant Secretary.
MFS SERIES TRUST II
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS GOVERNMENT MARKETS INCOME TRUST
MFS INTERMEDIATE INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg, Senior Vice President of MFS, is a Vice President, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer, and James R. Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST III
A. Keith Brodkin is the Chairman and President, James T.
Swanson, Robert J. Manning, Cynthia M. Brown and Joan S. Batchelder, Senior Vice
Presidents of MFS, Bernard Scozzafava, Vice President of MFS, and Matthew
Fontaine, Assistant Vice President of MFS, are Vice Presidents, Sheila
Burns-Magnan and Daniel E. McManus, Assistant Vice Presidents of MFS,
<PAGE> 369
are Assistant Vice Presidents, Stephen E. Cavan is the Secretary, W. Thomas
London is the Treasurer, James O. Yost is the Assistant Treasurer, and James R.
Bordewick, Jr., is the Assistant Secretary.
MFS SERIES TRUST IV
MFS SERIES TRUST IX
A. Keith Brodkin is the Chairman and President, Robert A.
Dennis and Geoffrey L. Kurinsky, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VII
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and Stephen C. Bryant, Senior Vice Presidents of MFS, are Vice
Presidents, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary.
MFS SERIES TRUST VIII
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames, Leslie J. Nanberg, Patricia A. Zlotin, James T. Swanson and John D.
Laupheimer, Jr., Vice President of MFS, are Vice Presidents, Stephen E. Cavan is
the Secretary, W. Thomas London is the Treasurer, James O. Yost is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL SERIES TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert A. Dennis are Vice Presidents, David B. Smith, Geoffrey L.
Schechter and David R. King, Vice Presidents of MFS, are Vice Presidents, Daniel
E. McManus, Assistant Vice President of MFS, is an Assistant Vice President,
Stephen E. Cavan is the Secretary, W. Thomas London is the Treasurer, James O.
Yost is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS VARIABLE INSURANCE TRUST
MFS UNION STANDARD TRUST
MFS INSTITUTIONAL TRUST
A. Keith Brodkin is the Chairman and President, Stephen E.
Cavan is the Secretary, W. Thomas London is the Treasurer, James O. Yost is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
MFS MUNICIPAL INCOME TRUST
A. Keith Brodkin is the Chairman and President, Cynthia M.
Brown and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, is the Assistant
Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 370
MFS MULTIMARKET INCOME TRUST
MFS CHARTER INCOME TRUST
A. Keith Brodkin is the Chairman and President, Leslie J.
Nanberg and James T. Swanson are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James O. Yost, Vice President of
MFS, is the Assistant Treasurer and James R. Bordewick, Jr., is the Assistant
Secretary.
MFS SPECIAL VALUE TRUST
A. Keith Brodkin is the Chairman and President, Jeffrey L.
Shames and Robert J. Manning are Vice Presidents, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, and James O. Yost, is the
Assistant Treasurer and James R. Bordewick, Jr., is the Assistant Secretary.
SGVAF
W. Thomas London is the Treasurer.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott and Jeffrey L. Shames are Directors, Ziad Malek, Senior Vice President of
MFS, is the President, Thomas J. Cashman, Jr., a Senior Vice President of MFS,
is a Senior Vice President, Stephen E. Cavan is a Director, Senior Vice
President and the Clerk, James R. Bordewick, Jr. is a Director, Vice President
and an Assistant Clerk, Robert T. Burns is an Assistant Clerk, Joseph W. Dello
Russo is the Treasurer and Thomas B. Hastings is the Assistant Treasurer.
MIL-UK
A. Keith Brodkin is a Director and the Chairman, Arnold D.
Scott, Jeffrey L. Shames, and James R. Bordewick, Jr., are Directors, Stephen E.
Cavan is a Director and the Secretary, Ziad Malek is the President, James E.
Russell is the Treasurer, and Robert T. Burns is the Assistant Secretary.
MIL FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker and William F. Waters
are Directors, Stephen E. Cavan is the Secretary, W. Thomas London is the
Treasurer, James O. Yost is the Assistant Treasurer and James R. Bordewick, Jr.,
is the Assistant Secretary, and Ziad Malek is a Senior Vice President.
MFS MERIDIAN FUNDS
A. Keith Brodkin is the Chairman, President and a Director,
Richard B. Bailey, John A. Brindle, Richard W. S. Baker, Arnold D. Scott,
Jeffrey L. Shames and William F. Waters are Directors, Stephen E. Cavan is the
Secretary, W. Thomas London is the Treasurer, James R.
<PAGE> 371
Bordewick, Jr., is the Assistant Secretary, James O. Yost is the Assistant
Treasurer, and Ziad Malek is a Senior Vice President.
MFD
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, William W. Scott, Jr., an Executive
Vice President of MFS, is the President, Stephen E. Cavan is the Secretary,
Robert T. Burns is the Assistant Secretary, Joseph W. Dello Russo is the
Treasurer, and Thomas B. Hastings is the Assistant Treasurer.
CIAI
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Cynthia Orcott is President, Bruce C.
Avery is the Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFSC
A. Keith Brodkin is the Chairman and a Director, Arnold D.
Scott and Jeffrey L. Shames are Directors, Joseph A. Recomendes, a Senior Vice
President of MFS, is Vice Chairman and a Director, Janet A. Clifford is the
Executive Vice President, Joseph W. Dello Russo is the Treasurer, Thomas B.
Hastings is the Assistant Treasurer, Stephen E. Cavan is the Secretary, and
Robert T. Burns is the Assistant Secretary.
MFIA
A. Keith Brodkin is the Chairman and a Director, Jeffrey L.
Shames, and Arnold D. Scott are Directors, Thomas J. Cashman, Jr., is the
President and a Director, Leslie J. Nanberg is a Senior Vice President, a
Managing Director and a Director, George F. Bennett, Carol A. Corley, John A.
Gee, Brianne Grady and Kevin R. Parke are Senior Vice Presidents and Managing
Directors, Joseph W. Dello Russo is the Treasurer, Thomas B. Hastings is the
Assistant Treasurer and Robert T. Burns is the Secretary.
RSI
William W. Scott, Jr. and Bruce C. Avery are Directors, Arnold
D. Scott is the Chairman and a Director, Joseph W. Dello Russo is the Treasurer,
Thomas B. Hastings is the Assistant Treasurer, Stephen E. Cavan is the
Secretary, Robert T. Burns is the Assistant Secretary and Sharon A. Brovelli and
Martin E. Beaulieu are Senior Vice Presidents.
In addition, the following persons, Directors or officers of
MFS, have the affiliations indicated:
A. Keith Brodkin Director, Sun Life Assurance Company of Canada
(U.S.), One Sun Life Executive Park, Wellesley
Hills, Massachusetts
<PAGE> 372
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street, New
York, New York
Donald A. Stewart President and a Director, Sun Life Assurance Company
of Canada, Sun Life Centre, 150 King Street West,
Toronto, Ontario, Canada (Mr. Stewart is also an
officer and/or Director of various subsidiaries and
affiliates of Sun Life)
John D. McNeil Chairman, Sun Life Assurance Company of Canada, Sun
Life Centre, 150 King Street West, Toronto, Ontario,
Canada (Mr. McNeil is also an officer and/or Director
of various subsidiaries and affiliates of Sun Life)
Joseph W. Dello Russo Director of Mutual Fund Operations, The Boston
Company, Exchange Place, Boston, Massachusetts (until
August, 1994)
ITEM 29. DISTRIBUTORS
(a) Reference is hereby made to Item 28 above.
(b) Reference is hereby made to Item 28 above; the principal
business address of each of these persons is 500 Boylston Street, Boston,
Massachusetts 02116.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are located, in
whole or in part, at the office of the Registrant and the following locations:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
</TABLE>
<PAGE> 373
<TABLE>
<S> <C>
Investors Bank & Trust Company 89 South Street
(custodian) Boston, MA 02111
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
</TABLE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) With respect 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 registrant undertakes to file an
Amendment to the Registration Statement with financial statements which need not
be certified, within four to six months from the effective date of this
Post-Effective Amendment or the commencement of investment operations of such
Funds.
(c) The registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
Shareholders upon request and without a charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE> 374
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C>
5 (e) Form of Amendment to Investment Advisory
Agreement for MFS(R)Research Growth and
Income Fund, dated January 2, 1997.
(i) Form of Investment Advisory Agreement for MFS(R)
Convertible Securities Fund.
(j) Form of Investment Advisory Agreement for MFS(R)
Blue Chip Fund; filed herewith.
(k) Form of Investment Advisory Agreement for MFS(R)
New Discovery Fund; filed herewith.
(l) Form of Investment Advisory Agreement for MFS(R)
Science and Technology Fund; filed herewith.
(m) Form of Investment Advisory Agreement for MFS(R)
Research International Fund; filed herewith.
(n) Form of Sub-Advisory Agreement for MFS(R) Research
International Fund by and between Massachusetts
Financial Services Company and Foreign &
Colonial Management Ltd. dated December 30,
1996.
(o) Form of Sub-Advisory Agreement for MFS(R) Research
International Fund by and between Foreign &
Colonial Management Ltd. and Foreign & Colonial
Emerging Markets Limited, dated December 30,
1996.
9 (b) Amendment to Shareholder Servicing Agent
Agreement to include Class P Shares, dated
September 3, 1996.
11 (a) Auditor's Consent Letter for Deloitte & Touche LLP
regarding MFS Managed Sectors Fund and MFS
Cash Reserve Fund.
(b) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS World Asset Allocation Fund.
</TABLE>
<PAGE> 375
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C>
(c) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Aggressive Growth Fund, MFS Equity
Income Fund, MFS Core Growth Fund, MFS Special
Opportunities Fund and MFS Research Growth and
Income Fund.
15 Master Distribution Plan pursuant to Rule 12b-1 under
the Investment Company Act of 1940 effective
January 1, 1997.
17 Financial Data Schedules for each class of each series
for MFS Managed Sectors Fund, MFS Cash Reserve
Fund and MFS World Asset Allocation Fund and
Class A Shares only for MFS Aggressive Growth
Fund, MFS Core Growth Fund, MFS Equity Income
Fund, MFS Special Opportunities Fund and MFS
Research Growth and Income Fund.
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.5(e)
FORM OF
AMENDMENT TO INVESTMENT
ADVISORY AGREEMENT
AMENDMENT dated as of January 2, 1997 to the Investment Advisory Agreement dated
January 2, 1996 by and between MFS Series Trust I (the "Trust") on behalf of MFS
Research Growth and Income Fund (the "Fund"), a series of the Trust, and
Massachusetts Financial Services Company, a Delaware corporation (the "Adviser")
(the "Agreement").
WITNESSETH
WHEREAS, the Trust on behalf of the Fund has entered into the Agreement with the
Adviser; and
WHEREAS, MFS has agreed to amend the Agreement as provided below;
NOW THEREFORE, in consideration of the mutual covenants and agreements of the
parties hereto as herein set forth, the parties covenant and agree as follows:
1. Amendment of the Agreement: Effective as of the date hereof, the
first sentence of Article 3 of the Agreement is deleted and replaced in its
entirety as follows:
"For the services to be rendered and the facilities provided,
the Fund shall pay to the Adviser an investment advisory fee
computed and paid monthly in an amount equal to the sum of
0.65% of the first $500 million of the Fund's average daily
net assets and 0.55% of the amount in excess of $500 million,
in each case on an annualized basis for the Fund's
then-current fiscal year."
2. Miscellaneous: Except as set forth in this Amendment, the Agreement
shall remain in full force and effect, without amendment or modification.
3. Prior Amendments: This Amendment supersedes any and all previous
amendments to the Agreement.
4. Limitation of Liability of the Trustees and Shareholders: A copy of
the Trust's Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts. The parties hereto acknowledge that the
obligations of or arising out of this instrument are not binding upon any of the
Trust's trustees, officers, employees, agents or shareholders individually, but
are binding solely upon the assets and property of
<PAGE> 2
the Trust in accordance with its proportionate interest hereunder. If this
instrument is executed by the Trust on behalf of one or more series of the
Trust, the parties hereto acknowledge that the assets and liabilities of each
series of the Trust are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or property of
the series on whose behalf the Trust has executed this instrument. If the Trust
has executed this instrument on behalf of more than one series of the Trust, the
parties hereto also agree that the obligations of each series hereunder shall be
several and not joint, in accordance with its proportionate interest hereunder,
and the parties hereto agree not to proceed against any series for the
obligations of another series.
IN WITNESS WHEREOF, the parties have caused this Amendment to the Agreement to
be executed and delivered in the names and on their behalf by the undersigned,
therewith duly authorized, all as of the day and year first above written.
MFS SERIES TRUST I,
on behalf of MFS RESEARCH GROWTH AND INCOME
FUND
By: ________________________________________
A. Keith Brodkin
Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By: ________________________________________
Arnold D. Scott
Senior Executive Vice President
- 2 -
<PAGE> 1
EXHIBIT NO. 99.5(i)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of December, 1996,
by and between MFS SERIES TRUST I, a Massachusetts business trust (the "Trust"),
on behalf of MFS CONVERTIBLE SECURITIES FUND, a series of the Trust (the
"Fund"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation
(the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 6, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give
- 1 -
<PAGE> 2
instructions to the Custodian of the Fund as to the deliveries of securities and
payments of cash for the account of the Fund. In connection with the selection
of such brokers or dealers and the placing of such orders, the Adviser is
directed to seek for the Fund execution at the most reasonable price by
responsible brokerage firms at reasonably competitive commission rates. In
fulfilling this requirement, the Adviser shall not be deemed to have acted
unlawfully or to have breached any duty, created by this Agreement or otherwise,
solely by reason of its having caused the Fund to pay a broker or dealer an
amount of commission for effecting a securities transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Adviser determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and to other clients of the Adviser as to which the Adviser exercises
investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization, and investment
advisory facilities and executive and supervisory personnel for managing the
investments and effecting the portfolio transactions of the Fund. The Adviser
shall arrange, if desired by the Trust, for Directors, officers and employees of
the Adviser to serve as Trustees, officers or agents of the Trust if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law. It is understood that the Fund will pay
all of its own expenses including, without limitation, compensation of Trustees
"not affiliated" with the Adviser; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing stock certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; expenses of shareholders'
meetings; and expenses relating to the issuance, registration and qualification
of shares of the Fund and the preparation, printing and mailing of prospectuses
for such purposes (except to the extent that any Distribution Agreement to which
the Trust is a party provides that another party is to pay some or all of such
expenses).
- 2 -
<PAGE> 3
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at an annual rate equal to 0.65% of the
Fund's average daily net assets for its then-current fiscal year. If the Adviser
shall serve for less than the whole of any period specified in this Article 3,
the compensation to the Adviser will be prorated.
ARTICLE 4. SPECIAL SERVICES.. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until December 30, 1998 on which date it will terminate unless its
continuance after December 30, 1998 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose
- 3 -
<PAGE> 4
of voting on such approval, and (ii) by the Board of Trustees of the Trust, or
by "vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST I on behalf of
MFS CONVERTIBLE SECURITIES
FUND, one of its series
By:___________________________
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By:___________________________
A. Keith Brodkin
Chairman
- 5 -
<PAGE> 1
EXHIBIT NO. 99.5(j)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of December, 1996,
by and between MFS SERIES TRUST I, a Massachusetts business trust (the "Trust"),
on behalf of MFS BLUE CHIP FUND, a series of the Trust (the "Fund"), and
MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the
"Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 6, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the
- 1 -
<PAGE> 2
placing of such orders, the Adviser is directed to seek for the Fund execution
at the most reasonable price by responsible brokerage firms at reasonably
competitive commission rates. In fulfilling this requirement, the Adviser shall
not be deemed to have acted unlawfully or to have breached any duty, created by
this Agreement or otherwise, solely by reason of its having caused the Fund to
pay a broker or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Adviser determined in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the Fund and to other clients of the Adviser as
to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization, and investment
advisory facilities and executive and supervisory personnel for managing the
investments and effecting the portfolio transactions of the Fund. The Adviser
shall arrange, if desired by the Trust, for Directors, officers and employees of
the Adviser to serve as Trustees, officers or agents of the Trust if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law. It is understood that the Fund will pay
all of its own expenses including, without limitation, compensation of Trustees
"not affiliated" with the Adviser; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing stock certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; expenses of shareholders'
meetings; and expenses relating to the issuance, registration and qualification
of shares of the Fund and the preparation, printing and mailing of prospectuses
for such purposes (except to the extent that any Distribution Agreement to which
the Trust is a party provides that another party is to pay some or all of such
expenses).
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and
- 2 -
<PAGE> 3
paid monthly at an annual rate equal to 0.65% of the Fund's average daily net
assets for its then-current fiscal year. If the Adviser shall serve for less
than the whole of any period specified in this Article 3, the compensation to
the Adviser will be prorated.
ARTICLE 4. SPECIAL SERVICES.. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until December 30, 1998 on which date it will terminate unless its
continuance after December 30, 1998 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Trust, or by "vote of a majority of the outstanding voting
securities" of the Fund.
- 3 -
<PAGE> 4
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST I on
behalf of MFS BLUE CHIP FUND,
one of its series
By: ______________________________
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: ______________________________
A. Keith Brodkin
Chairman
- 5 -
<PAGE> 1
EXHIBIT NO. 99.5(k)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of December, 1996,
by and between MFS SERIES TRUST I, a Massachusetts business trust (the "Trust"),
on behalf of MFS NEW DISCOVERY FUND, a series of the Trust (the "Fund"), and
MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the
"Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 6, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash for the account of the Fund. In
connection with the selection of such brokers or dealers and the placing of such
orders, the Adviser is directed to seek for the Fund execution at the most
- 1 -
<PAGE> 2
reasonable price by responsible brokerage firms at reasonably competitive
commission rates. In fulfilling this requirement, the Adviser shall not be
deemed to have acted unlawfully or to have breached any duty, created by this
Agreement or otherwise, solely by reason of its having caused the Fund to pay a
broker or dealer an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction, if the Adviser determined in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the Fund and to other clients of the Adviser as
to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization, and investment
advisory facilities and executive and supervisory personnel for managing the
investments and effecting the portfolio transactions of the Fund. The Adviser
shall arrange, if desired by the Trust, for Directors, officers and employees of
the Adviser to serve as Trustees, officers or agents of the Trust if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law. It is understood that the Fund will pay
all of its own expenses including, without limitation, compensation of Trustees
"not affiliated" with the Adviser; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing stock certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; expenses of shareholders'
meetings; and expenses relating to the issuance, registration and qualification
of shares of the Fund and the preparation, printing and mailing of prospectuses
for such purposes (except to the extent that any Distribution Agreement to which
the Trust is a party provides that another party is to pay some or all of such
expenses).
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at an annual rate equal to 0.75% of the
Fund's average daily net assets for its then-
- 2 -
<PAGE> 3
current fiscal year. If the Adviser shall serve for less than the whole of any
period specified in this Article 3, the compensation to the Adviser will be
prorated.
ARTICLE 4. SPECIAL SERVICES.. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until December 30, 1998 on which date it will terminate unless its
continuance after December 30, 1998 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose of voting on such approval, and (ii) by the Board of
Trustees of the Trust, or by "vote of a majority of the outstanding voting
securities" of the Fund.
- 3 -
<PAGE> 4
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST I on
behalf of MFS NEW DISCOVERY
FUND, one of its series
By: ______________________________
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: ______________________________
A. Keith Brodkin
Chairman
- 5 -
<PAGE> 1
EXHIBIT NO. 99.5(l)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of December, 1996,
by and between MFS SERIES TRUST I, a Massachusetts business trust (the "Trust"),
on behalf of MFS SCIENCE AND TECHNOLOGY FUND, a series of the Trust (the
"Fund"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation
(the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 6, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash
- 1 -
<PAGE> 2
for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders, the Adviser is directed to seek for the
Fund execution at the most reasonable price by responsible brokerage firms at
reasonably competitive commission rates. In fulfilling this requirement, the
Adviser shall not be deemed to have acted unlawfully or to have breached any
duty, created by this Agreement or otherwise, solely by reason of its having
caused the Fund to pay a broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Adviser
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the Fund and to other clients
of the Adviser as to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization, and investment
advisory facilities and executive and supervisory personnel for managing the
investments and effecting the portfolio transactions of the Fund. The Adviser
shall arrange, if desired by the Trust, for Directors, officers and employees of
the Adviser to serve as Trustees, officers or agents of the Trust if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law. It is understood that the Fund will pay
all of its own expenses including, without limitation, compensation of Trustees
"not affiliated" with the Adviser; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing stock certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; expenses of shareholders'
meetings; and expenses relating to the issuance, registration and qualification
of shares of the Fund and the preparation, printing and mailing of prospectuses
for such purposes (except to the extent that any Distribution Agreement to which
the Trust is a party provides that another party is to pay some or all of such
expenses).
- 2 -
<PAGE> 3
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at an annual rate equal to 0.75% of the
Fund's average daily net assets for its then-current fiscal year. If the Adviser
shall serve for less than the whole of any period specified in this Article 3,
the compensation to the Adviser will be prorated.
ARTICLE 4. SPECIAL SERVICES.. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until December 30, 1998 on which date it will terminate unless its
continuance after December 30, 1998 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose
- 3 -
<PAGE> 4
of voting on such approval, and (ii) by the Board of Trustees of the Trust, or
by "vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
- 4 -
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST I on behalf of
MFS SCIENCE AND TECHNOLOGY
FUND, one of its series
By: _________________________________
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: _________________________________
A. Keith Brodkin
Chairman
- 5 -
<PAGE> 1
EXHIBIT NO. 99.5(m)
FORM OF
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of December, 1996,
by and between MFS SERIES TRUST I, a Massachusetts business trust (the "Trust"),
on behalf of MFS RESEARCH INTERNATIONAL FUND, a series of the Trust (the
"Fund"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation
(the "Adviser").
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940; and
WHEREAS, the Adviser is willing to provide business services to the
Fund on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
ARTICLE 1. DUTIES OF THE ADVISER. The Adviser shall provide the Fund
with such investment advice and supervision as the latter may from time to time
consider necessary for the proper supervision of its funds. The Adviser shall
act as Adviser to the Fund and as such shall furnish continuously an investment
program and shall determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the assets of the Fund shall be
held uninvested, subject always to the restrictions of the Trust's Amended and
Restated Declaration of Trust, dated January 6, 1995, and By-Laws, each as
amended from time to time (respectively, the "Declaration" and the "By-Laws"),
to the provisions of the Investment Company Act of 1940 and the Rules,
Regulations and orders thereunder and to the Fund's then-current Prospectus and
Statement of Additional Information. The Adviser shall also make recommendations
as to the manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the Fund's portfolio securities shall be
exercised. Should the Trustees at any time, however, make any definite
determination as to the investment policy and notify the Adviser thereof in
writing, the Adviser shall be bound by such determination for the period, if
any, specified in such notice or until similarly notified that such
determination shall be revoked. The Adviser shall take, on behalf of the Fund,
all actions which it deems necessary to implement the investment policies
determined as provided above, and in particular to place all orders for the
purchase or sale of portfolio securities for the Fund's account with brokers or
dealers selected by it, and to that end, the Adviser is authorized as the agent
of the Fund to give instructions to the Custodian of the Fund as to the
deliveries of securities and payments of cash
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for the account of the Fund. In connection with the selection of such brokers or
dealers and the placing of such orders, the Adviser is directed to seek for the
Fund execution at the most reasonable price by responsible brokerage firms at
reasonably competitive commission rates. In fulfilling this requirement, the
Adviser shall not be deemed to have acted unlawfully or to have breached any
duty, created by this Agreement or otherwise, solely by reason of its having
caused the Fund to pay a broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Adviser
determined in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the Fund and to other clients
of the Adviser as to which the Adviser exercises investment discretion.
The Adviser may from time to time enter into sub-investment advisory agreements
with one or more investment advisers with such terms and conditions as the
Adviser may determine, provided that such sub-investment advisory agreements
have been approved in accordance with applicable provisions of the Investment
Company Act of 1940. Subject to the provisions of Article 6, the Adviser shall
not be liable for any error of judgment or mistake of law by any sub-adviser or
for any loss arising out of any investment made by any sub-adviser or for any
act or omission in the execution and management of the Fund by any sub-adviser.
ARTICLE 2. ALLOCATION OF CHARGES AND EXPENSES. The Adviser shall
furnish at its own expense investment advisory and administrative services,
office space, equipment and clerical personnel necessary for servicing the
investments of the Fund and maintaining its organization, and investment
advisory facilities and executive and supervisory personnel for managing the
investments and effecting the portfolio transactions of the Fund. The Adviser
shall arrange, if desired by the Trust, for Directors, officers and employees of
the Adviser to serve as Trustees, officers or agents of the Trust if duly
elected or appointed to such positions and subject to their individual consent
and to any limitations imposed by law. It is understood that the Fund will pay
all of its own expenses including, without limitation, compensation of Trustees
"not affiliated" with the Adviser; governmental fees; interest charges; taxes;
membership dues in the Investment Company Institute allocable to the Fund; fees
and expenses of independent auditors, of legal counsel, and of any transfer
agent, registrar or dividend disbursing agent of the Fund; expenses of
repurchasing and redeeming shares and servicing shareholder accounts; expenses
of preparing, printing and mailing stock certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions;
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions; insurance premiums; fees and
expenses of the custodian for all services to the Fund, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
calculating the net asset value of shares of the Fund; expenses of shareholders'
meetings; and expenses relating to the issuance, registration and qualification
of shares of the Fund and the preparation, printing and mailing of prospectuses
for such purposes (except to the extent that any Distribution Agreement to which
the Trust is a party provides that another party is to pay some or all of such
expenses).
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<PAGE> 3
ARTICLE 3. COMPENSATION OF THE ADVISER. For the services to be rendered
and the facilities provided, the Fund shall pay to the Adviser an investment
advisory fee computed and paid monthly at an annual rate equal to 1.00% of the
Fund's average daily net assets for its then-current fiscal year. If the Adviser
shall serve for less than the whole of any period specified in this Article 3,
the compensation to the Adviser will be prorated.
ARTICLE 4. SPECIAL SERVICES. Should the Trust have occasion to request
the Adviser to perform services not herein contemplated or to request the
Adviser to arrange for the services of others, the Adviser will act for the
Trust on behalf of the Fund upon request to the best of its ability, with
compensation for the Adviser's services to be agreed upon with respect to each
such occasion as it arises.
ARTICLE 5. COVENANTS OF THE ADVISER. The Adviser agrees that it will
not deal with itself, or with the Trustees of the Trust or the Trust's
distributor, if any, as principals in making purchases or sales of securities or
other property for the account of the Fund, except as permitted by the
Investment Company Act of 1940 and the Rules, Regulations or orders thereunder,
will not take a long or short position in the shares of the Fund except as
permitted by the Declaration, and will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement of
Additional Information of the Fund relative to the Adviser and its Directors and
officers.
ARTICLE 6. LIMITATION OF LIABILITY OF THE ADVISER. The Adviser shall
not 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 duties and obligations hereunder. As used
in this Article 6, the term "Adviser" shall include Directors, officers and
employees of the Adviser as well as that corporation itself.
ARTICLE 7. ACTIVITIES OF THE ADVISER. The services of the Adviser to
the Fund are not deemed to be exclusive, the Adviser being free to render
investment advisory and/or other services to others. The Adviser may permit
other fund clients to use the initials "MFS" in their names. The Fund agrees
that if the Adviser shall for any reason no longer serve as the Adviser to the
Fund, the Fund will change its name so as to delete the initials "MFS." It is
understood that the Trustees, officers and shareholders of the Trust are or may
be or become interested in the Adviser, as Directors, officers, employees, or
otherwise and that Directors, officers and employees of the Adviser are or may
become similarly interested in the Trust, and that the Adviser may be or become
interested in the Fund as a shareholder or otherwise.
ARTICLE 8. DURATION, TERMINATION AND AMENDMENT OF THIS AGREEMENT. This
Agreement shall become effective on the date first above written and shall
govern the relations between the parties hereto thereafter, and shall remain in
force until December 30, 1998 on which date it will terminate unless its
continuance after December 30, 1998 is "specifically approved at least annually"
(i) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or of the Adviser at a meeting specifically
called for the purpose
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<PAGE> 4
of voting on such approval, and (ii) by the Board of Trustees of the Trust, or
by "vote of a majority of the outstanding voting securities" of the Fund.
This Agreement may be terminated at any time without the payment of any
penalty by the Trustees or by "vote of a majority of the outstanding voting
securities" of the Fund, or by the Adviser, in each case on not more than sixty
days' nor less than thirty days' written notice to the other party. This
Agreement shall automatically terminate in the event of its "assignment".
This Agreement may be amended only if such amendment is approved by
"vote of a majority of the outstanding voting securities" of the Fund.
ARTICLE 9. SCOPE OF TRUST'S OBLIGATIONS. A copy of the Trust's
Declaration of Trust is on file with the Secretary of State of The Commonwealth
of Massachusetts. The Adviser acknowledges that the obligations of or arising
out of this Agreement are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are binding solely
upon the assets and property of the Trust. If this Agreement is executed by the
Trust on behalf of one or more series of the Trust, the Adviser further
acknowledges that the assets and liabilities of each series of the Trust are
separate and distinct and that the obligations of or arising out of this
Agreement are binding solely upon the assets or property of the series on whose
behalf the Trust has executed this Agreement.
ARTICLE 10. DEFINITIONS. The terms "specifically approved at least
annually," "vote of a majority of the outstanding voting securities,"
"assignment," "affiliated person," and "interested person," when used in this
Agreement, shall have the respective meanings specified, and shall be construed
in a manner consistent with, the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission under said Act.
ARTICLE 11. RECORD KEEPING. The Adviser will maintain records in a form
acceptable to the Trust and in compliance with the rules and regulations of the
Securities and Exchange Commission, including but not limited to records
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the rules thereunder, which at all times will be the property of the Trust
and will be available for inspection and use by the Trust.
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<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above. The undersigned Trustee of the Trust
has executed this Agreement not individually, but as Trustee under the
Declaration.
MFS SERIES TRUST I on behalf of
MFS RESEARCH INTERNATIONAL
FUND, one of its series
By: _____________________________
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: _____________________________
A. Keith Brodkin
Chairman
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<PAGE> 1
EXHIBIT NO. 99.5(n)
FORM OF
SUB-ADVISORY AGREEMENT
MFS RESEARCH INTERNATIONAL FUND
SUB-ADVISORY AGREEMENT, dated this 30 day of December, 1996, by and
between MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the
"Adviser") and FOREIGN & COLONIAL MANAGEMENT LTD., a company incorporated under
the laws of England and Wales (the "Sub-Adviser").
WITNESSETH:
WHEREAS, the Adviser provides MFS Research International Fund (the
"Fund"), a series of MFS Series Trust I (the "Trust"), an open-end investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), business services pursuant to the terms and conditions of an
investment advisory agreement dated December 30, 1996 (the "Advisory Agreement")
between the Adviser and the Trust, on behalf of the Fund; and
WHEREAS, the Sub-Adviser is willing to provide services to the Adviser
on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of the Sub-Adviser. The Sub-Adviser will furnish the Adviser
with information and advice relating to such portion of the Fund's assets as the
Adviser shall from time to time designate (the "Designated Assets"). Subject to
the supervision of the Trustees of the Trust and the Adviser, the Sub-Adviser
will: (a) manage the Designated Assets on behalf of the Fund in accordance with
the Fund's investment objective, policies and limitations as stated in the
Fund's then current Prospectus (the "Prospectus") and Statement of Additional
Information (the "Statement"), and the Trust's Amended and Restated Declaration
of Trust dated December 14, 1994, as amended, and Amended and Restated By-Laws,
each as from time to time in effect (respectively, the "Declaration" and the
"By-Laws") and in compliance with the 1940 Act and the rules, regulations and
orders thereunder; (b) make investment decisions with respect to the Designated
Assets; (c) place purchase and sale orders for portfolio transactions with
respect to the Designated Assets; (d) manage otherwise uninvested cash assets
with respect to the Designated Assets; (e) as the agent of the Fund, give
instructions (including trade tickets) to the custodian and any sub-custodian of
the Fund as to deliveries of securities, transfers of currencies and payments of
cash with respect to the Designated Assets (the Sub-Adviser shall promptly
notify the Adviser of such instructions); (f) employ professional portfolio
managers to provide research services to the Fund; (g) attend periodic meetings
of the Board of Trustees of the Trust and (h) obtain all the registrations,
qualifications and consents, on behalf of the Fund, which are necessary for the
Fund to purchase and sell assets in each jurisdiction (other than the United
States) in which the Fund's Designated Assets are to be invested (the
Sub-Adviser shall promptly
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<PAGE> 2
provide the Adviser with copies of any such registrations, qualifications and
consents). In providing these services, the Sub-Adviser will furnish
continuously an investment program with respect to the Designated Assets. The
Sub-Adviser shall be responsible for monitoring the Fund's compliance with the
Prospectus, the Statement, the Declaration, the By-Laws and the 1940 Act and the
rules, regulations and orders thereunder and in monitoring such compliance the
Sub-Adviser shall do so in the functional currency of the Fund. The Sub-Adviser
shall only be responsible for compliance with the above-mentioned restrictions
in regards to the Designated Assets. The Adviser agrees to provide the
Sub-Adviser with such assistance as may be reasonably requested by the
Sub-Adviser in connection with its activities under this Agreement, including,
without limitation, information concerning the Fund, its funds available, or to
become available, for investment and generally as to the conditions of the
Fund's affairs. From time to time the Adviser will notify the Sub-Adviser of the
aggregate U.S. Dollar amount of the Designated Assets. The Adviser will have
responsibility for exercising proxy, consent and other rights pertaining to the
Designated Assets; provided, however, that the Sub-Adviser will, as requested,
make recommendations to the Adviser as to the manner in which such proxy,
consent and other rights should be exercised.
Should the Trustees of the Trust or the Adviser at any time make any
determination as to investment policy and notify the Sub-Adviser thereof in
writing, the Sub-Adviser shall be bound by such determination for the period, if
any, specified in such notice or until notified that such determination has been
revoked. Further, the Adviser or the Trustees of the Trust may at any time, upon
written notice to the Sub-Adviser, suspend or restrict the right of the
Sub-Adviser to determine what Designated Assets shall be purchased or sold and
what portion, if any, of the Fund's Designated Assets shall be held uninvested.
It is understood that the Adviser undertakes to discuss with the Sub-Adviser any
such determinations of investment policy and any such suspension or restrictions
on the right of the Sub-Adviser to determine what Designated Assets shall be
purchased or sold or held uninvested, prior to the implementation thereof.
2. Certain Information to the Sub-Adviser. Copies of the Prospectus,
the Statement, the Declaration and the By-Laws have been delivered to the
Sub-Adviser. The Adviser agrees to notify the Sub-Adviser of each change in the
investment policies of the Fund and to provide to the Sub-Adviser as promptly as
practicable copies of all amendments and supplements to the Prospectus, the
Statement, the Declaration and the By-Laws. In addition, the Adviser will
promptly provide the Sub-Adviser with any procedures applicable to the
Sub-Adviser adopted from time to time by the Trustees of the Trust and agrees to
provide promptly to the Sub-Adviser copies of all amendments thereto.
3. Execution of Certain Documents. Subject to any other written
instructions of the Adviser and the Trustees of the Trust, the Sub-Adviser is
hereby appointed the Adviser's and the Trust's agent and attorney-in-fact to
execute account documentation, agreements, contracts and other documents as the
Sub-Adviser shall be requested by brokers, dealers, counterparties and other
persons in connection with its management of the Designated Assets.
4. Reports. The Sub-Adviser shall furnish to the Trustees of the Trust
or the Adviser, or both, as may be appropriate, quarterly reports of its
activities on behalf of the Fund,
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<PAGE> 3
as required by applicable law or as otherwise requested from time to time by the
Trustees of the Trust or the Adviser, and such additional information, reports,
evaluations, analyses and opinions as the Trustees of the Trust or the Adviser,
as appropriate, may request from time to time.
5. Brokerage. In connection with the selections of brokers, dealers or
other entities and the placing of orders for the purchase and sale of portfolio
investments for the Fund, the Sub-Adviser is directed to seek for the Fund
execution at the most favorable price by responsible brokerage firms at
reasonably competitive commission rates. In fulfilling this requirement, the
Sub-Adviser shall not be deemed to have acted unlawfully or to have breached any
duty, created by this Agreement or otherwise, solely by reason of its having
caused the Fund to pay a broker, dealer or other entity an amount of commission
for effecting a securities transaction in excess of the amount of commission
another broker, dealer or other entity would have charged for effecting that
transaction, if the Sub-Adviser determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services (within the meaning of Section 28(e) of the Securities Exchange Act of
1934, as amended) provided by such broker, dealer or other entity, viewed in
terms of either that particular transaction or the Sub-Adviser's overall
responsibilities with respect to the Fund and to other clients of the
Sub-Adviser as to which the Sub-Adviser exercises investment discretion.
6. Services to Other Companies or Accounts. On occasions when the
Sub-Adviser deems the purchase or sale of a security to be in the best interest
of the Fund as well as other clients, the Sub-Adviser, to the extent permitted
by applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction will be made by the Sub-Adviser in the
manner it considers to be the most equitable. The Sub-Adviser agrees to allocate
similarly opportunities to sell or otherwise dispose of securities among the
Fund and other clients of the Sub-Adviser.
7. Other Sub-Advisers. The Sub-Adviser may from time to time enter into
investment sub-advisory agreements with one or more investment advisers, (an
"Other Sub-Adviser"), to the Fund to perform some or all of the services for
which the Sub-Adviser is responsible pursuant to this Agreement upon such terms
and conditions as the Adviser and the Sub-Adviser may determine; provided,
however, that such investment sub-advisory agreements have been approved by a
majority of the Trustees of the Trust who are not interested persons of the
Trust, or the Sub-Adviser or the Other Sub-Adviser and by vote of a majority of
the outstanding voting securities of the Fund; and, provided, further, that the
Sub-Adviser shall own a majority of the voting securities of any Other
Sub-Adviser. The Sub-Adviser may terminate the services of any Other Sub-Adviser
at any time in its sole discretion, and shall at such time assume the
responsibilities of such Other Sub-Adviser unless and until a successor Other
Sub-Adviser is selected. The Sub-Adviser shall be liable for any error of
judgment or mistake of law by any Other Sub-Adviser and for any act or omission
in the execution and management of the Fund by any Other Sub-Adviser.
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<PAGE> 4
8. Compensation of the Sub-Adviser. For the services to be rendered by
the Sub-Adviser under this Agreement, the Adviser shall pay to the Sub-Adviser
compensation, computed and paid monthly in arrears in U.S. dollars, at a rate of
0.40% per annum of the average daily net asset value of the Fund. If the
Sub-Adviser shall serve for less than the whole of any month, the compensation
payable to the Sub-Adviser with respect to the Fund will be prorated. The
Sub-Adviser will pay its expenses incurred in performing its duties under this
Agreement. Neither the Trust nor the Fund shall be liable to the Sub-Adviser for
the compensation of the Sub-Adviser. For the purpose of determining fees payable
to the Sub-Adviser, the value of the Fund's net assets shall be computed at the
times and in the manner specified in the Prospectus and/or Statement. In the
event that the Adviser reduces its management fee payable under the Advisory
Agreement in order to comply with the expense limitations of a State securities
commission or otherwise, the Sub-Adviser agrees to reduce its fee payable under
this Agreement by a pro rata amount.
9. Limitation of Liability of the Sub-Adviser. The Sub-Adviser shall
not 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 duties and obligations hereunder. The
Trust, on behalf of the Fund, may enforce any obligations of the Sub-Adviser
under this Agreement and may recover directly from the Sub-Adviser for any
liability it may have to the Fund.
10. Activities of the Sub-Adviser. The services of the Sub-Adviser to
the Fund are not deemed to be exclusive, the Sub-Adviser being free to render
investment advisory and/or other services to others. It is understood that the
Trustees, officers and shareholders of the Trust, the Fund or the Adviser are or
may be or become interested in the Sub-Adviser or any person controlling,
controlled by or under common control with the Sub-Adviser, as trustees,
officers, employees or otherwise and that trustees, officers and employees of
the Sub-Adviser or any person controlling, controlled by or under common control
with the Sub-Adviser may become similarly interested in the Trust, the Fund or
the Adviser and that the Sub-Adviser may be or become interested in the Fund as
a shareholder or otherwise.
11. Covenants of the Sub-Adviser. The Sub-Adviser agrees that it (a)
will not deal with itself, "affiliated persons" of the Sub-Adviser, the Trustees
of the Trust or the Fund's distributor, as principals, agents, brokers or
dealers in making purchases or sales of securities or other property for the
account of the Fund, except as permitted by the 1940 Act and the rules,
regulations and orders thereunder and subject to the prior written approval of
the Adviser, (b) will not take a long or short position in the shares of the
Fund except as permitted by the Declaration and (c) will comply with all other
provisions of the Declaration and the By-Laws and the then-current Prospectus
and Statement relative to the Sub-Adviser and its trustees, officers, employees
and affiliates.
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<PAGE> 5
12. Representations, Warranties and Additional Agreements of the
Sub-Adviser. The Sub-Adviser represents, warrants and agrees that:
(a) It: (i) is registered as an investment adviser under the U.S.
Investment Advisers Act of 1940 (the "Advisers Act"), is
authorized to undertake investment business in the United
Kingdom by virtue of its membership in the Investment
Management Regulatory Organisation ("IMRO") and is registered
under the laws of any jurisdiction in which the Sub-Adviser is
required to be registered as an investment adviser in order to
perform its obligations under this Agreement, and will
continue to be so registered for so long as this Agreement
remains in effect; (ii) is not prohibited by the 1940 Act or
the Advisers Act from performing the services contemplated by
this Agreement; (iii) has met, and will continue to meet for
so long as this Agreement remains in effect, any other
applicable Federal or State requirements, or the applicable
requirements of any regulatory or industry self-regulatory
agency, necessary to be met in order to perform the services
contemplated by this Agreement; (iv) has the authority to
enter into and perform the services contemplated by this
Agreement; (v) will immediately notify the Adviser in writing
of the occurrence of any event that would disqualify the
Sub-Adviser from serving as an investment adviser of an
investment company pursuant to Section 9(a) of the 1940 Act or
otherwise; and (vi) will immediately notify the Adviser in
writing of any change of control of the Sub-Adviser or any
parent of the Sub-Adviser resulting in an "assignment" of this
Agreement.
(b) It will maintain, keep current and preserve on behalf of the
Fund, in the manner and for the periods of time required or
permitted by the 1940 Act and the rules, regulations and
orders thereunder and the Advisers Act and the rules,
regulations and orders thereunder, records relating to
investment transactions made by the Sub-Adviser for the Fund
as may be reasonably requested by the Adviser or the Fund from
time to time. The Sub-Adviser agrees that such records are the
property of the Fund, and will be surrendered to the Fund
promptly upon request; provided, however, that the Sub-Adviser
may retain copies of such records for archival purposes as
required by IMRO.
(c) The Sub-Adviser has adopted a written code of ethics complying
with the requirements of Rule 17j-1 under the 1940 Act and, if
it has not already done so, will provide the Adviser and the
Trust with a copy of such code of ethics, and upon any
amendment to such code of ethics, promptly provide such
amendment. At least annually the Sub-Adviser will provide the
Trust and the Adviser with a certificate signed by the chief
compliance officer (or the person performing such function) of
the Sub-Adviser certifying, to the best of his or her
knowledge, compliance with the code of ethics during the
immediately preceding twelve (12) month period,
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<PAGE> 6
including any material violations of or amendments to the code
of ethics or the administration thereof.
(d) It has provided the Adviser and the Trust with a copy of its
Form ADV as most recently filed with the Securities and
Exchange Commission (the "SEC") and will, promptly after
filing any amendment to its Form ADV with the SEC, furnish a
copy of such amendment to the Adviser and the Trust.
13. Duration and Termination of this Agreement. This Agreement shall
become effective on the date first above written and shall govern the relations
between the parties hereto thereafter, and shall remain in force until December
30, 1998 and each year thereafter but only so long as its continuance is
"specifically approved at least annually" (a) by the vote of a majority of the
Trustees of the Trust who are not "interested persons" of the Trust or of the
Adviser or of the Sub-Adviser at a meeting specifically called for the purpose
of voting on such approval, and (b) by the Board of Trustees of the Trust, or by
"vote of a majority of the outstanding voting securities" of the Fund. This
Agreement may be terminated at any time without the payment of any penalty by
the Trustees of the Trust, by "vote of a majority of the outstanding voting
securities" of the Fund or by the Adviser, on not more than sixty days nor less
than thirty days written notice, or by the Sub-Adviser on not more than ninety
days nor less than sixty days written notice. This Agreement shall automatically
terminate in the event of its "assignment" or in the event that the Advisory
Agreement shall have terminated for any reason.
14. Amendments to this Agreement. This Agreement may be amended only if
such amendment is approved by "vote of a majority of the outstanding voting
securities" of the Fund, by the Adviser and by the Sub-Adviser.
15. Certain Definitions. The terms "specifically approved at least
annually", "vote of a majority of the outstanding voting securities",
"assignment", "control", "affiliated persons" and "interested person", when used
in this Agreement, shall have the respective meanings specified, and shall be
construed in a manner consistent with, the 1940 Act and the rules, regulations
and orders thereunder, subject, however, to such exemptions as may be granted by
the SEC under the 1940 Act.
16. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by the Sub-Adviser pursuant
to Section 12 hereof shall survive for the duration of this Agreement and the
Sub-Adviser shall immediately notify, but in no event later than five (5)
business days, the Adviser in writing upon becoming aware that any of the
foregoing representations and warranties are no longer true.
17. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the internal laws of The Commonwealth of Massachusetts. All
notices provided for by this Agreement shall be in writing and shall be deemed
given when received, against appropriate receipt, by the Sub-Adviser's Secretary
in the case of the Sub-Adviser, the Adviser's General Counsel in the case of the
Adviser, and the Trust's Secretary in the case of the Fund, or such
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<PAGE> 7
other person as a party shall designate by notice to the other parties. This
Agreement constitutes the entire agreement among the parties hereto and
supersedes any prior agreement among the parties relating to the subject matter
hereof. The section headings of this Agreement are for convenience of reference
and do not constitute a part hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above.
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By:_________________________
Jeffrey L. Shames
President
FOREIGN & COLONIAL
MANAGEMENT LTD.
By:_________________________
James Oglivy
By:_________________________
Jonathan Lubran
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<PAGE> 8
The foregoing is hereby agreed to:
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The parties hereto
acknowledge that the obligations of or arising out of this instrument are not
binding upon any of the Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the Trust in accordance with its proportionate interest hereunder. If this
instrument is executed by the Trust on behalf of one or more series of the
Trust, the parties hereto acknowledge that the assets and liabilities of each
series of the Trust are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or property of
the series on whose behalf the Trust has executed this instrument. If the Trust
has executed this instrument on behalf of more than one series of the Trust, the
parties hereto also agree that the obligations of each series hereunder shall be
several and not joint, in accordance with its proportionate interest hereunder,
and the parties hereto agree not to proceed against any series for the
obligations of another series.
MFS SERIES TRUST I
on behalf of MFS RESEARCH INTERNATIONAL FUND
By: _________________________________________
A. Keith Brodkin
Chairman
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EXHIBIT NO. 99.5(o)
FORM OF
SUB-ADVISORY AGREEMENT
MFS RESEARCH INTERNATIONAL FUND
SUB-ADVISORY AGREEMENT, dated this 30th day of December, 1996, by and
between FOREIGN & COLONIAL MANAGEMENT LTD., a company incorporated under the
laws of England and Wales (the "Sub-Adviser"), and FOREIGN & COLONIAL EMERGING
MARKETS LIMITED, a company incorporated under the laws of England and Wales
("FCEM").
WITNESSETH:
WHEREAS, Massachusetts Financial Services Company (the "Adviser")
provides MFS Research International Fund (the "Fund"), a series of MFS Series
Trust I (the "Trust"), an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), business services
pursuant to the terms and conditions of an investment advisory agreement dated
December 30, 1996 (the "Advisory Agreement") between the Adviser and the Trust,
on behalf of the Fund;
WHEREAS, the Sub-Adviser provides services to the Adviser pursuant to
the terms and conditions of a sub-advisory agreement dated December 30, 1996
(the "FCM Sub-Advisory Agreement") between the Adviser and the Sub-Adviser; and
WHEREAS, FCEM is willing to provide services to the Sub-Adviser on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. Duties of FCEM. FCEM will furnish the Sub-Adviser with information
and advice relating to such portion of the Fund's assets as the Adviser,
Sub-Adviser and FCEM shall from time to time mutually designate (the "Designated
Assets"). Subject to the supervision of the Trustees of the Trust, the Adviser
and the Sub-Adviser, FCEM will: (a) manage the Designated Assets on behalf of
the Fund in accordance with the Fund's investment objective, policies and
limitations as stated in the Fund's then current Prospectus (the "Prospectus")
and Statement of Additional Information (the "Statement"), and the Trust's
Amended and Restated Declaration of Trust dated December 14, 1994, as amended,
and Amended and Restated By-Laws, each as from time to time in effect
(respectively, the"Declaration" and the "By-Laws") and in compliance with the
1940 Act and the rules, regulations and orders thereunder; (b) make investment
decisions with respect to the Designated Assets; (c) place purchase and sale
orders for portfolio transactions with respect to the Designated Assets; (d)
manage otherwise uninvested cash assets with respect to the Designated Assets ;
(e) as the agent of the Fund, give instructions (including trade tickets) to the
custodian and any sub-custodian of the Fund as to deliveries of securities,
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transfers of currencies and payments of cash with respect to the Designated
Assets (FCEM shall promptly notify the Adviser and the Sub-Adviser of such
instructions); (f) employ professional portfolio managers to provide research
services to the Fund; (g) attend periodic meetings of the Board of Trustees of
the Trust and (h) obtain all the registrations, qualifications and consents, on
behalf of the Fund, which are necessary for the Fund to purchase and sell assets
in each jurisdiction (other than the United States) in which the Designated
Assets are to be invested (FCEM shall promptly provide the Adviser and the
Sub-Adviser with copies of any such registrations, qualifications and consents).
In providing these services, FCEM will furnish continuously an investment
program with respect to the Designated Assets. FCEM shall be responsible for
monitoring the Fund's compliance with the Prospectus, the Statement, the
Declaration, the By-Laws and the 1940 Act and the rules, regulations and orders
thereunder and in monitoring such compliance FCEM shall do so in the functional
currency of the Fund. FCEM shall only be responsible for compliance with the
above-mentioned restrictions in regards to the Designated Assets. The
Sub-Adviser agrees to provide FCEM with such assistance as may be reasonably
requested by FCEM in connection with its activities under this Agreement,
including, without limitation, information concerning the Fund, its funds
available, or to become available, for investment and generally as to the
conditions of the Fund's affairs.
Should the Trustees of the Trust or the Adviser and the Sub-Adviser at
any time make any determination as to investment policy and notify FCEM thereof
in writing, FCEM shall be bound by such determination for the period, if any,
specified in such notice or until notified that such determination has been
revoked. Further, the Adviser and the Sub-Adviser or the Trustees of the Trust
may at any time, upon written notice to FCEM, suspend or restrict the right of
FCEM to determine what assets of the Fund shall be purchased or sold and what
portion, if any, of the Fund's assets shall be held uninvested. It is understood
that the Adviser and the Sub-Adviser undertake to discuss with FCEM any such
determinations of investment policy and any such suspensions or restrictions on
the right of FCEM to determine what assets of the Fund shall be purchased or
sold or held uninvested, prior to the implementation thereof.
2. Execution of Certain Documents. Subject to any other written
instructions of the Adviser, the Sub-Adviser and the Trustees of the Trust, FCEM
is hereby appointed the Sub-Adviser's and the Trust's agent and attorney-in-fact
to execute account documentation, agreements, contracts and other documents as
FCEM shall be requested by brokers, dealers, counterparties and other persons in
connection with its management of the Designated Assets.
3. Brokerage. In connection with the selections of brokers, dealers or
other entities and the placing of orders for the purchase and sale of portfolio
investments for the Fund with respect to the Designated Assets, FCEM is directed
to seek for the Fund execution at the most favorable price by responsible
brokerage firms at reasonably competitive commission rates. In fulfilling this
requirement, FCEM shall not be deemed to have acted unlawfully or to have
breached any duty, created by this Agreement or otherwise, solely by reason of
its having caused the Fund to pay a broker, dealer or other entity an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker, dealer or other entity would have charged for
effecting that transaction, if FCEM determined in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
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<PAGE> 3
services (within the meaning of Section 28(e) of the Securities Exchange Act of
1934, as amended) provided by such broker, dealer or other entity, viewed in
terms of either that particular transaction or FCEM's overall responsibilities
with respect to the Fund and to other clients of FCEM as to which FCEM exercises
investment discretion.
4. Reports. FCEM shall furnish to the Trustees of the Trust, the
Adviser or the Sub-Adviser, or all of them, as may be appropriate, quarterly
reports of its activities on behalf of the Fund, as required by applicable law
or as otherwise requested from time to time by the Trustees of the Trust, the
Adviser or the Sub-Adviser, and such additional information, reports,
evaluations, analyses and opinions as the Trustees of the Trust, the Adviser or
the Sub-Adviser, as appropriate, may request from time to time.
5. Services to Other Companies or Accounts. On occasions when FCEM
deems the purchase or sale of a security to be in the best interest of the Fund
as well as other clients, FCEM, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction will be made by FCEM in the manner it considers to be the most
equitable. FCEM agrees to allocate similarly opportunities to sell or otherwise
dispose of securities among the Fund and other clients of FCEM.
6. Compensation of FCEM. For the services to be rendered by FCEM under
this Agreement, the Sub-Adviser shall pay to FCEM compensation, computed and
paid monthly in arrears, at a rate of 0.12% per annum of the average daily net
asset value of the Fund. If FCEM shall serve for less than the whole of any
month, the compensation payable to FCEM with respect to the Fund will be
prorated. FCEM will pay its expenses incurred in performing its duties under
this Agreement. Neither the Trust, the Adviser nor the Fund shall be liable to
FCEM for the compensation of FCEM. For the purpose of determining fees payable
to FCEM, the value of the Fund's net assets shall be computed at the times and
in the manner specified in the Prospectus and/or Statement. In the event that
the Sub-Adviser reduces its management fee payable under the FCM Sub-Advisory
Agreement in order to comply with the expense limitations of a State securities
commission or otherwise, FCEM agrees to reduce its fee payable under this
Agreement by a pro rata amount.
7. Limitation of Liability of FCEM. FCEM shall not 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 duties and obligations hereunder. The Trust, on behalf of the
Fund, may enforce any obligations of FCEM under this Agreement and may recover
directly from FCEM for any liability it may have to the Fund.
8. Activities of FCEM. The services of FCEM to the Fund are not deemed
to be exclusive, FCEM being free to render investment advisory and/or other
services to others. It is understood that the Trustees, officers and
shareholders of the Trust, the Fund, the Adviser or the
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<PAGE> 4
Sub-Adviser are or may become interested in FCEM or any person controlling,
controlled by or under common control with FCEM, as trustees, officers,
employees or otherwise and that trustees, officers and employees of FCEM or any
person controlling, controlled by or under common control with FCEM may become
similarly interested in the Trust, the Fund, the Adviser or the Sub-Adviser and
that FCEM may be or become interested in the Fund as a shareholder or otherwise.
9. Covenants of FCEM. FCEM agrees that it (a) will not deal with
itself, "affiliated persons" of FCEM, the Sub-Adviser, the Trustees of the Trust
or the Fund's distributor, as principals, agents, brokers or dealers in making
purchases or sales of securities or other property for the account of the Fund,
except as permitted by the 1940 Act and the rules, regulations and orders
thereunder and subject to the prior written approval of the Adviser, (b) will
not take a long or short position in the shares of the Fund except as permitted
by the Declaration and (c) will comply with all other provisions of the
Declaration and the By-Laws and the then-current Prospectus and Statement
relative to FCEM and its trustees, officers, employees and affiliates.
10. Representations, Warranties and Additional Agreements of FCEM. FCEM
represents, warrants and agrees that:
(a) It: (i) is registered as an investment adviser under the U.S.
Investment Advisers Act of 1940 (the "Advisers Act"), is
authorized to undertake investment business in the United
Kingdom by virtue of its membership in the Investment
Management Regulatory Organisation ("IMRO") and is registered
under the laws of any jurisdiction in which FCEM is required
to be registered as an investment adviser in order to perform
its obligations under this Agreement, and will continue to be
so registered for so long as this Agreement remains in effect;
(ii) is not prohibited by the 1940 Act or the Advisers Act
from performing the services contemplated by this Agreement;
(iii) has met, and will continue to meet for so long as this
Agreement remains in effect, any other applicable Federal or
State requirements, or the applicable requirements of any
regulatory or industry self-regulatory agency, necessary to be
met in order to perform the services contemplated by this
Agreement; (iv) has the authority to enter into and perform
the services contemplated by this Agreement; (v) will
immediately notify the Adviser and the Sub-Adviser in writing
of the occurrence of any event that would disqualify FCEM from
serving as an investment adviser of an investment company
pursuant to Section 9(a) of the 1940 Act or otherwise; and
(vi) will immediately notify the Adviser and the Sub-Adviser
in writing of any change of control of FCEM or any parent of
FCEM resulting in an "assignment" of this Agreement.
(b) It will maintain, keep current and preserve on behalf of the
Fund, in the manner and for the periods of time required or
permitted by the 1940 Act and the rules, regulations and
orders thereunder and the Advisers Act and the rules,
regulations and orders thereunder, records relating to
investment transactions made by FCEM for the Fund as may be
reasonably requested by the Adviser or the Fund from time to
time. FCEM agrees that such records are the property of the
Fund, and will be
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<PAGE> 5
surrendered to the Fund promptly upon request; provided,
however, that FCEM may retain copies of such records for
archival purposes as required by IMRO.
(c) FCEM has adopted a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act and, if it has
not already done so, will provide the Adviser, the Sub-Adviser
and the Trust with a copy of such code of ethics, and upon any
amendment to such code of ethics, promptly provide such
amendment. At least annually FCEM will provide the Trust, the
Sub-Adviser and the Adviser with a certificate signed by the
chief compliance officer (or the person performing such
function) of FCEM certifying, to the best of his or her
knowledge, compliance with the code of ethics during the
immediately preceding twelve (12) month period, including any
material violations of or amendments to the code of ethics or
the administration thereof.
(d) It has provided the Adviser, the Sub-Adviser and the Trust
with a copy of its Form ADV as most recently filed with the
Securities and Exchange Commission (the "SEC") and will,
promptly after filing any amendment to its Form ADV with the
SEC, furnish a copy of such amendment to the Adviser, the
Sub-Adviser and the Trust.
11. Duration and Termination of this Agreement. This Agreement shall
become effective on the date first above written and shall govern the relations
between the parties hereto thereafter, and shall remain in force until December
30, 1998 and each year thereafter but only so long as its continuance is
"specifically approved at least annually" (a) by the vote of a majority of the
Trustees of the Trust who are not "interested persons" of the Trust, the
Adviser, the Sub-Adviser or FCEM at a meeting specifically called for the
purpose of voting on such approval, and (b) by the Board of Trustees of the
Trust, or by "vote of a majority of the outstanding voting securities" of the
Fund. This Agreement may be terminated at any time without the payment of any
penalty by the Trustees of the Trust, by "vote of a majority of the outstanding
voting securities" of the Fund or by the Adviser or the Sub-Adviser, on not more
than sixty days nor less than thirty days written notice, or by FCEM on not more
than ninety days nor less than sixty days written notice. This Agreement shall
automatically terminate in the event of its "assignment" or in the event that
the FCM Sub-Advisory Agreement or the Advisory Agreement shall have terminated
for any reason.
12. Amendments to this Agreement. This Agreement may be amended only if
such amendment is approved by "vote of a majority of the outstanding voting
securities" of the Fund, by the Adviser, by the Sub-Adviser and by FCEM.
13. Certain Definitions. The terms "specifically approved at least
annually", "vote of a majority of the outstanding voting securities",
"assignment", "control", "affiliated person" and "interested person", when used
in this Agreement, shall have the respective meanings specified, and shall be
construed in a manner consistent with, the 1940 Act and the rules, regulations
and orders thereunder, subject, however, to such exemptions as may be granted by
the SEC under the 1940 Act.
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<PAGE> 6
14. Survival of Representations and Warranties; Duty to Update
Information. All representations and warranties made by FCEM pursuant to Section
9 hereof shall survive for the duration of this Agreement and FCEM shall
immediately notify, but in no event later than five (5) business days, the
Adviser and the Sub-Adviser in writing upon becoming aware that any of the
foregoing representations and warranties are no longer true.
15. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the internal laws of The Commonwealth of Massachusetts. All
notices provided for by this Agreement shall be in writing and shall be deemed
given when received, against appropriate receipt, by the Sub-Adviser's Secretary
in the case of the Sub-Adviser, by the Adviser's General Counsel in the case of
the Adviser, by FCEM's Secretary in the case of FCEM and by the Trust's
Secretary in the case of the Fund, or such other person as a party shall
designate by notice to the other parties. This Agreement constitutes the entire
agreement among the parties hereto and supersedes any prior agreement among the
parties relating to the subject matter hereof. The section headings of this
Agreement are for convenience of reference and do not constitute a part hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, and their respective seals to be hereto affixed, all
as of the day and year first written above.
FOREIGN & COLONIAL
MANAGEMENT LTD.
By: __________________________
James Ogilvy
By: __________________________
Jonathan Lubran
FOREIGN & COLONIAL
EMERGING MARKETS
LIMITED
By: __________________________
Audley Twiston Davies
By: __________________________
Karen Clarke
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<PAGE> 7
The foregoing is hereby agreed to:
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The parties hereto
acknowledge that the obligations of or arising out of this instrument are not
binding upon any of the Trust's trustees, officers, employees, agents or
shareholders individually, but are binding solely upon the assets and property
of the Trust in accordance with its proportionate interest hereunder. If this
instrument is executed by the Trust on behalf of one or more series of the
Trust, the parties hereto acknowledge that the assets and liabilities of each
series of the Trust are separate and distinct and that the obligations of or
arising out of this instrument are binding solely upon the assets or property of
the series on whose behalf the Trust has executed this instrument. If the Trust
has executed this instrument on behalf of more than one series of the Trust, the
parties hereto also agree that the obligations of each series hereunder shall be
several and not joint, in accordance with its proportionate interest hereunder,
and the parties hereto agree not to proceed against any series for the
obligations of another series.
MFS SERIES TRUST I on behalf of
MFS RESEARCH INTERNATIONAL FUND
By: ___________________________________
A. Keith Brodkin
Chairman
MASSACHUSETTS FINANCIAL SERVICES
COMPANY
By: ___________________________________
Jeffrey L. Shames
President
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EXHIBIT NO. 99.9(b)
MFS SERIES TRUST I
500 BOYLSTON STREET - BOSTON - MASSACHUSETTS 02116
September 3, 1996
MFS Service Center, Inc.
500 Boylston Street
Boston, MA 02116
Dear Sir/Madam:
This will confirm our understanding that Exhibit B to the Shareholder
Servicing Agent Agreement between us, dated September 10, 1986, as amended, is
hereby amended, effective immediately, to read in its entirety as set forth on
Attachment 1 hereto.
Please indicate your acceptance of the foregoing by signing below.
Sincerely,
MFS SERIES TRUST I
By: W. THOMAS LONDON
---------------------------
W. Thomas London
Treasurer
Accepted and Agreed:
MFS SERVICE CENTER, INC.
By: JOSEPH W. DELLO RUSSO
-----------------------
Joseph W. Dello Russo
Treasurer
<PAGE> 2
ATTACHMENT 1
SEPTEMBER 3, 1996
EXHIBIT B TO THE SHAREHOLDER
SERVICING AGENT AGREEMENT BETWEEN
MFS SERVICE CENTER, INC. ("MFSC")
AND MFS SERIES TRUST I (THE "FUND")
1. The fees to be paid by the Fund on behalf of its series with respect to Class
A shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
2. The fees to be paid by the Fund on behalf of its series with respect to Class
B shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.22% of the first $500 million of the assets of the series attributable
to such class;
0.18% of the second $500 million of the assets of the series attributable
to such class;
0.13% over $1 billion of the assets of the series attributable to such
class.
3. The fees to be paid by the Fund on behalf of its series with respect to Class
C shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
4. The fees to be paid by the Fund on behalf of its series with respect to Class
P shares of each series of the Fund to MFSC, for MFSC's services as shareholder
servicing agent, shall be:
0.15% of the first $500 million of the assets of the series attributable
to such class;
0.12% of the second $500 million of the assets of the series attributable
to such class;
0.09% over $1 billion of the assets of the series attributable to such
class.
<PAGE> 1
Exhibit 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 27 to Registration Statement No.33-7638 of MFS Series Trust I of
our reports each dated October 4, 1996 appearing in the annual reports to
shareholders for the year ended August 31, 1996, of MFS Managed Sectors Fund and
MFS Cash Reserve Fund, each a series of MFS Series Trust I and to the references
to us under the headings "Condensed Financial Information" in each Prospectus
and "Independent Auditors and Financial Statements" in each Statement of
Additional Information, both of which are part of such Registration Statement.
DELOITTE & TOUCHE, LLP
Boston, Massachusetts
December 24, 1996
<PAGE> 1
EXHIBIT 99.11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No. 27 to
Registration Statement No. 33-7638 on Form N-1A of our report dated October 4,
1996, on the financial statements and financial highlights of MFS World Asset
Allocation Fund, a series of MFS Series Trust I, included in the 1996 Annual
Report to Shareholders.
ERNST & YOUNG LLP
-------------------------
Ernst & Young LLP
Boston, Massachusetts
December 24, 1996
<PAGE> 1
Exhibit 99.11(c)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors
and Financial Statements" in the Statement of Additional Information and to the
incorporation by reference in this Post-Effective Amendment No.27 to
Registration Statement No. 33-7638 on Form N-1A of our report dated October 4,
1996, on the financial statements and financial highlights of MFS Equity Income
Fund, MFS Research Growth and Income Fund, MFS Core Growth Fund, MFS Aggressive
Growth Fund and MFS Special Opportunities Fund, each a series of MFS Series
Trust I, included in the 1996 Annual Report to Shareholders.
ERNST & YOUNG LLP
--------------------------
Ernst & Young LLP
Boston, Massachusetts
December 24, 1996
<PAGE> 1
EXHIBIT NO. 99.15
MFS FUNDS
MASTER DISTRIBUTION PLAN PURSUANT TO RULE 12B-1 UNDER THE
INVESTMENT COMPANY ACT OF 1940
Effective January 1, 1997
This Distribution Plan (the "Plan") has been adopted by each of the
registered investment companies identified from time to time on Exhibit A hereto
(the "Trust" or "Trusts"), severally and not jointly, pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act"), and sets
forth the material aspects of the financing of the distribution of the classes
of shares representing interests in the same portfolio issued by the Trusts.
WITNESSETH:
WHEREAS, each Trust is engaged in business as an open-end management investment
company and is registered under the 1940 Act, some consisting of multiple
investment portfolios or series, each of which has separate investment
objectives and policies and segregated assets (the "Fund" or "Funds"); and
WHEREAS, each Fund intends to distribute its Shares of Beneficial Interest
(without par value) ("Shares") in accordance with Rule 12b-1 under the 1940 Act,
and desires to adopt this Distribution Plan as a plan of distribution pursuant
to such Rule; and
WHEREAS, each Fund presently offers multiple classes of Shares, some Funds
presently offering only certain classes of Shares to investors;
WHEREAS, each Trust has entered into a distribution agreement (the "Distribution
Agreement") in a form approved by the Board of Trustees of each Trust (the
"Board of Trustees") in the manner specified in Rule 12b-1, with MFS Fund
Distributors, Inc., a Delaware corporation, as distributor (the "Distributor"),
whereby the Distributor provides facilities and personnel and renders services
to each Fund in connection with the offering and distribution of Shares; and
WHEREAS, each Trust recognizes and agrees that the Distributor may retain the
services of firms or individuals to act as dealers (the "Dealers") of the Shares
in connection with the offering of Shares; and
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<PAGE> 2
WHEREAS, the Distribution Agreement provides that: (a) a sales charge may be
paid by investors who purchase Shares designated "Class A" and that the
Distributor and Dealers will receive such sales charge as partial compensation
for their services in connection with the sale of Class A Shares, and (b) the
Distributor may (but is not required to) impose certain deferred sales charges
in connection with the repurchase of Shares and the Distributor may retain or
receive from a fund, as the case may be, all such deferred sales charges; and
WHEREAS, the Board of Trustees of each Trust, in considering whether each Fund
should adopt and implement this Plan, has evaluated such information as it
deemed necessary to an informed determination as to whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of a Fund for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders; and
NOW THEREFORE, the Board of Trustees of each Trust hereby adopts this Plan for
each Fund as a plan of distribution in accordance with Rule 12b-1, relating to
the classes of Shares each Fund from time to time offers, on the following terms
and conditions:
1. SERVICES PROVIDED AND EXPENSES BORNE BY DISTRIBUTOR.
1.1. As specified in the Distribution Agreement, the Distributor
shall provide facilities, personnel and a program with respect
to the offering and sale of Shares. Among other things, the
Distributor shall be responsible for any commissions payable
to Dealers (including any ongoing maintenance commissions),
all expenses of printing (excluding typesetting) and
distributing prospectuses to prospective shareholders and
providing such other related services as are reasonably
necessary in connection therewith.
1.2. The Distributor shall bear all distribution-related expenses
to the extent specified in the Distribution Agreement in
providing the services described in Section 1.1, including,
without limitation, the compensation of personnel necessary to
provide such services and all costs of travel, office expenses
(including rent and overhead), equipment, printing, delivery
and mailing costs.
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<PAGE> 3
2. DISTRIBUTION FEES AND SERVICE FEES.
2.1 Distribution and Service Fees Common to Each Class of Shares.
2.1.1. Service Fees. As partial consideration for the personal
services and/or account maintenance services performed by each
Dealer in the performance of its obligations under its dealer
agreement with the Distributor, each Fund shall pay each
Dealer a service fee periodically at a rate not to exceed
0.25% per annum of the portion of the average daily net assets
of the Fund that is represented by the Class of Shares that
are owned by investors for whom such Dealer is the holder or
dealer of record. That portion of the Fund's average daily net
assets on which the fees payable under this Section 2.1.1.
hereof are calculated may be subject to certain minimum amount
requirements as may be determined, and additional or different
dealer qualification standards that may be established, from
time to time, by the Distributor. The Distributor shall be
entitled to be paid any fees payable under this Section 2.1.1.
hereof with respect to Shares for which no Dealer of record
exists or qualification standards have not been met as partial
consideration for personal services and/or account maintenance
services provided by the Distributor to those Shares. The
service fee payable pursuant to this Section 2.1.1. may from
time to time be paid by a Fund to the Distributor and the
Distributor will then pay these fees to Dealers on behalf of
the Fund or retain them in accordance with this paragraph.
2.1.2. Distribution Fees. As partial consideration for the
services performed as specified in the Distribution Agreement
and expenses incurred in the performance of its obligations
under the Distribution Agreement, a Fund shall pay the
Distributor a distribution fee periodically at a rate based on
the average daily net assets of a Fund attributable to the
designated Class of Shares. The amount of the distribution fee
paid by the Fund differs with respect to each Class of Shares,
as does the use by the Distributor of such distribution fees.
2.2. Distribution Fees Relating to Class A Shares
2.2.1. It is understood that the Distributor may impose
certain deferred sales charges in connection with the
repurchase of Class A Shares by a Fund and the Distributor may
retain (or receive from
- 3 -
<PAGE> 4
the Fund, as the case may be) all such deferred sales charges.
Each Fund listed on Exhibit B hereto shall pay the Distributor
a distribution fee periodically at a rate of 0.10% per annum
of average daily net assets of the Fund attributable to Class
A Shares. Each Fund listed on Exhibit C hereto shall pay the
Distributor a distribution fee periodically at a rate not to
exceed 0.25% per annum of average daily net assets of the Fund
attributable to Class A Shares. Such payments shall commence
following shareholder approval of the Plan but only upon
notification by the Distributor to the Fund of the
commencement of the Plan (the "Commencement Date").
2.2.2. The aggregate amount of fees and expenses paid pursuant
to Sections 2.1. and 2.2. hereof shall not exceed 0.35% per
annum and 0.50% per annum of the average daily net assets
attributable to Class A Shares of each Fund listed on Exhibit
B hereto and Exhibit C, hereto, respectively. No fees shall be
paid pursuant to Section 2.2.1. hereof or this Section 2.2.2.
to any insurance company which has entered into an agreement
with the Trust on behalf of a Fund and the Distributor 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.
2.3. Distribution Fees Relating to Class B Shares
2.3.1. It is understood that the Distributor may impose
certain deferred sales charges in connection with the
repurchase of Class B Shares by a Fund and the Distributor may
retain (or receive from the Fund, as the case may be) all such
deferred sales charges. As additional consideration for all
services performed and expenses incurred in the performance of
its obligations under the Distribution Agreement relating to
Class B Shares, a Fund shall pay the Distributor a
distribution fee periodically at a rate not to exceed 0.75%
per annum of the Fund's average daily net assets attributable
to Class B Shares.
2.3.2. Each Fund understands that agreements between the
Distributor and the Dealers may provide for payment of
commissions to Dealers in connection with the sale of Class B
Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by a Fund to the
Distributor under the Distribution Agreement to be paid by the
Distributor to
- 4 -
<PAGE> 5
the Dealers in consideration of the Dealer's services as a
dealer of the Class B Shares. Except as described in Section
2.1., nothing in this Plan shall be construed as requiring a
Fund to make any payment to any Dealer or to have any
obligations to any Dealer in connection with services as a
dealer of Class B Shares. The Distributor shall agree and
undertake that any agreement entered into between the
Distributor and any Dealer shall provide that, except as
provided in Section 2.1., such Dealer shall look solely to the
Distributor for compensation for its services thereunder and
that in no event shall such Dealer seek any payment from the
Fund.
2.4. Distribution Fees Relating to Class C Shares
2.4.1. It is understood that the Distributor may (but is not
required to) impose certain deferred sales charges in
connection with the repurchase of Class C Shares by a Fund and
the Distributor may retain (or receive from the Fund, as the
case may be) all such deferred sales charges. As additional
consideration for all services performed and expenses incurred
in the performance of its obligations under the Distribution
Agreement relating to Class C Shares, a Fund shall pay the
Distributor a distribution fee periodically at a rate not to
exceed 0.75% per annum of the Fund's average daily net assets
attributable to Class C Shares.
2.4.2. Each Fund understands that agreements between the
Distributor and the Dealers may provide for payment of
commissions to Dealers in connection with the sales of Class C
Shares and may provide for a portion (which may be all or
substantially all) of the fees payable by a Fund to the
Distributor under the Distribution Agreement to be paid to the
Dealers in consideration of the Dealer's services as a dealer
of the Class C Shares. Except as described in Section 2.1.,
nothing in this Plan shall be construed as requiring a Fund to
make any payment to any Dealer or to have any obligations to
any Dealer in connection with services as a dealer of Class C
Shares. The Distributor shall agree and undertake that any
agreement entered into between the Distributor and any Dealer
shall provide that, except as provided in Section 2.1., such
Dealer shall look solely to the Distributor for compensation
for its services thereunder and that in no event shall such
Dealer seek any payment from the Fund.
3. EXPENSES BORNE BY FUND. Each Fund shall pay all fees and expenses of
any independent auditor, legal counsel, investment adviser,
- 5 -
<PAGE> 6
administrator, transfer agent, custodian, shareholder servicing agent,
registrar or dividend disbursing agent of the Fund; expenses of
distributing and redeeming Shares and servicing shareholder accounts;
expenses of preparing, printing and mailing prospectuses, shareholder
reports, notices, proxy statements and reports to governmental officers
and commissions and to shareholders of a Fund, except that the
Distributor shall be responsible for the distribution-related expenses
as provided in Section 1 hereof.
4. ACTION TAKEN BY THE TRUST. Nothing herein contained shall be deemed to
require a Trust to take any action contrary to its Declaration of Trust
or By-laws or any applicable statutory or regulatory requirement to
which it is subject or by which it is bound, or to relieve or deprive
the Board of Trustees of the responsibility for and control of the
conduct of the affairs of a Fund.
5. EFFECTIVENESS OF PLAN. This Plan shall become effective upon (a)
approval by a vote of at least a "majority of the outstanding voting
securities" of each particular class of Shares (unless previously so
approved), and (b) approval by a vote of the Board of Trustees and a
vote of a majority of the Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the
operation of the Plan or in any agreement related to the Plan (the
"Qualified Trustees"), such votes to be cast in person at a meeting
called for the purpose of voting on this Plan.
6. DURATION OF PLAN. This Plan shall continue in effect indefinitely;
provided however, that such continuance is "specifically approved at
least annually" by vote of both a majority of the Trustees of the Trust
and a majority of the Qualified Trustees, such votes to be cast in
person at a meeting called for the purpose of voting on the continuance
of this Plan. If such annual approval is not obtained, this Plan, with
respect to the classes of Shares with respect to which such approval
was not obtained, shall expire 12 months after the effective date of
the last approval.
7. AMENDMENTS OF PLAN. This Plan may be amended at any time by the Board
of Trustees; provided that this Plan may not be amended to increase
materially the amount of permitted expenses hereunder without the
approval of holders of a "majority of the outstanding voting
securities" of the affected Class of Shares and may not be materially
amended in any case without a vote of a majority of both the Trustees
and the Qualified Trustees. This Plan may be terminated at any time by
a vote
- 6 -
<PAGE> 7
of a majority of the Qualified Trustees or by a vote of the holders of
a "majority of the outstanding voting securities" of Shares.
8. REVIEW BY BOARD OF TRUSTEES. Each Fund and the Distributor shall
provide the Board of Trustees, and the Board of Trustees shall review,
at least quarterly, a written report of the amounts expended under this
Plan and the purposes for which such expenditures were made.
9. SELECTION AND NOMINATION OF QUALIFIED TRUSTEES. While this Plan is in
effect, the selection and nomination of Qualified Trustees shall be
committed to the discretion of the Trustees who are not "interested
persons" of the Trust.
10. DEFINITIONS; COMPUTATION OF FEES. For the purposes of this Plan, the
terms "interested persons", "majority of the outstanding voting
securities" and "specifically approved at least annually" are used as
defined in the 1940 Act or the rules and regulations adopted
thereunder. All references herein to "Fund" shall be deemed to refer to
a Trust where such Trust does not have multiple portfolios or series.
In addition, for purposes of determining the fees payable to the
Distributor hereunder, (i) the value of a Fund's net assets shall be
computed in the manner specified in each Fund's then-current prospectus
and statement of additional information for computation of the net
asset value of Shares of the Fund and (ii) the net asset value per
Share of a particular class shall reflect any plan adopted under Rule
18f-3 under the 1940 Act.
11. RETENTION OF PLAN RECORDS. Each Trust shall preserve copies of this
Plan, and each agreement related hereto and each report referred to in
Section 8.1 hereof (collectively, the "Records") for a period of six
years from the end of the fiscal year in which such Record was made and
each such record shall be kept in an easily accessible place for the
first two years of said record-keeping.
12. APPLICABLE LAW. This Plan shall be construed in accordance with the
laws of The Commonwealth of Massachusetts and the applicable provisions
of the 1940 Act.
13. SEVERABILITY OF PLAN. If any provision of this Plan shall be held or
made invalid by a court decision, statute, rule or otherwise, the
remainder of the Plan shall not be affected thereby. The provisions of
this Plan are severable with respect to each Class of Shares offered by
a Fund and with respect to each Fund.
- 7 -
<PAGE> 8
14. SCOPE OF TRUST'S OBLIGATION. A copy of the Declaration of Trust of each
Trust is on file with the Secretary of State of The Commonwealth of
Massachusetts. It is acknowledged that the obligations of or arising
out of this Plan are not binding upon any of the Trust's trustees,
officers, employees, agents or shareholders individually, but are
binding solely upon the assets and property of the Trust in accordance
with its proportionate interest hereunder. If this Plan is adopted by
the Trust on behalf of one or more series of the Trust, it is further
acknowledged that the assets and liabilities of each series of the
Trust are separate and distinct and that the obligations of or arising
out of this Plan are binding solely upon the assets or property of the
series on whose behalf the Trust has adopted this Plan. If the Trust
has adopted this Plan on behalf of more than one series of the Trust,
it is also acknowledged that the obligations of each series hereunder
shall be several and not joint, in accordance with its proportionate
interest hereunder, and no series shall be responsible for the
obligations of another series.
- 8 -
<PAGE> 9
EXHIBIT A
DATED: JANUARY 1, 1997
<TABLE>
<CAPTION>
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12b-1
FUND PLAN PLAN ADOPTED
- -----------------------------------------------------------------------------
<S> <C> <C>
MFS Managed Sectors Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Cash Reserve Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS World Asset Allocation Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Aggressive Growth Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Research Growth and Income Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Core Growth Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Equity Income Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Special Opportunities Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Convertible Securities Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Blue Chip Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS New Discovery Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Science and Technology Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Research International Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Emerging Growth Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Capital Growth Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Intermediate Income Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Gold & Natural Resources Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS World Total Return Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Utilities Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS World Equity Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Strategic Income Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS World Growth Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
</TABLE>
- 9 -
<PAGE> 10
EXHIBIT A
(Continued)
<TABLE>
<CAPTION>
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12b-1
FUND PLAN PLAN ADOPTED
- -----------------------------------------------------------------------------
<S> <C> <C>
MFS Alabama Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Arkansas Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS California Municipal Bond Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Florida Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Georgia Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Maryland Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Massachusetts Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Mississippi Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS New York Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS North Carolina Municipal Bond Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Pennsylvania Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS South Carolina Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Tennessee Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Virginia Municipal Bond Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS West Virginia Municipal Bond Fund A,B January 1, 1997
- -----------------------------------------------------------------------------
MFS Municipal Income Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
MFS Government Limited Maturity Fund A,B,C January 1, 1997
- -----------------------------------------------------------------------------
</TABLE>
- 10 -
<PAGE> 11
EXHIBIT B
DATED: JANUARY 1, 1997
MFS Managed Sectors Fund
MFS Cash Reserve Fund
MFS Research Growth & Income Fund
MFS Emerging Growth Fund
MFS Capital Growth Fund
MFS Intermediate Income Fund
MFS Gold & Natural Resources Fund
MFS World Total Return Fund
MFS Utilities Fund
MFS World Equity Fund
MFS Strategic Income Fund
MFS World Growth Fund
MFS Alabama Municipal Bond Fund
MFS Arkansas Municipal Bond Fund
MFS California Municipal Bond Fund
MFS Florida Municipal Bond Fund
MFS Georgia Municipal Bond Fund
MFS Maryland Municipal Bond Fund
MFS Massachusetts Municipal Bond Fund
MFS Mississippi Municipal Bond Fund
MFS New York Municipal Bond Fund
MFS North Carolina Municipal Bond Fund
MFS Pennsylvania Municipal Bond Fund
MFS South Carolina Municipal Bond Fund
MFS Tennessee Municipal Bond Fund
MFS Virginia Municipal Bond Fund
MFS West Virginia Municipal Bond Fund
MFS Municipal Income Fund
MFS Government Limited Maturity Fund
- 11 -
<PAGE> 12
EXHIBIT C
DATED: JANUARY 1, 1997
MFS World Asset Allocation Fund
MFS Equity Income Fund
MFS Core Growth Fund
MFS Aggressive Growth Fund
MFS Special Opportunities Fund
MFS Convertible Securities Fund
MFS Blue Chip Fund
MFS New Discovery Fund
MFS Science and Technology Fund
MFS Research International Fund
- 12 -
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 07
<NAME> MFS AGGRESSIVE GROWTH FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 9956248
<INVESTMENTS-AT-VALUE> 10242768
<RECEIVABLES> 17761
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 6693
<TOTAL-ASSETS> 10267222
<PAYABLE-FOR-SECURITIES> 95587
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26952
<TOTAL-LIABILITIES> 122539
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8696282
<SHARES-COMMON-STOCK> 827742
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 13249
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1148632
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 286520
<NET-ASSETS> 10144683
<DIVIDEND-INCOME> 12981
<INTEREST-INCOME> 25327
<OTHER-INCOME> 0
<EXPENSES-NET> (25059)
<NET-INVESTMENT-INCOME> 13249
<REALIZED-GAINS-CURRENT> 1148632
<APPREC-INCREASE-CURRENT> 286520
<NET-CHANGE-FROM-OPS> 1448401
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 868196
<NUMBER-OF-SHARES-REDEEMED> (40453)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 10144683
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 43311
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77388
<AVERAGE-NET-ASSETS> 8758452
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 2.24
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.26
<EXPENSE-RATIO> 0.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 06
<NAME> MFS CORE GROWTH FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 662736
<INVESTMENTS-AT-VALUE> 680691
<RECEIVABLES> 27457
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2021
<TOTAL-ASSETS> 710170
<PAYABLE-FOR-SECURITIES> 19677
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4343
<TOTAL-LIABILITIES> 24020
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 601673
<SHARES-COMMON-STOCK> 55662
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (362)
<ACCUMULATED-NET-GAINS> 66889
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17950
<NET-ASSETS> 686150
<DIVIDEND-INCOME> 1918
<INTEREST-INCOME> 2442
<OTHER-INCOME> 0
<EXPENSES-NET> (4722)
<NET-INVESTMENT-INCOME> (362)
<REALIZED-GAINS-CURRENT> 66889
<APPREC-INCREASE-CURRENT> 17950
<NET-CHANGE-FROM-OPS> 84477
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 56000
<NUMBER-OF-SHARES-REDEEMED> (338)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 686150
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2361
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11897
<AVERAGE-NET-ASSETS> 476770
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.01)
<PER-SHARE-GAIN-APPREC> 2.34
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.33
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 04
<NAME> MFS EQUITY INCOME FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 448832
<INVESTMENTS-AT-VALUE> 474801
<RECEIVABLES> 1490
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3025
<TOTAL-ASSETS> 479316
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1936
<TOTAL-LIABILITIES> 1936
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 439287
<SHARES-COMMON-STOCK> 43125
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4878
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7246
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25969
<NET-ASSETS> 477380
<DIVIDEND-INCOME> 7846
<INTEREST-INCOME> 1004
<OTHER-INCOME> 0
<EXPENSES-NET> (3972)
<NET-INVESTMENT-INCOME> 4878
<REALIZED-GAINS-CURRENT> 7246
<APPREC-INCREASE-CURRENT> 25969
<NET-CHANGE-FROM-OPS> 38093
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 44072
<NUMBER-OF-SHARES-REDEEMED> (947)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 477380
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1986
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11045
<AVERAGE-NET-ASSETS> 401074
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 0.94
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.07
<EXPENSE-RATIO> 0.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 08
<NAME> MFS SPECIAL OPPORTUNITIES FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 2253463
<INVESTMENTS-AT-VALUE> 2313894
<RECEIVABLES> 43382
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 43125
<TOTAL-ASSETS> 2400402
<PAYABLE-FOR-SECURITIES> 78963
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 62804
<TOTAL-LIABILITIES> 141767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2038950
<SHARES-COMMON-STOCK> 198827
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 10016
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 168487
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41182
<NET-ASSETS> 2258635
<DIVIDEND-INCOME> 8807
<INTEREST-INCOME> 20441
<OTHER-INCOME> 0
<EXPENSES-NET> (19232)
<NET-INVESTMENT-INCOME> 10016
<REALIZED-GAINS-CURRENT> 168487
<APPREC-INCREASE-CURRENT> 41182
<NET-CHANGE-FROM-OPS> 219685
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 198828
<NUMBER-OF-SHARES-REDEEMED> (1)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2258635
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31621
<AVERAGE-NET-ASSETS> 1941814
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 1.30
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.36
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 05
<NAME> MFS RESEARCH GROWTH AND INCOME FUND
<MULTIPLIER> 1
<S> <C>
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<NAME> MFS SERIES TRUST I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS MANAGED SECTORS FUND - CLASS B
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</TABLE>
