<PAGE> 1
As filed with the Securities and Exchange Commission on December 24, 1997
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. 29
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 31
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, 1997 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
================================================================================
<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) STRATEGIC 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
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b), (c) Investment Objectives and Policies; *
Investment Techniques; Additional
Risk Factors
5 (a) The Funds; Management of the Funds - *
Investment Adviser
(b) Front Cover Page; Management of the *
Funds - Investment Adviser; Back
Cover Page
(c) Management of the Funds - Investment *
Adviser
(d) Management of the Funds - Investment *
Adviser; Administrator - Back Cover
Page
(e) Management of the Funds - Shareholder
Servicing Agent; Back Cover Page *
(f) Expense Summary; Condensed Financial *
Information; Information Concerning
Shares of the Funds - Expenses
(g) Investment Objective and Policies;
Information Concerning Shares of the *
Fund - Purchases
(h) * *
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
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b),(c),(d) * *
(e) Shareholder Services *
(f) Information Concerning Shares of the *
Funds - Distributions; Shareholder
Services - Distribution Options
(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 Plan;
Information Concerning Shares of
the Funds - Purchases; Expense
Summary
(f) Information Concerning Shares of the *
Funds - Distribution Plan
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART A PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(g) Expense Summary; Information
Concerning Shares of the Funds -
Purchases; Information Concerning
Shares of the Funds - Exchanges;
Information Concerning Shares of
the Funds - Redemptions and
Repurchases; Information Concerning
Shares of the Funds - Distribution Plan;
Information Concerning Shares of the
Fund - Distributions; Information
Concerning Shares of the Funds -
Performance Information; Shareholder
Services
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> 6
<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;Trustee
Compensation Table
15 (a) * *
(b),(c) * Management of the Funds -
Trustees and Officers
16 (a) Management of the Funds - Management of the Funds -
Investment Adviser Investment Adviser;
Management of the Fund -
Trustees and Officers
(b) Management of the Funds - Management of the Funds -
Investment Adviser Investment Adviser
(c) * *
(d) * Management of the Funds -
Investment Adviser;
Administrator
(e) * Portfolio Transactions and
Brokerage Commissions
(f) Information Concerning Shares of Distribution Plan
the Funds - Distribution Plan
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(g) * *
(h) * Management of the Funds -
Custodian; Independent
Auditors and Financial
Statements; Back Cover Page
(i) * Management of the Funds -
Shareholder Servicing Agent
17 (a),(b),(c) * Portfolio Transactions and
(d),(e) Brokerage Commissions
18 (a) Information Concerning Shares of Description of Shares Voting
the 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 Plan
(c) * *
22 (a) * *
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
ITEM NUMBER STATEMENT OF ADDITIONAL
FORM N-1A, PART B PROSPECTUS CAPTION INFORMATION CAPTION
- ----------------- ------------------ -------------------
<S> <C> <C>
(b) * Determination of Net Asset
Value and Performance;
Performance Information
23 * Independent Auditors and
Financial Statements
</TABLE>
- --------------------------
* Not Applicable
** Contained in Annual Report
<PAGE> 9
MFS MANAGED SECTORS FUND
SUPPLEMENT TO THE JANUARY 1, 1998 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,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
<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) ....................................................... 0.32%
-------
Total Operating Expenses ................................................... 1.07%
</TABLE>
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended August 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year................................ $ 11
3 years............................... $ 34
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Deloitte
& Touche LLP.
-1-
<PAGE> 10
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
---------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 13.18
===========
Income from investment operations # -
Net investment loss $ (0.07)
Net realized and unrealized gain
on investments and foreign currency transactions 3.75
-----------
Total from investment operations $ 3.68
===========
Net asset value - end of period $ 16.86
===========
Total return 27.92%++
Ratios (to average net assets)/
Supplemental data:
Expenses ## 1.07%+
Net investment income (0.65)%+
Portfolio turnover 96%
Average Commission Rate $ 0.0569
Net assets at end of period
(000 omitted) $ 2,349
</TABLE>
- -----------
* For the period from the inception of Class I shares, January 2, 1997
through August 31, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Three classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares and Class I shares. Class I shares are available for
purchase only by Eligible Purchasers, as defined above, and are described in
this Supplement. Class A shares and Class B shares are described in the Fund's
Prospectus and are available for purchase by the general public.
-2-
<PAGE> 11
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 convert
to Class A shares approximately eight years after purchase. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class I shares do not convert to any
other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares and Class B shares because expenses
attributable to Class A shares and Class B shares generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998
-3-
<PAGE> 12
MFS(R) MANAGED PROSPECTUS
SECTORS FUND JANUARY 1, 1998
(A member of the CLASS A SHARES OF BENEFICIAL INTEREST
MFS Family of Funds(R)) CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Managed Sectors Fund (the "Fund"), a
non-diversified series of MFS Series Trust I (the "Trust"). The investment
objective of 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 "Information Concerning Shares of the
Fund -- 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.
(continued on next page)
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.
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> 13
(continued from previous page)
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, 1998, 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
(http://www.sec.gov) 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Expense Summary.............................................. 3
2. Condensed Financial Information.............................. 5
3. The Fund..................................................... 8
4. Investment Objective and Policies............................ 8
5. Certain Securities and Investment Techniques................. 9
6. Additional Risk Factors...................................... 15
7. Management of the Fund....................................... 19
8. Information Concerning Shares of the Fund.................... 21
Purchases.................................................. 21
Exchanges.................................................. 27
Redemptions and Repurchases................................ 28
Distribution Plan.......................................... 31
Distributions.............................................. 33
Tax Status................................................. 33
Net Asset Value............................................ 34
Description of Shares, Voting Rights and Liabilities....... 34
Performance Information.................................... 35
9. Shareholder Services......................................... 35
Appendix A................................................... A-1
Appendix B................................................... B-1
Appendix C................................................... C-1
Appendix D................................................... D-1
</TABLE>
2
<PAGE> 14
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------- --------
<S> <C> <C>
Maximum Initial Sales Charge Imposed on
Purchases of Fund Shares (as a percentage of
offering price).............................. 5.75% 0.00%
Maximum Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable).......... See Below(1) 4.00%
</TABLE>
ANNUAL OPERATING EXPENSES OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<S> <C> <C>
Management Fees................................ 0.75% 0.75%
Rule 12b-1 Fees................................ 0.35%(2) 1.00%(3)
Other Expenses(4).............................. 0.33% 0.36%
----- ----
Total Operating Expenses....................... 1.43% 2.11%
</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 (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"
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)
0.35% 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) 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
<PAGE> 15
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B
- ---------------------------------------------- ------- ---------------
<S> <C> <C> <C>
(1)
1 year....................................... $ 71 $ 61 $ 21
3 years...................................... 100 96 66
5 years...................................... 131 133 113
10 years...................................... 219 227(2) 227(2)
</TABLE>
- ---------------
(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.
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.
4
<PAGE> 16
2. 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
CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------
NINE
MONTHS PERIOD
YEAR ENDED AUGUST 31, ENDED ENDED
------------------------------ AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993*
-------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period......................... $ 13.16 $ 15.55 $ 13.41 $ 15.50 $ 15.68
-------- -------- -------- -------- --------
Income from investment
operations# --
Net investment loss.......... $ (0.13) $ (0.08) $ (0.05) $ (0.03) $ (0.02)
-------- -------- -------- -------- --------
Net realized and unrealized
gain (loss) on investments
and
foreign currency
transactions............... 5.46 0.58 3.22 0.77 (0.16)
-------- -------- -------- -------- --------
Total from investment
operations..................... $ 5.33 $ 0.50 $ 3.17 $ 0.74 $ (0.18)
-------- -------- -------- -------- --------
Less distributions declared to
shareholders from net realized
gain
on investments and foreign
currency transactions.......... $ (1.68) $ (2.89) $ (1.03) $ (2.83) $ --
-------- -------- -------- -------- --------
Net asset value -- end of
period......................... $ 16.81 $ 13.16 $ 15.55 $ 13.41 $ 15.50
======== ======== ======== ======== ========
Total return++................... 43.92% 3.92% 26.12% 5.12%++ (5.99)%+
-------- -------- -------- -------- --------
Ratios (to average net assets)/
Supplemental data:
Expenses##................... 1.43% 1.43% 1.46% 1.52%+ 1.59%+
-------- -------- -------- -------- --------
Net investment loss.......... (0.93)% (0.56)% (0.34)% (0.26)%+ (0.75)%+
-------- -------- -------- -------- --------
Portfolio turnover............... 96% 117% 115% 76% 106%
-------- -------- -------- -------- --------
Average commission rate###....... $ 0.0569 $ 0.0411 $ -- $ -- $ --
-------- -------- -------- -------- --------
Net assets at end of period (000
omitted)....................... $288,227 $207,504 $178,367 $121,498 $136,179
-------- -------- -------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares, September 20, 1993 through
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.
</TABLE>
5
<PAGE> 17
FINANCIAL HIGHLIGHTS
CLASS B SHARES
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------
NINE
MONTHS YEAR
YEAR ENDED AUGUST 31, ENDED ENDED
------------------------------ AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993
-------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period......................... $ 13.14 $ 15.46 $ 13.35 $ 15.49 $ 15.42
-------- -------- -------- -------- --------
Income from investment
operations# --
Net investment loss.......... $ (0.23) $ (0.18) $ (0.14) $ (0.10) $ (0.25)
-------- -------- -------- -------- --------
Net realized and unrealized
gain on investments and
foreign currency
transactions............... 5.47 0.58 3.20 0.75 0.94
-------- -------- -------- -------- --------
Total from investment
operations..................... $ 5.24 $ 0.40 $ 3.06 $ 0.65 $ 0.69
-------- -------- -------- -------- --------
Less distributions declared to
shareholders from net realized
gain
on investments and foreign
currency transactions.......... $ (1.57) $ (2.72) $ (0.95) $ (2.79) $ (0.62)
-------- -------- -------- -------- --------
Net asset value -- end of
period......................... $ 16.81 $ 13.14 $ 15.46 $ 13.35 $ 15.49
======== ======== ======== ======== ========
Total return..................... 42.95% 3.17% 25.19% 4.47%++ 4.50%
-------- -------- -------- -------- --------
Ratios (to average net assets)/
Supplemental data:
Expenses##................... 2.11% 2.15% 2.18% 2.26%+ 2.21%
-------- -------- -------- -------- --------
Net investment loss.......... (1.60)% (1.27)% (1.06)% (1.01)%+ (1.55)%
-------- -------- -------- -------- --------
Portfolio turnover............... 96% 117% 115% 76% 106%
-------- -------- -------- -------- --------
Average commission rate###....... $ 0.0569 $ 0.0411 $ -- $ -- $ --
-------- -------- -------- -------- --------
Net assets at end of period (000
omitted)....................... $157,052 $129,858 $199,773 $214,055 $232,982
-------- -------- -------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ 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.
</TABLE>
6
<PAGE> 18
FINANCIAL HIGHLIGHTS
CLASS B SHARES -- (CONTINUED)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------------
1992 1991 1990 1989 1988 1987**
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a
share outstanding
throughout each
period):
Net asset value --
beginning of period.... $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94 $ 6.50
-------- -------- -------- -------- -------- --------
Income from investment
operations --
Net investment income
(loss)............. $ (0.24) $ (0.12) $ (0.03) $ 0.03 $ 0.09 $ 0.03
-------- -------- -------- -------- -------- --------
Net realized and
unrealized gain
(loss) on
investments and
foreign currency
transactions....... 2.66 3.89 (2.06) 3.51 0.89 0.42
-------- -------- -------- -------- -------- --------
Total from investment
operations............. $ 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........... $ -- $ -- $ -- $ (0.08) $ (0.06) $ (0.01)
-------- -------- -------- -------- -------- --------
Net asset value -- end of
period................. $ 15.42 $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94
======== ======== ======== ======== ======== ========
Total return............. 18.62% 40.85% (18.46)% 45.35% 14.06% 7.47%+
-------- -------- -------- -------- -------- --------
Ratios (to average net
assets)/Supplemental
data:
Expenses............. 2.37% 2.44% 2.50% 2.52% 2.31% 2.25%+
-------- -------- -------- -------- -------- --------
Net investment income
(loss)............. (1.85)% (1.00)% (0.27)% 0.37% 1.08% 0.09%+
-------- -------- -------- -------- -------- --------
Portfolio turnover....... 22% 59% 79% 84% 146% 163%
-------- -------- -------- -------- -------- --------
Net assets at end of
period (000 omitted)... $249,493 $190,232 $152,132 $180,416 $137,311 $134,762
-------- -------- -------- -------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
** For the period from the commencement of the Fund's investment operations, December
29, 1986 through November 30, 1987.
+ Annualized.
</TABLE>
7
<PAGE> 19
3. 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, 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 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.
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.
8
<PAGE> 20
In response to changes or anticipated changes in the general economy or within
one or more particular industry sectors, the Fund may increase, decrease or
eliminate entirely a particular sector's representation in the Fund's portfolio;
similarly, the Fund may acquire securities of a sector not then represented in
its portfolio. A sector or stock of a particular company will be added to or
eliminated from the Fund's portfolio based upon such factors as such sector's or
such company's economic cycle and sensitivity to interest rates. For example, as
interest rates rise and the performance of interest-sensitive stocks declines,
the Fund expects to remove such stocks from its portfolio. Any one sector or
cash may comprise up to 50% of the Fund's portfolio. The Fund has registered as
a "non-diversified" investment company so that more than 5% of the Fund's assets
may be invested (subject to the tax limitations described below) in the
securities of any one or more issuers. As a result of its non-diversified
status, the Fund's shares may be more susceptible to adverse changes in the
value of securities of a particular company than would be the shares of a
diversified investment company. Similarly, due to the Fund's policy of generally
concentrating in no more than five industry sectors at any one time, some of
which may overlap, the value of the Fund's shares may be more susceptible to any
single economic, political or regulatory occurrence than would be the shares of
an investment company without a policy of concentration in particular industry
sectors.
While the Fund's policy is to invest primarily in common stocks, it may seek
appreciation in other types of securities such as non-convertible and
convertible bonds, convertible preferred stocks and warrants to purchase common
stock, when relative values make such investments appear attractive either as
individual issues or as types of securities in certain economic environments
(see "Additional Risk Factors -- Lower-Rated Fixed Income Securities" 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 engage in certain securities transactions and investment techniques
as described under the caption "Certain Securities and 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
Investment Techniques" in the SAI.
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.
9
<PAGE> 21
FOREIGN SECURITIES: The Fund may also invest in foreign securities, which may
be traded on foreign exchanges. The Fund may invest up to 50% (and expects
generally to invest between 0% and 25%) of its total assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts ("ADRs")). Investing in foreign securities or on foreign
exchanges may present a greater degree of risk than investing in domestic
issuers. These risks include changes in currency rates, exchange control
regulations, governmental administration, economic or monetary policy (in this
country or abroad), war or expropriation. In particular, the dollar value of
portfolio securities of non-U.S. issuers fluctuates with changes in market and
economic conditions abroad and with changes in relative currency values (when
the value of the dollar increases as compared to a foreign currency, the dollar
value of a foreign-denominated security decreases, and vice versa). Costs may be
incurred in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including confiscatory
taxation and potential difficulties in enforcing contractual obligations and
could be subject to extended settlement periods. Therefore, an investment in
shares of the Fund may be subject to a greater degree of risk than investments
in other investment companies which invest exclusively in domestic securities.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also invest in ADRs which are
certificates issued by a U.S. depositary (usually a bank) and represent a
specified quantity of shares of an underlying non-U.S. stock on deposit with a
custodian bank as collateral. Because ADRs trade on United States securities
exchanges, the Adviser does not treat them as foreign securities. However, they
are subject to many of the risks of foreign securities (described above) such as
changes in exchange rates and more limited information about foreign issuers.
EMERGING MARKET SECURITIES: Consistent with the Fund's 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 location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country. See "Additional Risk Factors -- Emerging Markets" below.
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
10
<PAGE> 22
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.
SHORT-TERM INVESTMENTS FOR DEFENSIVE PURPOSES: During periods of unusual market
conditions when the Adviser believes that investing for temporary defensive
purposes is appropriate, or in order to meet anticipated redemption requests, a
large portion or all of the assets of the Fund may be invested in cash or cash
equivalents including, but not limited to, obligations of banks (including
certificates of deposit, bankers' acceptances and repurchase agreements) with
assets of $1 billion or more, commercial paper, short-term notes, obligations
issued or guaranteed by the U.S. Government or any of its agencies, authorities
or instrumentalities and related repurchase agreements. See Appendix D to this
Prospectus for a description of certain short-term obligations.
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 segregate liquid assets
sufficient to cover its commitments.
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"). A determination is made, 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, retains oversight,
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in the Fund 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
11
<PAGE> 23
fair value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these securities
than in the case of unrestricted securities.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral.
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.
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.
However, the writing of options constitutes only a partial hedge up to the
amount of premium, less any transaction costs. In contrast, 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
12
<PAGE> 24
adjustment of the strike price and may also provide for the periodic adjustment
of the premium during the term of the option.
OPTIONS ON STOCK INDICES: The Fund may write (sell) covered call and put
options and purchase call and put options on stock indices. The Fund may write
options on stock indices for the purpose of increasing its gross income and to
protect its portfolio against declines in the value of securities it owns or
increases in the value of securities to be acquired. When the Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. The Fund
will thereby retain the amount of the premium, less related transaction costs,
which will increase its gross income and offset part of the reduced value of
portfolio securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS: The Fund may enter into interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, futures contracts on
indices and foreign currency futures contracts are collectively referred to as
"Futures Contracts.") The Fund will utilize Futures Contracts for hedging and
non-hedging purposes, subject to applicable law. Purchases or sales of stock
index futures contracts for hedging purposes are used to attempt to protect the
Fund's current or intended stock investments from broad fluctuations in stock
prices, and foreign currency futures contracts are purchased or sold to attempt
to hedge against the effects of exchange rate changes on the Fund's current or
intended investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of portfolio securities occurs as a result of
a general stock market decline, a general increase in interest rates or a
decline in the dollar value of foreign currencies in which portfolio securities
are denominated, the adverse effects of such changes may be offset, in whole or
part, by gains on the sale of Futures Contracts. Conversely, the increased cost
of portfolio securities to be acquired, caused by a general rise in the stock
market, a general decline in interest rates or a rise in the dollar value of
foreign currencies, may be offset, in whole or part, by gains on Futures
Contracts purchased by the Fund. The Fund will incur brokerage fees when it
purchases and sells Futures Contracts, and it will be required to make and
maintain margin deposits.
OPTIONS ON FUTURES CONTRACTS: The Fund may purchase and write options to buy or
sell interest rate futures contracts and options on stock index futures
contracts. (Unless otherwise specified, options on interest rate futures
contracts and options on stock index futures contracts are collectively referred
to as "Options on Futures Contracts.") Such investment strategies will be
13
<PAGE> 25
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 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
14
<PAGE> 26
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.
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 Objective, Policies and Restrictions" in the SAI.
FIXED INCOME SECURITIES: 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.
LOWER RATED FIXED-INCOME SECURITIES: The Fund may invest up to 5% of its net
assets 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
15
<PAGE> 27
Fund but will be reflected in the net asset value of shares of the Fund. The
market for these lower rated fixed income securities may be less liquid than the
market for investment grade fixed income securities. Furthermore, the liquidity
of these lower rated securities may be affected by the market's perception of
their credit quality. Therefore, the Adviser's judgment may at times play a
greater role in valuing these securities than in the case of investment grade
fixed income securities, and it also may be more difficult during times of
certain adverse market conditions to sell these lower rated securities at their
fair value to meet redemption requests or to respond to changes in the market.
No minimum rating standard is required by the Fund. To the extent the Fund
invests in these lower rated fixed income securities, the achievement of its
investment objective may be more dependent on the Adviser's own credit analysis
than in the case of a fund investing in higher quality bonds. While the Adviser
may refer to ratings issued by established credit rating agencies, it is not a
policy of the Fund to rely exclusively on ratings issued by these agencies, but
rather to supplement such ratings with the Adviser's own independent and ongoing
review of credit quality.
The Fund may also invest in fixed income securities rated Baa by Moody's or BBB
by S&P or by Fitch and comparable unrated securities. These securities, while
normally exhibiting adequate protection parameters, may have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade fixed income securities.
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.
16
<PAGE> 28
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.
The investment objective and policies discussed above may be changed without
shareholder approval.
FOREIGN SECURITIES: 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 supervision than in the United States.
EMERGING MARKETS: 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
17
<PAGE> 29
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.
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 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.
18
<PAGE> 30
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 Conduct Rules
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of 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).
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.
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. 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). Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, the Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- MFS manages the Fund pursuant to an Investment Advisory
Agreement dated September 1, 1993 (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. 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, 1997, MFS received management fees
under the Advisory Agreement of $2,864,061 (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(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS
19
<PAGE> 31
Institutional Trust, MFS/Sun Life Series Trust and seven variable accounts, each
of which is a registered investment company established by Sun Life Assurance
Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the
sale of various fixed/variable annuity contracts. MFS and its wholly owned
subsidiary, MFS Institutional Advisors, Inc., 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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 29, 1997. As of such date, the MFS organization managed
approximately $44.2 billion of assets invested in equity securities and
approximately $20.1 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 is a subsidiary
of Sun Life of Canada (U.S.) Holdings, Inc., which in turn is a wholly owned
subsidiary of Sun Life Assurance Company of Canada ("Sun Life"). The Directors
of MFS are A. Keith Brodkin, Jeffrey L. Shames, 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 the Chairman, President
and a Trustee of the Trust. W. Thomas London, Ellen M. Moynihan, Mark E.
Bradley, Stephen E. Cavan, James R. Bordewick, Jr. and James O. Yost, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997 as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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.
20
<PAGE> 32
8. 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. As used in the Prospectus and any appendices thereto the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to investment in
the Fund.
This Prospectus offers Class A and B shares, which bear sales charges and
distribution fees in different forms and amounts, as described below:
CLASS A SHARES: Class A shares are generally offered at net asset value plus an
initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
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
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares
21
<PAGE> 33
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;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN
HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY; and
(v) on investments in Class A shares by certain retirement plans subject
to ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- -------------------------------------
<C> <S>
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>
22
<PAGE> 34
For purposes of determining the level of commissions to be paid to dealers with
respect to a shareholder's new investment in Class A shares made on or after
April 1, 1996, purchases for each shareholder account (and certain other
accounts for which the shareholder is a record or beneficial holder) will be
aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases -- Contingent Deferred Sales Charge" for
further discussion of the CDSC.
WAIVERS OF INITIAL SALES CHARGE AND CDSC. In certain circumstances, the initial
sales charge imposed upon purchases of Class A shares and the CDSC imposed upon
redemptions of Class A shares is waived. These circumstances are described in
Appendix A to this Prospectus. In addition to these circumstances, the CDSC
imposed upon the redemption of Class A shares is waived with respect to shares
held by certain retirement plans qualified under Section 401(a) or 403(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and subject to ERISA,
where:
(i) the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have pursuant
to a purchase order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of the MFS Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or regulation
which results in a material adverse change to the tax advantaged nature of the
plan, or in the event that the plan and/or sponsoring organization: (i) becomes
insolvent or bankrupt; (ii) is terminated 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.
23
<PAGE> 35
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 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 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.
24
<PAGE> 36
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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or
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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 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 or arrange for the sale of 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 and other employees, payment for travel
expenses, including lodging, incurred by registered representatives and other
employees 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 and other
employees 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
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<PAGE> 38
laws on this issue may differ from the interpretation of federal law expressed
herein and banks and financial institutions may be required to register as
broker-dealers pursuant to state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with respect to shares on which the initial sales charge has already been
paid. In the event that a shareholder initially purchases Units and then
exchanges into Class A shares subject to a CDSC of an MFS Fund, the CDSC period
will commence upon such exchange, and the applicability of the CDSC with respect
to subsequent exchanges shall be governed by the rules set forth above in this
paragraph.
GENERAL: 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
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<PAGE> 39
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.
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
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<PAGE> 40
"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,
29
<PAGE> 41
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of $1 million or more of Class A shares or purchases by certain
retirement plans of Class A shares) of Direct Purchases may be redeemed without
charge ("Free Amount"). Moreover, no CDSC is ever assessed on additional shares
acquired through the automatic reinvestment of dividends or capital gain
distributions ("Reinvested Shares"). Therefore, at the time of redemption of a
particular class, (i) any Free Amount is not subject to the CDSC and (ii) the
amount of redemption equal to the then-current value of Reinvested Shares is not
subject to the CDSC, but (iii) any amount of the redemption in excess of the
aggregate of the then-current value of Reinvested Shares and the Free Amount is
subject to a CDSC. The CDSC will first be applied against the amount of Direct
Purchases which will result in any such charge being imposed at the lowest
possible rate. The CDSC to be imposed upon redemptions will be calculated as set
forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their shares
have a one-time right to reinvest the redemption proceeds in the same class of
shares of any of the MFS Funds (if shares of such Fund are available for sale)
at net asset value (with a credit for any CDSC paid) within 90 days of the
redemption pursuant to the Reinstatement Privilege. If the shares credited for
any CDSC paid are then redeemed within six years of the initial purchase in the
case of Class B shares or within 12 months of the initial purchase for certain
Class A share purchases, a CDSC will be imposed upon redemption. Such purchases
under the Reinstatement Privilege are subject to all limitations in the SAI
regarding this privilege.
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.
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<PAGE> 42
INVOLUNTARY REDEMPTIONS/SMALL ACCOUNTS. Due to the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem shares in any
account for their then current value if at any time the total investment in such
account drops below $500 because of redemptions or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A 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.
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
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<PAGE> 43
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.
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).
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.
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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 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 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 gain 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 (as well as
the rate category or categories under which such gains are taxable), the
portion, if any, representing a return of capital (which is free of current
taxes but which 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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
33
<PAGE> 45
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 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.
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<PAGE> 46
PERFORMANCE INFORMATION
From time to time, the Fund will provide total rate of return quotations for
each class of shares and may also quote fund rankings in the relevant fund
category from various sources, such as the Lipper Analytical Securities
Corporation and Wiesenberger Investment Companies Service. Total rate of return
quotations will reflect the average annual percentage change over stated periods
in the value of an investment in a class of 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class. See the SAI for further
information on the calculation of total rate of return for share classes with
different class inception 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, 1997, 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.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund should contact the Shareholder Servicing
Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and capital gain distributions for that year (see
"Tax Status").
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<PAGE> 47
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.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, B and C shares of
that shareholder in the MFS Funds or 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
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<PAGE> 48
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. 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
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<PAGE> 49
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, 1998, 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> 50
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). As used in this Appendix,
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares, 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 MFD
serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser
to any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses
identified above and certain trusts, pension, profit-sharing or other
retirement plans for the sole benefit of such persons, provided the
shares are not resold except to 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.
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<PAGE> 51
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.
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<PAGE> 52
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
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.
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<PAGE> 53
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has
attained the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds
(the "Initial Purchase") (this waiver applies to the shares acquired from
the Initial Purchase and all shares of Eligible Funds subsequently
acquired by the shareholder); provided that the dealer through which the
Initial Purchase is made enters into an agreement with MFD to accept
delayed payment of commissions with respect to the Initial Purchase and
all subsequent investments by the shareholder in the Eligible Funds
subject to such requirements as may be established from time to time by
MFD (for a schedule of the amount of commissions paid by MFD to the
dealer on such investments, see "Purchases -- Class A Shares -- Purchases
Subject to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for Massachusetts Investors
Trust, Massachusetts Investors Growth Stock Fund, MFS Municipal Bond
Fund, MFS Municipal Limited Maturity Fund, MFS Money Market Fund, MFS
Government Money Market Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B 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
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the
shares are held solely in the deceased individual's name or in a living
trust for the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if
shares are held either solely or jointly in the disabled individual's
name or in a living trust for the benefit of the disabled individual (in
which case a disability certification form is required to be submitted to
the Shareholder Servicing Agent).
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<PAGE> 54
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> 55
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
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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, 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.
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(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.
C-1
<PAGE> 59
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.
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.
C-2
<PAGE> 60
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.
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.
C-3
<PAGE> 61
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-4
<PAGE> 62
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
D-1
<PAGE> 63
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.
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> 64
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
<PAGE> 65
-------------------
Bulk Rate
U.S. Postage
Paid
MFS
-------------------
[MFS LOGO]
We invented the mutual fund[SM]
MFS(R) MANAGED SECTORS FUND
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 66
[MFS LOGO]
<TABLE>
<S> <C>
MFS(R) MANAGED STATEMENT OF
SECTORS FUND ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1998
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
Certain Securities and Investment Techniques.......................................... 2
3. Management of the Fund................................................................ 14
Trustees.............................................................................. 14
Officers.............................................................................. 14
Trustee Compensation Table............................................................ 15
Investment Adviser.................................................................... 16
Investment Advisory Agreement......................................................... 16
Administrator......................................................................... 16
Custodian............................................................................. 17
Shareholder Servicing Agent........................................................... 17
Distributor........................................................................... 17
4. Portfolio Transactions and Brokerage Commissions...................................... 18
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs.................................................... 19
Exchange Privilege.................................................................... 22
Tax-Deferred Retirement Plans......................................................... 22
6. Tax Status............................................................................ 22
7. Distribution Plan..................................................................... 24
8. Determination of Net Asset Value and Performance...................................... 25
9. Description of Shares, Voting Rights and Liabilities.................................. 27
10. Independent Auditors and Financial Statements......................................... 28
Appendix A - Performance Information.................................................. A-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, 1998. 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> 67
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Managed Sectors Fund, a
non-diversified series of
MFS Series Trust I (the
"Trust"). The Fund was known
as MFS Lifetime Managed
Sectors Fund and was a
separate open-end
diversified management
company, organized as a
Massachusetts business trust
in 1986 and known as Life-
time Managed Sectors Trust
prior to August 3, 1992. The
Fund became a series of the
Trust on June 3, 1993.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1998, as
amended or supplemented from
time to time.
</TABLE>
2. INVESTMENT OBJECTIVE, POLICIES AND
RESTRICTIONS
The Fund's 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.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
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 liquid assets sufficient to cover any
commitments or to limit any potential risk. However, although the Fund does not
intend to make such purchases for speculative purposes and intends to adhere to
the provisions of 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 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.
2
<PAGE> 68
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 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.
3
<PAGE> 69
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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held 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 liquid assets in
a segregated account with its custodian. Put and call options written by the
Fund may also be covered in such other manner as may be in accordance with the
requirements of the exchange on which, or the counter party with which, the
option is traded, and applicable laws and regulations. If the writer's
obligation is not so covered, it is subject to the risk of the full change in
value of the underlying security from the time the option is written until
exercise.
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 liquid assets. 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 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.
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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 fully covered and could be subject to risk of loss in the event
of adverse changes in the value of the index. The Fund may also cover call
options on stock indices by holding a call on the same index and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets in a segregated account with its custodian, or by holding a put on the
same stock index and in
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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 liquid assets in a
segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
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 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
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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 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
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exercise price of the call written if the difference is maintained by the Fund
in liquid assets in a segregated account with its custodian. The Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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 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
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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 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 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
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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.
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
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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 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
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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.
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
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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) below
and the Fund's non-fundamental investment policy regarding illiquid securities,
these investment restrictions and policies are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
The Fund may not:
(1) Borrow 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 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.
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(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 (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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November 1997) 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 8/18/26)
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* (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; Address: 36080
Shaker Blvd., Hunting Valley, Ohio
OFFICERS
W. THOMAS LONDON* Treasurer (born 3/1/44)
Massachusetts Financial Services Company, Senior Vice President
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JAMES 0. YOST* Assistant Treasurer (born 6/12/60)
Massachusetts Financial Services Company, Vice President
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
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 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 below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
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.................... $3,725 $1,005 10 $247,168
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 4,175 2,050 14 149,258
Dr. Lawrence Cohn.................... 3,500 730 18 136,508
Sir David Gibbons.................... 3,725 1,642 13 136,508
Abby M. O'Neill...................... 3,725 837 10 123,758
Walter E. Robb, III.................. 4,175 2,050 15 149,258
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 5,300 820 20 149,258
Ward Smith........................... 5,300 1,025 13 149,258
</TABLE>
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 75. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
15
<PAGE> 81
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>
$3,150 $473 $ 788 $1,103 $ 1,575
3,686 553 922 1,290 $ 1,843
4,222 633 1,056 1,478 $ 2,111
4,758 714 1,190 1,665 $ 2,379
5,294 794 1,324 1,853 $ 2,647
5,830 875 1,458 2,041 $ 2,915
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of November 29, 1997, 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 an indirect
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997 as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Administrative Services
Agreement of $29,828.
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"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives 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, 1997, 1996 and 1995, MFS received fees
under the Advisory Agreement of $2,864,061, $2,731,358 and $2,505,884,
respectively.
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
16
<PAGE> 82
facilities, and all executive and supervisory personnel necessary for managing
the Fund's investments, effecting its portfolio transactions and, in general,
administering its affairs.
The Advisory Agreement with the Fund will remain in effect until August 1, 1998,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment 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 the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. The Custodian has contracted with the Shareholder Servicing
Agent to administer and perform certain dividend and distribution disbursing
functions for the Fund.
DISTRIBUTOR
MFD, a wholly owned subsidiary of MFS, serves as the distributor for the
continuous offering of shares of the Fund pursuant to a Distribution Agreement
dated as of January 1, 1995 (the "Distribution Agreement"). Prior to January 1,
1995, MFS Financial Services, Inc. ("FSI"), another wholly owned subsidiary of
MFS, was the Fund's distributor. Where this SAI refers to MFD in relation to the
receipt or payment of money with respect to a period or periods prior to January
1, 1995, such reference shall be deemed to include FSI, as the predecessor in
interest to MFD.
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
17
<PAGE> 83
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. 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, 1997, MFD received sales charges of
$20,163 and dealers received sales charges of $136,181 (as their concession on
gross sales charges of $156,344) for selling Class A shares of the Fund; the
Fund received $6,551,638 representing the aggregate net asset values of such
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 fiscal years ended August 31, 1997, 1996 and 1995, the CDSC imposed
on redemptions of Class A shares was approximately $190, $86 and $0,
respectively.
During the fiscal years ended August 31, 1997, 1996 and 1995, the CDSC imposed
on redemptions of Class B shares was approximately $101,980, $122,087 and
$175,565, respectively.
The Distribution 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 vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, 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
18
<PAGE> 84
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 $50,980 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, 1997, the Fund paid total brokerage
commissions of $811,980 on total transactions of $501,193,940. 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.
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.
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
19
<PAGE> 85
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 Class A, B
and C shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank
collective investment fund) reaches a discount level (see "Purchases" in the
Prospectus for the sales charges on quantity 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and will not be subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder considering the Distribution Investment Program
should obtain and read the prospectus of the other fund and consider the
differences in objectives and policies before making any investment.
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder Servicing
Agent to send him (or anyone he designates) regular periodic payments based upon
the value of his account. Each payment under a Systematic Withdrawal Plan
("SWP") must be at least $100, except 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
20
<PAGE> 86
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 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
21
<PAGE> 87
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 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
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<PAGE> 88
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 of the Fund's portfolio assets. Because the
Fund intends to distribute all of its net investment income and net realized
capital gains to shareholders in accordance with the timing requirements imposed
by the Code, it is not expected that the Fund will be required to pay any
federal income or excise taxes, although the Fund's foreign-source income may be
subject to foreign withholding taxes. If the Fund should fail to qualify as a
"regulated investment company" in any year, the Fund would incur a regular
corporate federal income tax upon its taxable income and Fund distributions
would generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes, whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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. Such capital gains may be
taxable to shareholders that are individuals, estates or trusts at maximum rates
of 20%, 25% or 28%, depending on the source of the gain. 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain will be eligible for reduced tax rates if the shares were
realized by an individual, an estate or a trust held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 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 coupon bonds, 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.
The Fund's transactions in options, Futures Contracts, Forward Contracts, and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing, and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with 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 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 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. The
Fund may elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might have
otherwise have continued to hold.
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<PAGE> 89
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 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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to such withholding. 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.
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.
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 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.
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<PAGE> 90
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 836,020 $ 338,827 $497,193
Class B Shares $1,405,119 $1,097,806 $307,313
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. This determination is made once during each
such day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use of
the pricing services has been approved by the Board of Trustees. All other
securities, futures contracts and options in the Fund's portfolio (other than
short-term obligations) for which the principal market is one or more securities
or commodities exchanges (whether domestic or foreign) will be valued at the
last reported sale price or at the settlement price prior to the determination
(or if there has been no current sale, at the closing bid price) on the primary
exchange on which such securities, Futures Contracts or options are traded; but
if a securities exchange is not the principal market for securities, such
securities will, if market quotations are readily available, be valued at
current bid prices, unless such securities are reported on the NASDAQ system, in
which case they are valued at the last sale price or, if no sales occurred
during the day, at the last quoted bid price. Debt securities (other than
short-term obligations) in the Fund's portfolio are valued on the basis of
valuations furnished by a pricing service which utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yields, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Short-term obligations, if any, in the Fund's portfolio are valued at amortized
cost, which constitutes fair value as determined by the Board of Trustees.
Short-term securities with a remaining maturity in excess of 60 days will be
valued based upon dealer supplied valuations. Portfolio securities and
over-the-counter options and Forward Contracts, for which there are no
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees. A share's net asset value is
effective for orders received by the dealer prior to its calculation and
received by MFD, in its capacity as the Fund's distributor, prior to the close
of the business day.
PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares) and therefore may result in
a higher rate of return, (ii) a total rate of return assuming an initial account
value of $1,000, which will result in a higher rate of return since the value of
the initial account will not be reduced by the current maximum sales charge
(currently 5.75%) and/or (iii) total rates of return which represent
25
<PAGE> 91
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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
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 A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS -- The performance results for Class B shares presented in
Appendix A attached hereto under the heading "Performance Results" assume an
initial investment of $10,000 in Class B shares, and cover the period from
January 1, 1987 through December 31, 1996. 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 Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Saloman Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy by Gordon
K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
may use charts and graphs to illustrate the past performance of various indices
such as those mentioned above and illustrations using hypothetical rates of
return to illustrate the effects of compounding and tax-deferral. The Fund may
advertise examples of the effects of periodic investment plans, including the
principle of dollar cost averaging. In such a program, an investor invests a
fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against a loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals.
From time to time, the Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks 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
26
<PAGE> 92
other professionals, or from surveys, regarding individual and family financial
planning. Such views may include information regarding: retirement planning; tax
management strategies; estate planning; general investment techniques (e.g.,
asset allocation and disciplined saving and investing); business succession;
ideas and information provided through the MFS Heritage Planning(sm) program, an
intergenerational financial planning assistance program; issues with respect to
insurance (e.g., disability and life insurance and Medicare supplemental
insurance); and issues regarding financial and health care management for
elderly.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS
AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (without par value)
of one or more separate series and to divide or combine the shares of any series
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in that series. The Trustees have currently
authorized shares of the Fund and twelve 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, Class A shares, Class B shares and Class I
shares for this Fund, as well as Class A, B, C and I shares for three of the
Trust's other series, Class A and I shares for eight of the Trust's other series
and Class A, B and C shares for one of the Trust's other series. Each share of a
class of the Fund represents an equal proportionate interest in the assets of
the Fund allocable to that class. Upon liquidation of the Fund, shareholders of
each class are entitled to share pro rata in the net assets of the Fund
allocable to such class available for distribution to shareholders. The Trust
reserves the right to create and issue additional series or classes of shares,
in which case the shares of each class would participate equally in the
earnings, dividends and assets allocable to that class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as described in "Purchases -- Conversion of Class B Shares" in
the Prospectus). Shares are fully paid and non-assessable. The Trust may enter
into a merger or consolidation, or sell all or substantially all of its assets
(or all or substantially all of the assets belonging to any series of the
Trust), if approved by the vote of the holders of two-thirds of the Trust's
outstanding shares voting as a single class, or of the affected series of the
Trust, as the case may be, except that if the Trustees of the Trust recommend
such merger, consolidation or sale, the approval by vote of the holders of a
majority of the Trust's or the affected series' outstanding shares (as defined
in "Investment Restrictions") will be sufficient. The Trust or any series of the
Trust may also be terminated (i) upon liquidation and distribution of its
assets, if approved by the vote of the
27
<PAGE> 93
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, 1997, the Statement of Assets and
Liabilities at August 31, 1997, the Statement of Operations for the year ended
August 31, 1997, the Statement of Changes in Net Assets for the years ended
August 31, 1997 and 1996, 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.
28
<PAGE> 94
APPENDIX A
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 B 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, 1987................................... 12,031 0 42 12,073
December 31, 1988................................... 12,546 0 181 12,727
December 31, 1989................................... 17,500 0 304 17,804
December 31, 1990................................... 15,109 0 263 15,372
December 31, 1991................................... 24,109 0 420 24,529
December 31, 1992................................... 24,078 986 420 25,484
December 31, 1993................................... 20,593 5,423 405 26,421
December 31, 1994................................... 18,375 6,016 1,095 25,486
December 31, 1995................................... 20,000 8,479 5,192 33,671
December 31, 1996................................... 20,812 11,308 7,032 39,152
</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 as of August 31, 1997.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
1 YEAR 5 YEAR 10 YEAR
------ ------ -------
<S> <C> <C> <C>
Class A shares with sales charge.................................. 35.67% 17.02%(1) 11.4%(1)
Class A shares without sales charge............................... 43.92% 18.16%(1) 11.94%(1)
Class B shares with CDSC.......................................... 38.95% 17.29% 11.62%
Class B shares without CDSC....................................... 42.95% 17.50% 11.62%
Class I shares.................................................... 43.37%(2) 17.57%(2) 11.66%(2)
</TABLE>
(1) Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the inception 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) Class I share performance includes the performance of the Fund's Class B
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and B shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class B shares generally are subject to a CDSC. Class
I share performance has not, however, been adjusted to reflect differences
in operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class I shares.
A-1
<PAGE> 95
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
MANAGED SECTORS
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MMS-13-1/97/500 08/208
<PAGE> 96
<PAGE>
[LOGO]
MFS(SM)
INVESTMENT MANAGEMENT
Annual Report
August 31, 1997
MFS(R) MANAGED SECTORS FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 2
Portfolio Manager's Profile ............................................... 6
Portfolio Concentration .................................................... 6
Fund Facts ................................................................ 7
Performance Summary ....................................................... 7
Tax Form Summary ........................................................... 9
Portfolio of Investments ...................................................10
Financial Statements .......................................................14
Notes to Financial Statements ..............................................21
Independent Auditors' Report ...............................................27
The MFS Family of Funds(R) .................................................28
Trustees and Officers ......................................................29
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 43.92%, CLASS B SHARES
42.95%, AND CLASS I SHARES 43.37%. (SEE PERFORMANCE SUMMARY FOR MORE
INFORMATION.)
o THE FUND'S STRONG PERFORMANCE CAN BE ATTRIBUTED TO A NUMBER OF FACTORS,
INCLUDING ITS HOLDINGS IN TECHNOLOGY AND ENERGY, PARTICULARLY
SEMICONDUCTORS IN THE TECHNOLOGY AREA AND OIL SERVICES IN THE ENERGY
SECTOR.
o SOME OF THE POSITIVE PERFORMANCE WAS OFFSET BY UNDERPERFORMING HOLDINGS
IN THE GAMING INDUSTRY AND IN A FEW HEALTH MAINTENANCE ORGANIZATIONS.
o CONDITIONS FOR FINANCIAL ASSETS HAVE CONTINUED TO BE EXTREMELY POSITIVE,
AS MODEST ECONOMIC GROWTH AND TECHNOLOGY- DRIVEN PRODUCTIVITY GAINS HAVE
HELPED KEEP INFLATIONARY PRESSURES IN CHECK.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's willingness to raise interest
rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point
where a cautious investment approach seems warranted.
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 15, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Kenneth J. Enright]
Kenneth J. Enright
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 43.92%, Class B shares 42.95%, and Class I shares 43.37%.
These returns, which include the reinvestment of distributions but exclude the
effects of any sales charges, compare to a 40.78% return for the Standard &
Poor's 500 Composite Index, a popular, unmanaged index of common stock total
return performance. The Lipper Capital Appreciation Fund Index, which more
closely reflects the Fund's objectives, returned 24.95% during the same
period.
Q. WHAT DO YOU SEE AS SOME OF THE MAJOR REASONS FOR THE FUND'S PERFORMANCE
OVER THE PAST YEAR?
A. The strong performance can be attributed to a number of factors. First,
technology and energy, two of the Fund's four sectors, had very strong
results -- particularly semiconductors in the technology area and oil
services in the energy sector. Both of these subsectors were dominant
holdings for the Fund within their respective categories. Second, the Fund
benefited when a number of its holdings, including McDonnell Douglas,
Healthsource, Smith's Food and Drug, Equitable of Iowa, and ADT Ltd., were
acquired during the year. Finally, Tyco International,
one of the Fund's largest holdings, was up over 85% during the past 12
months, and its prospects for continued strong earnings growth have been
bolstered by both strong internal fundamentals and a number of
acquisitions, including that of ADT, which have added to earnings.
Q. A YEAR AGO, YOU SAID THE FUND HAD NARROWED ITS SECTOR FOCUS TO FOUR AREAS:
TECHNOLOGY, ENERGY, HEALTH CARE, AND LEISURE. HAVE YOU MADE ANY IMPORTANT
SHIFTS IN EMPHASIS AMONG SECTORS?
A. While the Fund continues to be invested in the four sectors outlined last
year, as well as in the "other" category -- consisting of additional
sectors that we feel have attractive prospects for the future --
significant changes within each sector have occurred. Specifically, the
overall weighting in the energy sector was reduced modestly through the
sales of two marine-supply boat companies, Tidewater and Seacor, on full
valuation; a reduction in the Fund's Occidental Petroleum position; and the
trimming of other oil service stocks on the basis of price strength. The
technology weighting is about the same as last year, although there were
numerous changes within the sector. The health care weighting was increased
by over 3%, primarily through additions of both wholesale and retail drug
distribution companies, as we believe the prospects for these segments of
the industry are quite positive. Although gaming issues were sold due to
weak fundamentals, the leisure category was increased by over 2% with the
additions of a number of cellular telephone holdings and full-service hotel
stocks. The latter group is expected to continue to prosper from strong
demand and restricted supply for a number of years to come. Finally, the
"other" category was reduced by 5% of total assets, and the number of
holdings within that area were concentrated.
Q. WHAT ABOUT PARTICULAR STOCKS? ANY MAJOR CHANGES THERE?
A. Yes, as I mentioned, a number of companies were acquired, and those stocks
were either sold, tendered, or are awaiting the consummation of their
respective deals. In technology, the Fund's Intel holding was materially
reduced during the summer as near-term earnings waned, while National
Semiconductor and BMC Software were sold on price strength and Cabletron
and Sybase were sold due to what we viewed as deteriorating prospects. On
the buy side, positions were taken in Compaq Computer, Computer Associates
International, Texas Instruments, IBM, Sony, and Teradyne.
In health care, Pacific Health Systems, Coventry, and Pharmacia-Upjohn were
sold, while other positions were established to take advantage of what we saw
as more favorable prospects for the drug distribution industry, which is
being driven by both earnings growth and continued consolidation. Smith's
Food and Drug, Rite Aid, and CVS were purchased in the retail segment of that
category, while new positions in Cardinal Health, McKesson, and AmeriSource
gave us exposure to the wholesale segment. In addition, we initiated a
significant position in Bristol-Myers Squibb because we believe this
company's strong product flow should continue and even accelerate, despite
its already attractive valuation relative to its peer group. Among leisure
companies, weak-performing gaming stocks such as Showboat, MGM Grand, and
Argosy were sold, while hotel stocks such as Host Marriott, Hilton Hotels,
ITT, and LaQuinta were purchased. We also purchased the stocks of the
cellular telephone companies AirTouch and Sprint.
Q. COULD YOU TALK ABOUT SOME OF YOUR HOLDINGS THAT PERFORMED BETTER THAN
EXPECTED, AND WHY YOU THINK THEY DID WELL?
A. Our holdings in the oil services industry were a real standout for the
Fund, as several companies contributed strongly to performance. These
included Cooper Cameron, the Fund's largest holding in this area, which
gained 146%; Camco, up 108%; BJ Services, up 92%; and Weatherford Enterra,
up 60%. This industry has consolidated to a point at which there are now a
few leaders in each segment; they have lowered their operating costs,
upgraded their managements, and are operating in a positive environment
that, in turn, is lending itself to higher capacity utilization and, thus,
better pricing. In technology, the semiconductor area exhibited strong
demand, benefiting well-positioned companies such as Intel, which gained
135%; National Semiconductor, up 62%; and Texas Instruments, up 70% since
its purchase. Also, Compaq, which is up 98% since it was purchased,
continues to gain market share, reduce costs, and move toward the "build-
to-suit" model successfully executed by Dell Computer. Sun Microsystems,
Computer Associates, and IBM also contributed to the Fund's technology-
sector performance. AirTouch has increased 36% since its purchase, while
Tyco International and ADT (which was acquired by Tyco this year) were both
very strong performers.
Q. NOW, WHAT ABOUT SOME STOCKS OR SECTORS THAT DID NOT PERFORM AS WELL AS YOU
WOULD HAVE LIKED?
A. Some of the positive performance was offset by holdings in the gaming
industry and a few health care stocks, specifically those of health
maintenance organizations (HMOs). As a result of deteriorating
fundamentals, the Fund sold the gaming-related holdings Showboat, MGM
Grand, and Argosy, and the HMOs Pacificare Health and Coventry. The Fund
continues to hold Harrah's Entertainment, a geographically diverse gaming
concern with a strong management team. We expect its 1998 results to
improve materially, which should lead to better stock performance.
Disappointing results were also associated with three companies, each
undergoing corporate restructuring, and each in different industries:
Telephone & Data Systems, Digital Equipment, and Occidental Petroleum. The
Fund continues to believe that the value of each of these stocks is
significantly above its current share price and that each company's
management is taking positive steps to narrow the gap between its intrinsic
value and its marketplace value.
Q. IN GENERAL, HOW WOULD YOU CHARACTERIZE THE BUSINESS AND ECONOMIC
ENVIRONMENT OF THE PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. Economic conditions for financial assets have continued to be extremely
positive over the past year, as modest economic growth and technology-
driven productivity gains have kept inflationary pressures in check.
Contributing to this near-perfect backdrop has been the prospect of
additional fiscal discipline in Washington. These attributes have not gone
unnoticed by investors, and stock market performance has been quite robust
for each of the past three years. Unlike the previous two years, though,
this market has been characterized by narrow breadth, with performance
being driven by large-cap, multinational leaders in their respective
industries, creating an environment in which stock selection, as opposed to
sector weighting, has generally been the key to positive performance. As a
result, valuations for many of those companies with visible, steady growth
are at all-time highs. Fortunately, the Fund has had strong performance
without significant exposure to many of these stocks, but we are
increasingly wary of the impact these stocks may have on the overall
market, given their historically high valuations.
Q. WHAT KIND OF INVESTMENT ENVIRONMENT DO YOU ANTICIPATE GOING FORWARD, AND
HOW MIGHT THIS AFFECT SOME OF YOUR DECISIONS FOR THE FUND?
A. While we currently see few reasons to believe this positive backdrop should
not continue, investors have incorporated much of this good news into the
market, so there appears to be little room for error at either the company
or sector level. Regardless of the sector, we believe stock selection,
driven by strong fundamental research, will continue to be the key factor
in determining overweightings or underweightings versus the overall market.
/s/ Kenneth J. Enright
------------------------------------
Kenneth J. Enright
Portfolio Manager
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
KENNETH J. 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 PORTFOLIO
MANAGER OF MFS() R MANAGED SECTORS FUND IN 1993. HE IS A CHARTERED FINANCIAL
ANALYST (C.F.A.).
- --------------------------------------------------------------------------------
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
TOP 10 EQUITY HOLDINGS
TYCO INTERNATIONAL LTD. COMPUTER ASSOCIATES INTERNATIONAL, INC.
Manufacturer of fire protection, Computer software company
packaging, and electronic equipment
DIGITAL EQUIPMENT CORP.
TELEPHONE & DATA SYSTEMS, INC. Computer manufacturing and networking
Provider of rural and local company
telephone services
HARRAH'S ENTERTAINMENT, INC.
COMPAQ COMPUTER CORP. Owner of gaming operations in several
Personal computer company states
UNITED HEALTHCARE CORP. ATMEL CORP.
Health maintenance organization Manufacturer of electronic components
and semiconductors
COOPER CAMERON CORP.
Manufacturer of oil and gas EQUITABLE OF IOWA COS.
production equipment Life and health insurance company
LARGEST EQUITY SECTORS
Leisure 20.9%
Technology 32.7%
Miscellaneous 3.4%
(Conglomerates, special
products/sevices)
Energy 10.3%
Medical and Health
Technology and Services 15.9%
Other Sectors 16.8%
For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
OBJECTIVE: 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: CLASS A: SEPTEMBER 20, 1993
CLASS B: DECEMBER 29, 1986
CLASS I: JANUARY 2, 1997
SIZE: $447.6 MILLION NET ASSETS AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information below and on the following pages 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. The performance of other share classes will
be greater than or less than the line shown, based on the differences in
charges and fees paid by shareholders investing in different classes. It is
not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended August 31, 1997)
MFS Managed S&P 500 Lipper Capital
Sectors Fund - Composite Appreciation Consumer Price
Class B Index Funds Index Index - U.S.
-------------- --------- --------------- --------------
8/92 $10,000 $10,000 $10,000 $10,000
8/93 $11,900 $11,500 $12,300 $10,300
8/94 $12,100 $12,200 $12,900 $10,600
8/95 $15,200 $14,800 $15,800 $10,900
8/96 $15,700 $17,500 $17,700 $11,200
8/97 $22,393 $24,644 $22,082 $11,405
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended August 31, 1997)
MFS Managed S&P 500 Lipper Capital
Sectors Fund - Composite Appreciation Consumer Price
Class B Index Funds Index Index - U.S.
-------------- --------- --------------- --------------
8/87 $10,000 $10,000 $10,000 $10,000
8/89 $10,700 $11,400 $11,000 $10,900
8/91 $12,400 $13,800 $12,800 $11,900
8/93 $16,000 $17,200 $16,600 $12,700
8/95 $20,300 $22,000 $21,100 $13,300
8/97 $30,029 $36,711 $29,820 $14,044
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Managed Sectors Fund (Class A)
including 5.75% sales charge (SEC results) +35.67% +21.13% +17.02% +11.40%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class A)
at net asset value +43.92% +23.55% +18.16% +11.94%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class B)
with CDSC (SEC results) +38.95% +22.01% +17.29% +11.62%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class B)
at net asset value +42.95% +22.68% +17.50% +11.62%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Managed Sectors Fund (Class I)
at net asset value +43.37% +22.80% +17.57% +11.66%
- -----------------------------------------------------------------------------------------------------------------------------------
Average specialty/miscellaneous fund+ +22.49% +16.07% +17.08% +11.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Lipper Capital Appreciation Funds Index+ +24.95% +19.67% +17.17% +11.47%
- -----------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +40.78% +26.58% +19.77% +13.89%
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*++ + 2.19% + 2.55% + 2.66% + 3.45%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
* The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 5.75% sales charge. Class B
share SEC results reflect the applicable CDSC, which declines over six years
as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class I shares, which became available
on January 2, 1997, have no sales charge or Rule 12b-1 fees and are only
available to certain institutional investors.
Class A share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class A shares. Because operating expenses
attributable to Class B shares are greater than those of Class A shares, Class
A share performance generally would have been higher than Class B share
performance. The Class B share performance included within the Class A share
SEC performance has been 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 I share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class B shares are greater than those of Class I shares, Class
I share performance generally would have been higher than Class B share
performance. The Class B share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
CDSC.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
MFS MANAGED SECTORS FUND HAS DESIGNATED $23,914,768 AS A LONG-TERM
CAPITAL GAIN.
DIVIDENDS RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 10.29%.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - August 31, 1997
Stocks - 96.6%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- --------------------------------------------------------------------------------
Energy - 10.3%
Apache Corp. 142,500 $ 5,655,469
BJ Services Co.* 75,000 5,418,750
Camco International, Inc. 79,000 5,441,125
Cooper Cameron Corp.* 205,000 13,299,375
Noble Drilling Corp.* 125,000 3,554,688
Occidental Petroleum Corp. 219,770 5,150,859
Weatherford Enterra, Inc.* 165,000 7,600,312
-------------
$ 46,120,578
- --------------------------------------------------------------------------------
Leisure - 20.9%
Aerial Communications, Inc.* 275,000 $ 2,389,063
AirTouch Communications, Inc.* 137,000 4,632,313
Harrah's Entertainment, Inc.* 525,000 11,779,687
HFS, Inc.* 155,000 8,631,562
Hilton Hotels Corp. 230,000 7,058,125
Host Marriott Corp.* 300,000 5,850,000
ITT Corp.* 57,000 3,580,313
LIN Television Corp.* 145,500 6,902,156
LaQuinta Inns, Inc. 153,300 3,219,300
Promus Hotel Corp.* 175,000 6,792,187
Telephone & Data Systems, Inc. 830,000 32,785,000
-------------
$ 93,619,706
- --------------------------------------------------------------------------------
Medical and Health Technology and Services - 15.9%
Aetna, Inc. 23,100 $ 2,204,606
AmeriSource Health Corp., "A"* 66,800 3,344,175
Bristol-Myers Squibb Co. 105,500 8,018,000
Cardinal Health, Inc. 35,000 2,318,750
Cigna Corp. 29,700 5,446,237
Columbia/HCA Healthcare Corp. 95,000 2,998,438
CVS Corp. 60,000 3,382,500
Genesis Health Ventures, Inc.* 137,100 4,781,363
McKesson Corp.## 56,600 5,302,712
Medpartners, Inc.* 206,000 4,403,250
Mid Atlantic Medical Services, Inc.* 33,400 515,613
Rite Aid Corp. 95,000 4,755,938
Smith's Food & Drug Centers, Inc., "B"* 77,500 4,243,125
St. Jude Medical, Inc.* 142,000 5,404,875
United Healthcare Corp. 286,100 13,911,612
-------------
$ 71,031,194
- --------------------------------------------------------------------------------
Technology - 32.7%
3Com Corp.* 83,500 $ 4,169,781
Analog Devices, Inc.* 139,400 4,617,625
Ascend Communications, Inc.* 65,000 2,758,438
Aspect Telecommunications Corp.* 225,000 4,950,000
Atmel Corp.* 325,000 11,496,875
Cisco Systems, Inc.* 42,000 3,165,750
Compaq Computer Corp.* 239,000 15,654,500
Computer Associates International, Inc. 180,000 12,037,500
Digital Equipment Corp.* 275,000 11,825,000
Intel Corp. 45,000 4,145,625
International Business Machines Corp. 76,000 7,666,500
Loral Space & Communications Corp.* 435,000 7,612,500
Microsoft Corp.* 35,000 4,626,563
Oracle Systems Corp.* 158,500 6,042,812
Sony Corp. (Japan) 64,000 5,572,139
Spectrum Holobyte, Inc.* 869,200 4,183,025
Sprint Corp. 110,000 5,170,000
Sun Microsystems, Inc.* 135,000 6,480,000
Synopsys, Inc.* 145,000 5,020,625
Teradyne, Inc.* 132,000 7,350,750
Texas Instruments, Inc. 70,000 7,953,750
WorldCom, Inc.* 133,000 3,981,688
-------------
$ 146,481,446
- --------------------------------------------------------------------------------
Other - 16.8%
AGCO Corp. 190,000 $ 6,175,000
Equitable of Iowa Cos. 145,000 9,443,125
Jefferson Smurfit Corp.* 135,000 2,624,063
Keystone International, Inc. 145,000 5,464,687
Office Depot, Inc.* 323,600 5,966,375
Stone Container Corp. 253,900 4,379,775
Tyco International Ltd.* 445,000 34,904,687
Wisconsin Central Transportation Corp.* 205,800 6,379,800
-------------
$ 75,337,512
- --------------------------------------------------------------------------------
Total Stocks (Identified Cost, $340,795,515) $ 432,590,436
- --------------------------------------------------------------------------------
Convertible Bond
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------
Spectrum Holobyte, Inc., 6.5s, 2002 (Technology)##
(Identified Cost, $560,000) $ 560 $ 403,900
- --------------------------------------------------------------------------------
Short-Term Obligations - 2.0%
- --------------------------------------------------------------------------------
General Electric Capital Corp., due 9/02/97, at
Amortized Cost $ 8,800 $ 8,798,626
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Put Options Purchased - 1.6%
- --------------------------------------------------------------------------------
ISSUER/EXPIRATION MONTH/STRIKE PRICE CONTRACTS VALUE
- --------------------------------------------------------------------------------
S & P 500 Index/March/875
(Premiums Paid, $5,320,429) 1,810 $ 7,285,250
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $355,474,570) $ 449,078,212
- --------------------------------------------------------------------------------
Call Options Written - (1.2)%
- --------------------------------------------------------------------------------
3Com Corp.
October/60 835 $ (114,812)
Aetna, Inc.
January/115 230 (60,375)
AirTouch Communications, Inc.
January/35 1,370 (368,188)
Atmel Corp.
November/40 2,000 (400,000)
Bristol-Myers Squibb Co.
December/95 1,000 (62,500)
Cigna Corp.
October/200 150 (26,250)
Computer Associates International, Inc.
October/80 1,000 (31,250)
Compaq Computer Corp.
January/60 450 (1,350,000)
Cooper Cameron Corp.
November/60 1,350 (1,147,500)
Digital Equipment Corp.
October/45 1,500 (300,000)
Genesis Health Ventures, Inc.
December/40 1,000 (56,250)
Harrah's Entertainment, Inc.
November/25 2,350 (146,875)
HFS, Inc.
January/65 1,400 (315,000)
International Business Machines Corp.
January/120 460 (155,250)
Loral Space & Communications Corp.
January/20 2,250 (210,938)
Microsoft Corp.
October/150 350 (78,750)
Office Depot, Inc.
October/20 1,500 (56,250)
Smith's Food & Drug Centers, Inc., "B"
January/65 770 (38,500)
Telephone & Data Systems, Inc.
November/45 2,000 (62,500)
Texas Instruments, Inc.
October/125 700 (306,250)
Tyco International Ltd.
October/95 2,178 (54,450)
United Healthcare Corp.
December/60 1,400 (105,000)
Wisconsin Central Transportation Corp.
January/40 1,750 (120,312)
WorldCom, Inc.
December/37.5 1,320 (99,000)
- --------------------------------------------------------------------------------
Total Call Options Written (Premiums Received,
$5,098,759) $ (5,666,200)
Other Assets, Less Liabilities - 1.0% 4,216,209
- --------------------------------------------------------------------------------
Net Assets - 100.0% $ 447,628,221
- --------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $355,474,570) $449,078,212
Cash 71,733
Receivable for investments sold 6,955,635
Receivable for Fund shares sold 1,720,442
Dividends and interest receivable 75,692
Other assets 3,297
-------------
Total assets $457,905,011
-------------
Liabilities:
Payable for investments purchased $ 4,052,035
Payable for Fund shares reacquired 138,726
Written options outstanding, at value
(premiums received, $5,098,759) 5,666,200
Payable to affiliates -
Management fee 27,611
Administrative fee 552
Shareholder servicing agent fee 4,786
Distribution and service fee 200,801
Accrued expenses and other liabilities 186,079
-------------
Total liabilities $ 10,276,790
-------------
Net assets $ 447,628,221
=============
Net assets consist of:
Paid-in capital $292,536,744
Unrealized appreciation on investments and translation of
assets and liabilities in
foreign currencies 93,036,201
Accumulated undistributed net realized gain on
investments and foreign currency transactions 62,106,077
Accumulated net investment loss (50,801)
-------------
Total $447,628,221
=============
Shares of beneficial interest outstanding 26,628,795
==========
Class A shares:
Net asset value per share
(net assets of $288,226,715 / 17,148,342 shares of
beneficial interest outstanding) $16.81
======
Offering price per share (100 / 94.25) $17.84
======
Class B shares:
Net asset value and offering price per share
(net assets of $157,052,242 / 9,341,131 shares of
beneficial interest outstanding) $16.81
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $2,349,264 / 139,322 shares of
beneficial interest outstanding) $16.86
======
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
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 1,584,274
Interest 253,981
Foreign taxes withheld (2,322)
------------
Total investment income $ 1,835,933
------------
Expenses -
Management fee $ 2,864,061
Trustees' compensation 46,635
Shareholder servicing agent fee 338,341
Shareholder servicing agent fee (Class A) 112,975
Shareholder servicing agent fee (Class B) 101,851
Distribution and service fee (Class A) 836,020
Distribution and service fee (Class B) 1,405,119
Administrative fee 29,828
Custodian fee 147,918
Postage 78,101
Printing 59,523
Auditing fees 43,779
Legal fees 5,056
Miscellaneous 306,624
------------
Total expenses $ 6,375,831
Fees paid indirectly (67,900)
------------
Net expenses $ 6,307,931
------------
Net investment loss $ (4,471,998)
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 69,776,619
Written options transactions 86,142
Foreign currency transactions (18,487)
------------
Net realized gain on investments and foreign
currency transactions $ 69,844,274
------------
Change in unrealized appreciation -
Investments $ 73,137,532
Written option transactions (567,441)
Translation of assets and liabilities in foreign currencies (69)
------------
Net unrealized gain on investments and foreign currency
translation $ 72,570,022
------------
Net realized and unrealized gain on investments
and foreign currency $142,414,296
------------
Increase in net assets from operations $137,942,298
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment loss $ (4,471,998) $ (3,156,831)
Net realized gain on investments and foreign currency
transactions 69,844,274 62,458,699
Net unrealized gain (loss) on investments and foreign
currency translation 72,570,022 (45,740,086)
-------------- --------------
Increase in net assets from operations $ 137,942,298 $ 13,561,782
-------------- --------------
Distributions declared to shareholders -
From net realized gain on investments and foreign
currency transactions (Class A) $ (26,355,849) $ (37,126,652)
From net realized gain on investments and foreign
currency transactions (Class B) (15,051,923) (28,912,351)
-------------- --------------
Total distributions declared to shareholders $ (41,407,772) $ (66,039,003)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 128,378,865 $ 105,543,935
Net asset value of shares issued to shareholders in
reinvestment of distributions 38,469,332 60,342,057
Cost of shares reacquired (153,117,052) (154,185,704)
-------------- --------------
Increase in net assets from Fund share transactions $ 13,731,145 $ 11,700,288
-------------- --------------
Total increase (decrease) in net assets $ 110,265,671 $ (40,776,933)
Net assets:
At beginning of period 337,362,550 378,139,483
-------------- --------------
At end of period (including accumulated net investment
loss of $50,801 and $257,410, respectively) $ 447,628,221 $ 337,362,550
============== ==============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED AUGUST 31, ENDED PERIOD ENDED
---------------------------------------- AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993*
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share
outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 13.16 $ 15.55 $ 13.41 $ 15.50 $ 15.68
---------- ---------- ---------- ---------- ----------
Income from investment operations# -
Net investment loss $ (0.13) $ (0.08) $ (0.05) $ (0.03) $ (0.02)
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions 5.46 0.58 3.22 0.77 (0.16)
---------- ---------- ---------- ---------- ----------
Total from investment
operations $ 5.33 $ 0.50 $ 3.17 $ 0.74 $ (0.18)
---------- ---------- ---------- ---------- ----------
Less distributions declared to
shareholders from net realized gain
on investments and foreign currency transactions $ (1.68) $ (2.89) $ (1.03) $ (2.83) $ --
---------- ---------- ---------- ---------- ----------
Net asset value - end of period $ 16.81 $ 13.16 $ 15.55 $ 13.41 $ 15.50
========== ========== ========== ========== ==========
Total return(+) 43.92% 3.92% 26.12% 5.12%++ (5.99)%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.43% 1.43% 1.46% 1.52%+ 1.59%+
Net investment loss (0.93)% (0.56)% (0.34)% (0.26)%+ (0.75)%+
Portfolio turnover 96% 117% 115% 76% 106%
Average commission rate### $ 0.0569 $ 0.0411 $ -- $ -- $ --
Net assets at end of period
(000 omitted) $ 288,227 $ 207,504 $ 178,367 $ 121,498 $ 136,179
</TABLE>
*For the period from the commencement of the Fund's offering of Class A
shares, September 20, 1993, through 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
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED AUGUST 31, ENDED YEAR ENDED
---------------------------------------- AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each period):
Net asset value - beginning of period $ 13.14 $ 15.46 $ 13.35 $ 15.49 $ 15.42
---------- ---------- ---------- ---------- ----------
Income from investment operations# -
Net investment loss $ (0.23) $ (0.18) $ (0.14) $ (0.10) $ (0.25)
Net realized and unrealized gain
on investments and foreign currency transactions 5.47 0.58 3.20 0.75 0.94
---------- ---------- ---------- ---------- ----------
Total from investment operations $ 5.24 $ 0.40 $ 3.06 $ 0.65 $ 0.69
---------- ---------- ---------- ---------- ----------
Less distributions declared to
shareholders from net realized gain
on investments and foreign currency transactions $ (1.57) $ (2.72) $ (0.95) $ (2.79) $ (0.62)
---------- ---------- ---------- ---------- ----------
Net asset value - end of period $ 16.81 $ 13.14 $ 15.46 $ 13.35 $ 15.49
========== ========== ========== ========== ==========
Total return 42.95% 3.17% 25.19% 4.47%++ 4.50%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.11% 2.15% 2.18% 2.26%+ 2.21%
Net investment loss (1.60)% (1.27)% (1.06)% (1.01)%+ (1.55)%
Portfolio turnover 96% 117% 115% 76% 106%
Average commission rate### $ 0.0569 $ 0.0411 $ -- $ -- $ --
Net assets at end of period
(000 omitted) $ 157,052 $ 129,858 $ 199,773 $ 214,055 $ 232,982
</TABLE>
+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
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988 1987**
- ----------------------------------------------------------------------------------------------------------------------
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 $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94 $ 6.50
-------- -------- -------- -------- -------- --------
Income from investment operations -
Net investment income (loss) $ (0.24) $ (0.12) $ (0.03) $ 0.03 $ 0.09 $ 0.03
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions 2.66 3.89 (2.06) 3.51 0.89 0.42
-------- -------- -------- -------- -------- --------
Total from investment operations $ 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 $ -- $ -- $ -- $ (0.08) $ (0.06) $ (0.01)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $ 15.42 $ 13.00 $ 9.23 $ 11.32 $ 7.86 $ 6.94
======== ======== ======== ======== ======== ========
Total return 18.62% 40.85% (18.46)% 45.35% 14.06% 7.47%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.37% 2.44% 2.50% 2.52% 2.31% 2.25%+
Net investment income (loss) (1.85)% (1.00)% (0.27)% 0.37% 1.08% 0.09%+
Portfolio turnover 22% 59% 79% 84% 146% 163%
Net assets at end of period
(000 omitted) $249,493 $190,232 $152,132 $180,416 $137,311 $134,762
</TABLE>
**For the period from the commencement of the Fund's investment operations,
December 29, 1986, through November 30, 1987.
+Annualized.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1997***
- ------------------------------------------------------------------------------
CLASS I
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $13.18
------
Income from investment operations# -
Net investment loss $(0.07)
Net realized and unrealized gain on investments
and foreign currency
transactions 3.75
------
Total from investment operations $ 3.68
------
Net asset value - end of period $16.86
======
Total return 27.92%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.07%+
Net investment loss (0.65)%+
Portfolio turnover 96%
Average commission rate $0.0569
Net assets at end of period (000 omitted) $ 2,349
***For the period from the commencement of the Fund's offering of Class I
shares, January 2, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data for the period are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
See notes to financial statements
<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 reported at market value using last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are reported at market value using 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.
Written Options - The Fund may also write call or put options in exchange for
a premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the option contract. When a
written option expires, the Fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put is exercised, the premium reduces the cost basis
of the security 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 part of an income producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
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.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the ex-
dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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. Capital gains taxes have been provided on unrealized and realized
gains from securities transactions in countries where such a capital gains tax
is applicable. Realized and unrealized gain is reported net of any capital
gains tax in the Statement of Operations.
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, 1997, $4,678,607 was reclassified from
accumulated undistributed 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.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
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.
Administrator - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
and other administrative services. As a partial reimbursement for the cost of
providing these services, the Fund pays MFS an administrative fee of up to
0.015% per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
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
$13,010 for the year ended August 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$20,163 for the year ended August 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's 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 $98,942 for the year ended August 31, 1997. Fees incurred under
the distribution plan during the year ended August 31, 1997, were 0.35% of
average daily net assets attributable to Class A shares on an annualized
basis.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B 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 $43,967
for Class B shares for the year ended August 31, 1997. Fees incurred under the
distribution plans during the year ended August 31, 1997, 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 by
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, 1997, were
$190 and $101,980 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 fund's average daily net assets of each class of shares at
an effective annual rate of up to 0.13%. Prior to January 1, 1997, the fee was
calculated as a percentage of the average daily net assets of each class of
shares 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
$363,613,893 and $398,257,524, 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 $355,994,583
============
Gross unrealized appreciation $103,042,265
Gross unrealized depreciation (9,958,636)
------------
Net unrealized appreciation $ 93,083,629
============
(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
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,344,407 $ 80,513,731 4,380,258 $ 63,996,858
Shares issued to shareholders in
reinvestment of distributions 1,814,003 24,108,369 2,625,824 33,269,508
Shares transferred to Class I (167,732) (2,210,708) -- --
Shares reacquired (5,609,695) (83,104,253) (2,712,657) (38,139,937)
--------- ------------- ---------- -------------
Net increase 1,380,983 $ 19,307,139 4,293,425 $ 59,126,429
========= ============= ========== =============
Class B Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
Shares sold 3,284,660 $ 47,554,552 2,993,295 $ 41,547,077
Shares issued to shareholders in
reinvestment of distributions 1,075,701 14,360,963 2,128,326 27,072,549
Shares reacquired (4,899,090) (69,295,923) (8,163,355) (116,045,767)
---------- ------------- ---------- --------------
Net decrease (538,729) $ (7,380,408) (3,041,734) $ (47,426,141)
========== ============= ========== ==============
Class I Shares
PERIOD ENDED
AUGUST 31, 1997*
--------------------------
SHARES AMOUNT
- -------------------------------------------------------------------
Shares sold 23,376 $ 310,582
Shares transferred from Class A 167,732 2,210,708
Shares reacquired (51,786) (716,876)
------- ------------
Net increase 139,322 $ 1,804,414
======= ============
</TABLE>
*For the period from the commencement of the Fund's offering of Class I
shares, January 2, 1997, through August 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1997, was $3,405.
(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. The notional or contractual
amounts of these instruments represent the investment the Fund has in
particular classes of financial instruments and does not necessarily represent
the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Written Option Transactions
1997 CALLS
-----------------------
CONTRACTS PREMIUMS
- ------------------------------------------------------------------------------
Outstanding, Beginning of Period -- --
Options written 30,985 $5,306,231
Options terminated in closing transactions 1,672 207,472
------ ----------
Outstanding, End of Period 29,313 $5,098,759
====== ==========
At August 31, 1997, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<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 (one of
the series constituting MFS Series Trust I) as of August 31, 1997, the related
statement of operations for the year the ended, the statement of changes in
net assets for the years ended August 31, 1997 and 1996, and the financial
highlights for each of the years in the three-year period ended August 31,
1997, 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, 1997 by correspondence with 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, 1997, 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 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) MANAGED SECTORS FUND
<S> <C>
TRUSTEES SECRETARY
Stephen E. Cavan*
A. Keith Brodkin* - Chairman and President
ASSISTANT SECRETARY
Richard B. Bailey* - Private Investor; James R. Bordewick, Jr.*
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company
AUDITORS
Marshall N. Cohan - Private Investor Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION
Surgery, Brigham and Women's Hospital; For MFS stock and bond market outlooks,
Professor of Surgery, Harvard Medical School call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; For information on MFS mutual funds, call your
Chairman, Bank of N.T. Butterfield & Son Ltd. financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Abby M. O'Neill - Private Investor; from 9 a.m. to 5 p.m. Eastern time (or leave a
Director, Rockefeller Financial Services, Inc. message anytime).
(investment advisers)
INVESTOR SERVICE
Walter E. Robb, III - President and Treasurer, MFS Service Center, Inc.
Benchmark Advisors, Inc. (corporate financial P.O. Box 2281
consultants); President, Benchmark Boston, MA 02107-9906
Consulting Group, Inc. (office services);
Trustee, Landmark Funds (mutual funds) For general information, call toll free:
1-800-225-2606 any business day from
Arnold D. Scott* - Senior Executive Vice 8 a.m. to 8 p.m. Eastern time.
President, Director and Secretary,
Massachusetts Financial Services Company For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from
Jeffrey L. Shames* - President and Director, 9 a.m. to 5 p.m. Eastern time. (To use this
Massachusetts Financial Services Company service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
J. Dale Sherratt - President, Insight Resources,
Inc. (acquisition planning specialists) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Ward Smith - Former Chairman (until 1994), (1-800-637-8255) anytime from a touch-tone
NACCO Industries; Director, Sundstrand telephone.
Corporation
WORLD WIDE WEB
INVESTMENT ADVISER www.mfs.com
Massachusetts Financial Services Company
500 Boylston Street [Dalbar For the fourth year in a row, MFS
Boston, MA 02116-3741 Logo] earned a #1 ranking in the DALBAR,
Inc. Broker/Dealer Survey, Main Office
DISTRIBUTOR Operations Service Quality Category.
MFS Fund Distributors, Inc. The firm achieved a 3.42 overall score on a
500 Boylston Street scale of 1 to 4 in the 1997 survey. A total of
Boston, MA 02116-3741 111 firms responded, offering input on the
quality of service they received from 29 mutual
PORTFOLIO MANAGER fund companies nationwide. The survey contained
Kenneth J. Enright* questions about service quality in 11
categories, including "knowledge of operations
TREASURER contact," "keeping you informed," and "ease of
W. Thomas London* doing business" with the firm.
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) MANAGED BULK RATE
SECTORS FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MMS-2 10/97 49M 08/208/808
<PAGE> 97
<TABLE>
<S> <C>
PROSPECTUS
JANUARY 1, 1998
CLASS A SHARES OF BENEFICIAL
INTEREST
MFS(R) CASH CLASS B SHARES OF BENEFICIAL
RESERVE FUND INTEREST
(A member of the MFS Family of CLASS C SHARES OF BENEFICIAL
Funds(R)) INTEREST
</TABLE>
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Cash Reserve Fund (the "Fund"), a diversified
series of MFS Series Trust I (the "Trust"). The investment objective of the Fund
is to provide as high a level of current income as is considered consistent with
the preservation of capital and liquidity. The minimum initial investment
generally is $1,000 per account (see "Information Concerning Shares of the
Fund -- 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.
(continued on next page)
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.
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> 98
(continued from previous page)
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, 1998, 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
(http://www.sec.gov) that contains the SAI materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................. 3
2. Condensed Financial Information............................. 5
3. The Fund.................................................... 7
4. Investment Objective and Policies........................... 8
5. Certain Securities and Investment Techniques................ 9
6. Management of the Fund...................................... 10
7. Information Concerning Shares of the Fund................... 12
Purchases............................................... 12
Exchanges............................................... 16
Redemptions and Repurchases............................. 17
Distribution Plan....................................... 20
Distributions........................................... 23
Tax Status.............................................. 24
Description of Shares, Voting Rights and Liabilities.... 24
Performance Information................................. 25
8. Shareholder Services........................................ 26
Appendix A.................................................. A-1
Appendix B.................................................. B-1
Appendix C.................................................. C-1
Appendix D.................................................. D-1
</TABLE>
2
<PAGE> 99
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
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)................... 0.49% 0.49% 0.49%
---- ---- ----
Total Operating Expenses (after
applicable fee reduction)(5)...... 0.94% 1.94% 1.94%
</TABLE>
- ---------------
(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% of the Fund's average daily net
assets.
(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 and 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) 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
<PAGE> 100
(5) Absent the Management Fee reduction, "Total Operating Expenses" would have
been 1.04%, 2.04%, and 2.04% for Class A, B and C shares respectively.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------------------------------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1 year........................ $ 10 $ 60 $ 20(1) $ 30 $ 20(1)
3 years....................... 30 91 61 61 61
5 years....................... 52 125 105 105 105
10 years....................... 116 201(2) 199(2) 227 227
</TABLE>
- ---------------
(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.
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.
4
<PAGE> 101
2. 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
CLASS A, CLASS B AND CLASS C SHARES
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
NINE
MONTHS
YEAR ENDED AUGUST 31, ENDED YEAR ENDED
--------------------------- AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993*
------- ------- ------- ---------- ------------
<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 incomesec................. $ 0.05 $ 0.04 $ 0.05 $ 0.02 $ 0.01
------- ------- ------- ------ ------
Less distributions declared to
shareholders from net investment
income................................. (0.05) (0.04) (0.05) (0.02) (0.01)
------- ------- ------- ------ ------
Net asset value -- end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ====== ======
Total return............................. 4.64% 4.75% 4.91% 2.89%+ 2.28%+
------- ------- ------- ------ ------
Ratios (to average net
assets)/Supplemental datasec.:
Expenses##........................... 0.93% 0.84% 0.90% 0.86%+ 0.92%+
------- ------- ------- ------ ------
Net investment income................ 4.54% 4.62% 4.94% 3.11%+ 2.26%+
------- ------- ------- ------ ------
Net assets at end of period (000
omitted)............................... $45,007 $37,872 $10,852 $2,156 $ 49
------- ------- ------- ------ ------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares, September 7, 1993,
through November 30, 1993.
+ Annualized.
## For the fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
sec. The investment adviser did not impose a portion of its management fee
for the periods indicated. If this fee had been incurred by the Fund,
the net investment income per share and the ratios would have been:
Net investment income............... $ 0.04 $ 0.04 $ 0.05 $ 0.02 $ 0.01
Ratios (to average net assets):
Expenses##........................ 1.03% 0.94% 1.00% 0.96%+ 1.02%+
Net investment income............. 4.44% 4.52% 4.84% 3.01%+ 2.16%+
</TABLE>
5
<PAGE> 102
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------
YEAR ENDED NOVEMBER
YEAR ENDED AUGUST 31, NINE 30,
-------------------------------- MONTHS ENDED --------------------
1997 1996 1995 AUGUST 31, 1994 1993 1992
-------- -------- -------- --------------- -------- --------
<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
incomesec........... $ 0.03 $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
-------- -------- -------- --------- -------- --------
Less distributions
declared to
shareholders from
net investment
income.............. (0.03) (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 $ 1.00
======== ======== ======== ========= ======== ========
Total return.......... 3.58% 3.64% 3.81% 1.79%+ 1.16% 1.79%
-------- -------- -------- --------- -------- --------
Ratios (to average net
assets)/Supplemental
data[sec.]:
Expenses##........ 1.95% 1.92% 1.93% 1.94%+ 2.00% 2.22%
-------- -------- -------- --------- -------- --------
Net investment
income.......... 3.53% 3.58% 3.69% 1.88%+ 1.19% 1.83%
-------- -------- -------- --------- -------- --------
Net assets at end of
period (000
omitted)............ $244,416 $251,192 $166,519 $ 213,635 $155,274 $125,439
-------- -------- -------- --------- -------- --------
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ Annualized.
## For the fiscal years ending after September 1, 1995, the Fund's expenses
are calculated without reduction for fees paid indirectly.
sec. 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.......... $ 0.03 $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Ratios (to
average net
assets):
Expenses##..... 2.05% 2.02% 2.03% 2.04%+ 2.10% 2.32%
Net investment
income........ 3.43% 3.48% 3.59% 1.78%+ 1.09% 1.73%
</TABLE>
6
<PAGE> 103
<TABLE>
<CAPTION>
CLASS C
CLASS B -----------------
-------------------------------------------------------
YEAR ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------------------------------- -----------------
1991 1990 1989 1988 1987** 1997 1996***
-------- -------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a
share outstanding
throughout each
period):
Net asset value --
beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- ------- ------
Net investment
incomesec......... $ 0.04 $ 0.06 $ 0.07 $ 0.06 $ 0.04 $ 0.03 $ 0.01
-------- -------- -------- -------- ------- ------- ------
Less distributions
declared to
shareholders from net
investment income..... (0.04) (0.06) (0.07) (0.06) (0.04) (0.03) (0.01)
-------- -------- -------- -------- ------- ------- ------
Net asset value -- end
of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======= ======= ======
Total return........... 4.56% 6.12% 7.34% 5.85% 4.42%+ 3.60% 3.67%+
-------- -------- -------- -------- ------- ------- ------
Ratios (to average net
assets)/Supplemental
data[sec.]:
Expenses##.......... 2.04% 2.23% 2.24% 2.06% 2.06%+ 1.95% 1.79%+
-------- -------- -------- -------- ------- ------- ------
Net investment
income............ 4.53% 6.06% 7.10% 5.59% 5.59%+ 3.57% 3.60%+
-------- -------- -------- -------- ------- ------- ------
Net assets at end of
period (000
omitted).............. $161,040 $203,314 $146,885 $139,518 $83,845 $16,373 $6,642
-------- -------- -------- -------- ------- ------- ------
</TABLE>
- ---------------
<TABLE>
<C> <S>
** For the period from the commencement of the Fund's investment operations,
December 29, 1986 through November 30, 1987.
*** For the period from the inception of Class C shares, April 1, 1996 through August
31, 1996.
+ Annualized.
## For the fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
sec. 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 $ -- $ -- $ -- $ -- $ 0.03 $ 0.01
Ratios (to average
net assets):
Expenses##....... 2.13% -- -- -- -- 2.05% 1.89%+
Net investment
income.......... 4.44% -- -- -- -- 3.47% 3.50%+
</TABLE>
3. THE FUND
The Fund is a diversified series of the Trust, an open-end management investment
company which was organized as a business trust under the laws of The
Commonwealth of Massachusetts 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 continuously sold to the public and
7
<PAGE> 104
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.
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
8
<PAGE> 105
such as negotiable certificates of deposit (Eurodollars). Since the portfolio of
the Fund may contain such securities, an investment therein may involve a
greater degree of risk than an investment in a fund which invests only in debt
obligations of U.S. domestic issuers, due to the possibility that there may be
less publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war or expropriation. The Fund may
invest up to 75% of its assets in all finance companies as a group, all banks
and bank holding companies as a group and all utility companies as a group, when
in the opinion 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. CERTAIN SECURITIES AND 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
9
<PAGE> 106
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 Conduct Rules
of the National Association of Securities Dealers, Inc. (the "NASD") and such
other policies as the Trustees may determine, the Adviser may consider sales of
shares of the Fund and of other investment company clients of MFD, as a factor
in the selection of broker-dealers to execute the Fund's portfolio transactions.
From time to time, the Adviser may direct certain portfolio transactions to
broker-dealer firms which, in turn, have agreed to pay a portion of the Fund's
operating expenses (e.g., fees charged by the custodian of the Fund's assets).
For a further discussion of portfolio trading, see the SAI.
The SAI includes a discussion of other investment policies and a listing of
specific investment restrictions which govern the Fund's investment policies.
The specific investment restrictions listed in the SAI may be changed without
shareholder approval unless indicated otherwise (see "Investment Restrictions"
in the SAI). Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, the Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
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"). Under
the Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. 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, 1997, MFS received management fees under the Advisory Agreement
of $1,509,721 (0.55% of the Fund's average daily net assets) before a reduction
of $273,794.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS Union
Standard Trust, MFS Variable Insurance Trust, MFS Institutional Trust, MFS/Sun
Life Series Trust and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
10
<PAGE> 107
("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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 29, 1997. As of such date, the MFS organization managed
approximately $44.2 billion of assets invested in equity securities and
approximately $20.1 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 is a subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., which in turn
is a wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life"). The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, 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., James O. Yost, Ellen M. Moynihan, Mark E. Bradley, all of whom
are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997 as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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.
11
<PAGE> 108
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. As used in the Prospectus and any appendices thereto the term
"dealer" includes any broker, dealer, bank (including bank trust departments),
registered investment adviser, financial planner and any other financial
institutions having a selling agreement or other similar agreement with MFD.
Dealers may 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 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.
12
<PAGE> 109
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 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
13
<PAGE> 110
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.
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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
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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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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
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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
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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 (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.
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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 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
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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 ("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 and Class C shares,
transactions will be aggregated on a calendar year basis -- all transactions
made during a calendar year, regardless of when during the year they have
occurred, will age one year at the close of business on December 31 of that year
and each subsequent year.
At the time of a redemption of Class B 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 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
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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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares 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 certain features of the
Distribution Plan that are common to each class of shares, as described below.
SERVICE FEES. The Distribution Plan provides that the Fund may pay MFD a service
fee of up to 0.25% of the average daily net assets attributable to the class of
shares to which the Distribution Plan relates (i.e., Class A 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
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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 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 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
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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 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.
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CURRENT LEVEL OF DISTRIBUTION AND SERVICE FEES. The Fund's Class A, Class B and
Class C distribution and service fees for its current fiscal year are 0.00%,
1.00% and 1.00% per annum, respectively. Payment of the 0.25% per annum Class A
service fee and 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.
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.
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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
its net investment income and net realized capital gains 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 the Fund's foreign-source income may be subject to foreign withholding
taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. The Fund expects that none of its distributions will be
eligible for the dividends received deduction for corporations. 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 advisers in this
regard.
Shortly after the end of each calendar year, each shareholder will be sent a
statement setting forth the federal income tax status of all dividends and
distributions for that year including the portion taxable as ordinary income,
the portion taxable as long-term capital gain (as well as the rate category or
categories under which such gains are taxable), the portion, if any,
representing a return of capital (which is free of current taxes but which
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% (or any
lower rate permitted under an applicable treaty) on taxable 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. The Fund is also required in certain
circumstances to apply backup withholding at the 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
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<PAGE> 121
Plan or on any other matter that affects solely that class of shares, but will
otherwise vote together with all other classes of shares of the series on all
other matters. The Trust does not intend to hold annual shareholder meetings.
The Declaration of Trust provides that a Trustee may be removed from office in
certain instances (see "Description of Shares, Voting Rights and Liabilities" in
the SAI).
Each share of each class of the Fund represents an equal proportionate interest
in the Fund, subject to the liabilities of that class, with each other share of
the Fund. Shares have no pre-emptive or conversion rights (except as set forth
in "Purchases -- Conversion of Class B Shares"). Shares are fully paid and
non-assessable. Should a series of the Fund be liquidated, the shareholders of
each class are entitled to share pro rata in the net assets attributable to that
class available for distribution to shareholders. Shares will remain on deposit
with the Shareholder Servicing Agent and certificates will not be issued.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance (e.g., fidelity bonding and errors and omissions insurance)
existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund may advertise its yield and effective yield for each
class of shares. Both yield and effective yield are based on historical earnings
and are not intended to indicate future performance. The yield of a class of
shares of the Fund refers to the income allocable to that class generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then annualized; that is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in the class of shares of the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield and effective yield calculations for Class B 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, 1997, 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.
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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 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
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<PAGE> 123
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may 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.
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, 1998, 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
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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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<PAGE> 125
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. As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD.
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 MFD
serves as distributor;
- Employees, directors, partners, officers and trustees of any sub-adviser to
any MFS Fund;
- Employees or registered representatives of dealers;
- Certain family members of any such individual and their spouses identified
above and certain trusts, pension, profit-sharing or other retirement plans
for the sole benefit of such persons, provided the shares are not resold
except to the MFS Fund which issued the Shares; and
- Institutional Clients of MFS or MFS Institutional Advisors, Inc. ("MFSI").
4. INVOLUNTARY REDEMPTIONS
- 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
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- Distributions made on or after the IRA owner has attained the age of 70 1/2
years old, but only with respect to the minimum distribution under
applicable Internal Revenue Code ("Code") rules.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Distributions made on or after the 401(a) or ESP Plan participant, as
applicable, has attained the age of 70 1/2 years old, but only with respect
to the minimum distribution under applicable Code rules;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will constitute
new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- 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
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- 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. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
8. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including registered
investment advisers and financial planners) which have established certain
operational arrangements with MFD which include a requirement that such
shares be sold for the sole benefit of clients participating in a "wrap"
account, mutual fund "supermarket" account or a similar program under which
such clients pay a fee to such dealer.
9. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code of
1986, as amended) of the account value at the time of establishment.
10. 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.
11. 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
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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.
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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.
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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.
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NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
FITCH INVESTORS 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.
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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
<PAGE> 134
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Bulk Rate
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MFS
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[MFS LOGO]
We invented the mutual fund[SM]
MFS(R) CASH RESERVES FUND
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 135
[MFS LOGO]
<TABLE>
<S> <C>
MFS(R) CASH STATEMENT OF
RESERVE FUNDSM ADDITIONAL INFORMATION
(A member of the MFS Family of
Funds(R)) January 1, 1998
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
1. Definitions........................................................................... 2
2. Certain Securities and Investment Techniques.......................................... 2
3. Investment Restrictions............................................................... 2
4. Management of the Fund................................................................ 4
Trustees.......................................................................... 4
Officers.......................................................................... 4
Trustee Compensation Table........................................................ 5
Investment Adviser................................................................ 6
Custodian......................................................................... 6
Administrator..................................................................... 7
Shareholder Servicing Agent....................................................... 7
Distributor....................................................................... 7
5. Portfolio Transactions and Brokerage Commissions...................................... 7
6. Shareholder Services.................................................................. 8
Investment and Withdrawal Programs................................................ 8
Exchange Privilege................................................................ 10
Tax-Deferred Retirement Plans..................................................... 11
7. Tax Status............................................................................ 11
8. Net Income and Distributions.......................................................... 12
9. Performance Information............................................................... 12
10. Distribution Plan..................................................................... 14
11. Description of Shares, Voting Rights and Liabilities.................................. 15
12. Independent Auditors and Financial Statements......................................... 15
Appendix A -- Performance Information................................................. A-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, 1998. 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> 136
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS(R) Cash Reserve Fund, a
series of MFS Series Trust I
(the "Trust"), a
Massachusetts business
trust. The Trust was previ-
ously known as "MFS Lifetime
Managed Sectors Fund" prior
to August 1, 1993. On August
3, 1992, the Trust changed
its name from "Lifetime
Managed Sectors Trust." The
Fund is the successor to MFS
Lifetime Money Market Fund,
which was reorganized as a
series of the Trust on
September 7, 1993.
"MFS" or the -- Massachusetts Financial
"Adviser" Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1998, as
amended or supplemented from
time to time.
</TABLE>
2. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The Fund's 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) and the Fund's
nonfundamental investment restriction regarding illiquid securities, these
investment restrictions and policies are adhered to at the time of purchase or
utilization of assets; a subsequent change in
2
<PAGE> 137
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.
(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.
3
<PAGE> 138
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.
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 (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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November, 1997) 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 8/18/26)
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* (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
NACCO Industries (holding company), Chairman (prior to June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director. Address: 36080
Shaker Blvd., Hunting Valley, 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
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
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 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 below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued, and estimated benefits payable under, the
retirement plan.
4
<PAGE> 139
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.................... $3,725 $1,005 10 $247,168
A. Keith Brodkin..................... -0- -0- N/A -0-
Marshall N. Cohan.................... 4,175 2,050 14 149,258
Dr. Lawrence Cohn.................... 3,500 730 18 136,508
Sir David Gibbons.................... 3,725 1,642 13 136,508
Abby M. O'Neill...................... 3,725 837 10 123,758
Walter E. Robb, III.................. 4,175 2,050 15 149,258
Arnold D. Scott...................... -0- -0- N/A -0-
Jeffrey L. Shames.................... -0- -0- N/A -0-
J. Dale Sherratt..................... 5,300 820 20 149,258
Ward Smith........................... 5,300 1,025 13 149,258
</TABLE>
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 75. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND UPON RETIREMENT(4)
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
AVERAGE TRUSTEE FEES 3 5 7
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$3,150 $472 $ 787 $1,102
3,686 553 921 1,290
4,222 633 1,055 1,478
4,757 714 1,189 1,665
5,293 794 1,323 1,853
5,829 874 1,457 2,040
<CAPTION>
10 OR MORE
- ----------------------------------------------
<S> <C>
$1,575
1,843
2,111
2,379
2,647
2,914
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of November 29, 1997, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
As of November 29, 1997, Worldwide Transactions Limited, Attn: Ian Dickson,
Washington Mall West, Reid Street, 4th Floor, Hamilton, Bermuda HM11, was the
record owner of 5.96% 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 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.
5
<PAGE> 140
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 is an indirect 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"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives 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, 1997, 1996 and 1995, the Adviser
received management fees under the Fund's Advisory Agreement of $1,509,721,
$1,191,151 and $1,134,567 (before reductions of $273,794, $215,813 and
$206,280), respectively.
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, 1997, see "Statement of Operations" in the Fund's
Annual Report to shareholders dated August 31, 1997 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, 1998,
and will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's shares (as defined in "Investment 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 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.
6
<PAGE> 141
ADMINISTRATOR: MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement dated March 1, 1997 as amended. Under
this Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum
of the Fund's average daily net assets. This fee reimburses MFS for a portion of
the costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Administrative Services
Agreement of $23,063.
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 the Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by the Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. 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 year ended August 31, 1997, the Contingent Deferred Sales
Charges ("CDSC") imposed on redemption of Class A shares was $49. During the
fiscal years ended August 31, 1997, 1996 and 1995, the CDSC imposed on
redemption of Class B shares was $1,111,045, $793,596 and $769,924,
respectively. During the fiscal year ended August 31, 1997 and the period from
April 1, 1996 through August 31, 1996, the CDSC imposed on shareholder
redemptions of Class C shares was $24,444 and $2,440, respectively.
The Distribution 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 vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and in either case, by a
majority of the Trustees who are not parties to such Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
5. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
employees of the Adviser, who are appointed and supervised by its senior
officers. Changes in the Fund's investments are reviewed by the Board of
Trustees. The Fund's portfolio manager may serve other clients of the Adviser or
any subsidiary of MFS in a similar capacity.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and other
clients of the Adviser on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities, such as government securities, which are
principally traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Adviser
normally seeks to deal directly with the primary market makers, unless in its
opinion, better prices are available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. From time to time, soliciting
dealer fees are available to the Adviser on the tender of the Fund's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer 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
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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 $50,980 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, 1997, 1996 and 1995, 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 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
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the differences in objectives and policies before making any investment.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
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 signed by the record owner(s) exactly as shares
are registered;
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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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local income taxes, on the dividends and capital gain distributions
they receive from the Fund. Dividends from ordinary income are taxable to the
shareholders as ordinary income for federal income tax purposes whether the
distributions are paid in cash or reinvested 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 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 the rate of 30%. The Fund intends
to withhold U.S. federal income tax payments at the rate of 30% (or any lower
rate permitted under an applicable treaty) on taxable dividends or other
payments made to Non-U.S. Persons that are subject to such withholding. 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 paid to any shareholder (including a Non-U.S.
Person) who does not furnish to the Fund certain information and certifications
or who is otherwise subject to backup withholding. Backup withholding will not,
however, be applied to payments which have been subject to 30% withholding.
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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.
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, Martin Luther King, Jr. 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
12
<PAGE> 147
losses from the sale of securities or any unrealized appreciation or
depreciation on portfolio securities. In addition, any effective yield quotation
of each class of the Fund so used shall be calculated by compounding the current
yield quotation for such period by multiplying such quotation by 7/365, adding 1
to the product, raising the sum to a power equal to 365/7, and subtracting 1
from the result. These yield quotations should not be considered as
representative of the yield of each class of the Fund in the future since the
yield will vary based on the type, quality and maturities 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 A attached hereto under the heading
"Performance Quotations."
PERFORMANCE RESULTS -- The performance results presented in Appendix A attached
hereto under the heading "Performance Results" assume an initial investment in
Class B shares of $10,000, and cover the period from January 1, 1987 through
December 31, 1996. It has been assumed that dividend and capital gain
distributions were reinvested in additional shares. Any performance results
provided by the Fund should not be considered as representative of the
performance of the Fund in the future. 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 Securities Corporation, 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").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
13
<PAGE> 148
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed/income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified
market-value-adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
10. DISTRIBUTION 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, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF
AMOUNT OF DISTRIBUTION DISTRIBUTION
DISTRIBUTION AND SERVICE AND SERVICE
AND SERVICE FEES FEES
FEES PAID RETAINED RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
- ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Class B Shares.......... $ 2,281,359 $ 1,746,133 $ 535,226
Class C Shares.......... $ 120,624 $ 15 $ 120,609
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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
14
<PAGE> 149
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, Class A shares, Class B
shares and Class C shares, of the Fund, as well as Class A, B, C and I shares
for three of the Trust's other series, Class A and I shares for eight of the
Trust's other series and Class A, B and I shares for one of the Trust's other
series. Each share of a class of the Fund represents an equal proportionate
interest in the assets of the Fund allocable to that class. Upon liquidation of
the Fund, shareholders of each class are entitled to share pro rata in the net
assets of the Fund allocable to such class available for distribution to
shareholders. The Trust reserves the right to create and issue additional series
or classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, shareholders
have under certain circumstances the right to remove one or more Trustees in
accordance with the provisions of Section 16(c) of the 1940 Act. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the Trust's shares. Shares have no pre-emptive or conversion
rights (except as set forth in "Purchases-Conversion of Class B Shares" in the
Prospectus). The Trust may enter into a merger or consolidation, or sell all or
substantially all of its assets (or all or substantially all of the assets
belonging to any series of the Trust), if approved by the vote of the holders of
two-thirds of the Trust's outstanding shares voting as a single class, or of the
affected series of the Trust, as the case may be, except that if the Trustees of
the Trust recommend such merger, consolidation or sale, the approval by vote of
the holders of a majority of the Trust's or the affected series' outstanding
shares (as defined in "Investment Restrictions") will be sufficient. The Trust
or any series of the Trust may also be terminated (i) upon liquidation and
distribution of its assets, if approved by the vote of the holders of two-thirds
of its outstanding shares, or (ii) by the Trustees by written notice to the
shareholders of the Trust or the affected series. If not so terminated, the
Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that it shall maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, Trustees, officers, employees and agents covering
possible tort or other liabilities. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance existed and the Trust itself was unable to
meet its obligations.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
12. INDEPENDENT AUDITORS AND
FINANCIAL STATEMENTS
Deloitte & Touche LLP are the Fund's independent auditors, providing audit
services, tax return preparation, and assistance and consultation with respect
to the preparation of filings with the SEC.
The Portfolio of Investments at August 31, 1997, the Statement of Assets and
Liabilities at August 31, 1997, the Statement of Operations for the year ended
August 31, 1997, the Statement of Changes in Net Assets for the two years ended
August 31,
15
<PAGE> 150
1997 and 1996, 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.
16
<PAGE> 151
APPENDIX A
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 B 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, 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
December 31, 1996............................................ 10,000 0 4,858 14,858
</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
All performance quotations are as of August 31, 1997.
<TABLE>
<CAPTION>
7-DAY 7-DAY
CURRENT EFFECTIVE
ANNUALIZED ANNUALIZED
YIELD YIELD
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A shares...................................................................... 4.64% 4.75%
Class B shares...................................................................... 3.66% 3.73%
Class C shares...................................................................... 3.66% 3.73%
</TABLE>
A-1
<PAGE> 152
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street, Boston, MA 02116
(617)954-5000
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
(617)954-5000
CUSTODIAN AND DIVIDEND DISBURSING AGENT
State Street Bank & Trust Company
225 Franklin Street, Boston, MA 02110
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street, Boston, MA 02110
MFS(R)
CASH RESERVE
FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MCR-13-1/97/500 01/201/301
<PAGE> 153
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) CASH RESERVE FUND
[Graphic omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Portfolio Manager's Overview .............................................. 2
Portfolio Manager's Profile ............................................... 3
Portfolio Concentration ................................................... 3
Fund Facts ................................................................ 3
Portfolio of Investments .................................................. 4
Financial Statements ...................................................... 5
Notes to Financial Statements ............................................. 11
Independent Auditors' Report .............................................. 16
Trustees and Officers ..................................................... 17
- --------------------------------------------------------------------------------
HIGHLIGHTS
o THE ANNUALIZED COMPOUNDED YIELD ON AN INVESTMENT IN CLASS A SHARES OF THE
FUND FOR THE SEVEN-DAY PERIOD ENDED AUGUST 31, 1997, ROSE TO 4.75%, FROM
4.71% ON AUGUST 31, 1996, WHILE THE YIELDS ON CLASS B AND CLASS C SHARES
ROSE TO 3.73%, FROM 3.60% AND 3.70%, RESPECTIVELY.
o ON MARCH 25, 1997, THE FEDERAL RESERVE BOARD RAISED THE FEDERAL FUNDS RATE
0.25%, FROM 5.25% TO 5.50%. AS A RESULT, YIELDS ON 90-DAY COMMERCIAL PAPER
HAVE RISEN APPROXIMATELY 20 BASIS POINTS (0.20%) OVER THE PAST YEAR.
o THE FUND'S AVERAGE MATURITY OF 39 DAYS IS SHORTER THAN THE IBC DONOGHUE
INDEX OF 63 DAYS BECAUSE THE FUND IS SEEKING TO TAKE ADVANTAGE OF THE
HIGHER YIELDS THAT WILL RESULT IF THE ECONOMY BEGINS TO ACCELERATE.
o APPROXIMATELY 39% OF THE FUND'S NET ASSETS ARE INVESTED IN COMMERCIAL
PAPER, WITH THE BALANCE INVESTED IN U.S. GOVERNMENT-GUARANTEED SECURITIES,
A REFLECTION OF THE NARROW YIELD SPREADS BETWEEN GOVERNMENT-AGENCY
OBLIGATIONS AND COMMERCIAL PAPER.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
In January 1998, shareholders will be mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1997.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. The rapid
pace of growth seen in the first quarter slowed slightly in the second quarter,
to an annual rate of 3.3%. While real (inflation-adjusted) growth could moderate
further in the third quarter, we believe economic momentum will carry well into
the first quarter of 1998. The money supply is increasing at a rapid rate, the
housing and automobile markets are strengthening, and it now appears that
Christmas sales could be quite good. Because economic growth continues to be
impressive, markets are likely to begin focusing on the Federal Reserve Board's
(the Fed's) willingness to raise interest rates.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule out
the possibility of future monetary tightening in the second half of the year if,
as we now expect, the economy strengthens during the balance of 1997. Therefore,
our risk/reward outlook for the fixed-income markets is neutral, and we believe
that fixed-income investors should think in terms of earning the coupon income
from their investments rather than seeking possible gains from price
appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGER'S OVERVIEW
[Photo of Geoffrey L. Kurinsky]
Dear Shareholders:
Since August 31, 1996, short-term interest rates have moved modestly higher. 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, 1997, rose to 4.75%, from
4.71% at the beginning of the period. The annualized compounded yield on an
investment in Class B shares rose to 3.73%, from 3.60%, and in Class C shares to
3.73%, from 3.70%.
On March 25, 1997, the Federal Reserve Board raised the federal funds rate (the
interest rate charged by banks to other banks in need of overnight loans) 25
basis points (0.25%), from 5.25% to 5.50%. As a result, yields on 90-day
commercial paper have risen approximately 20 basis points (0.20%) over the past
year. In the next few months, we expect short-term rates to remain stable, with
a possible tightening by year-end if the economy shows signs of inflationary
pressures.
The Fund's average maturities have been relatively neutral to short over the
past 12 months. The average maturity of the Fund as of August 31, 1997, was 39
days, versus 41 days on August 31, 1996. This is shorter than the IBC Donoghue
Index of 63 days because the Fund is seeking to take advantage of the higher
yields that will result if the economy begins to accelerate.
The portfolio continues to include only the highest-quality corporate, bank, and
government securities in order to help provide investors with security against
credit risk. On August 31, 1997, approximately 39% of the Fund's net assets were
invested in commercial paper, with the balance invested in securities issued or
guaranteed by the U.S. Treasury or agencies or instrumentalities of the U.S.
government. (Government guarantees apply to individual securities only and not
to prices and yields of shares in a managed portfolio.) The large position in
government-guaranteed paper is due to the narrow yield spreads between
government-agency obligations and commercial paper. We believe this emphasis on
quality should allow the Fund to continue to help investors obtain current
income and, at the same time, preserve capital and liquidity.
Respectfully,
/s/ Geoffrey L. Kurinsky
Geoffrey L. Kurinsky
Portfolio Manager
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
GEOFFREY L. KURINSKY BEGAN HIS CAREER AT MFS IN 1987 IN THE FIXED INCOME
DEPARTMENT. A GRADUATE OF THE UNIVERSITY OF MASSACHUSETTS AND THE BOSTON
UNIVERSITY 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(R) CASH RESERVE FUND SINCE 1992.
- --------------------------------------------------------------------------------
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
Commercial Paper 39.2%
Repurchase Agreements 20.1%
Other Sectors 4.4%
U. S. Government & Agency Obligations 36.3%
- --------------------------------------------------------------------------------
FUND FACTS
OBJECTIVE: 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.
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.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A SHARES: SEPTEMBER 7, 1993
CLASS B SHARES: DECEMBER 29, 1986
CLASS C SHARES: APRIL 1, 1996
SIZE: $305.8 MILLION NET ASSETS AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
<TABLE>
<CAPTION>
Commercial Paper - 39.2%
- ------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
American Express Credit Corp., due 9/23/97 $ 8,000 $ 7,973,258
Atlantic Richfield Co., due 9/09/97 6,000 5,992,720
Bank of America Federal Savings Bank, due 12/17/97 7,000 6,884,321
Bankers Trust New York Corp., due 10/08/97 5,000 4,971,736
Beneficial Corp., due 9/24/97 7,000 6,975,448
Carolina Power & Light Co., due 10/29/97 5,000 4,955,614
Coca-Cola Co., due 10/17/97 7,500 7,447,771
du Pont (E.I.) de Nemours & Co., due 11/25/97 - 12/05/
97 10,000 9,861,583
Ford Motor Credit Corp., due 10/07/97 7,000 6,961,360
General Electric Capital Corp., due 11/17/97 7,300 7,213,031
Goldman Sachs Group LP, due 9/19/97 5,000 4,986,250
GTE Funding, Inc., due 9/08/97 6,000 5,993,560
Hershey Foods Corp., due 10/30/97 - 12/04/97 11,000 10,874,504
Merrill Lynch & Co., Inc., due 10/21/97 8,000 7,938,778
PepsiCo, Inc., due 9/22/97 7,000 6,977,623
Procter & Gamble Co., due 12/19/97 7,000 6,884,066
Toys-R-Us, Inc., due 9/10/97 7,000 6,990,410
- ------------------------------------------------------------------------------------------------
Total Commercial Paper $119,882,033
- ------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations - 36.3%
- ------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 10/01/97 - 1/06/98 $32,515 $ 32,177,145
Federal Home Loan Bank, due 11/21/97 5,000 4,939,250
Federal Home Loan Mortgage Corp., due 9/12/97 - 9/18/97 15,450 15,417,935
Federal National Mortgage Assn., due 9/03/97 - 11/10/97 51,800 51,578,912
Tennessee Valley Authority, due 10/23/97 7,000 6,945,299
- ------------------------------------------------------------------------------------------------
Total U.S. Government and Agency Obligations $111,058,541
- ------------------------------------------------------------------------------------------------
Repurchase Agreement - 20.1%
- ------------------------------------------------------------------------------------------------
Goldman Sachs, dated 8/29/97, due 9/02/97, total to be received $61,478,889
(secured by various U.S. Treasury and Federal Agency obligations in a
jointly traded
account), at Cost $61,441 $ 61,441,000
- ------------------------------------------------------------------------------------------------
Total Investments, at Amortized Cost and Value $292,381,574
Other Assets, Less Liabilities - 4.4% 13,414,778
- ------------------------------------------------------------------------------------------------
Net assets - 100.0% $305,796,352
- ------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
AUGUST 31, 1997
- ------------------------------------------------------------------------------
Assets:
Investments, at amortized cost and value $230,940,574
Repurchase agreements, at cost and value 61,441,000
------------
Total investments, at amortized cost and value $292,381,574
Cash 101,689
Receivable for Fund shares sold 15,463,902
Interest receivable 28,416
Other assets 1,771
------------
Total assets $307,977,352
------------
Liabilities:
Distributions payable $ 59,400
Payable for Fund shares reacquired 1,770,701
Payable to affiliates -
Management fee 10,383
Shareholder servicing agent fee 3,000
Distribution and service fee 137,331
Administrative fee 346
Accrued expenses and other liabilities 199,839
------------
Total liabilities $ 2,181,000
------------
Net assets (represented by paid-in capital) $305,796,352
============
Shares of beneficial interest outstanding 305,796,352
===========
Class A shares:
Net asset value and offering price per share
(net assets of $45,007,475 / 45,007,475 shares of
beneficial interest outstanding) $1.00
=====
Class B shares:
Net asset value and offering price per share
(net assets of $244,415,917 / 244,415,917 shares of
beneficial interest outstanding) $1.00
=====
Class C shares:
Net asset value and offering price per share
(net assets of $16,372,960 / 16,372,960 shares of
beneficial interest outstanding) $1.00
=====
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------
Net investment income:
Interest $14,970,444
-----------
Expenses -
Management fee $ 1,509,721
Trustees' compensation 53,391
Shareholder servicing agent fee 244,509
Shareholder servicing agent fee (Class A) 15,339
Shareholder servicing agent fee (Class B) 162,312
Shareholder servicing agent fee (Class C) 3,845
Distribution and service fee (Class B) 2,281,359
Distribution and service fee (Class C) 120,624
Administrative fee 23,063
Custodian fee 134,315
Postage 126,643
Printing 79,853
Auditing fees 36,989
Legal fees 6,986
Miscellaneous 472,223
-----------
Total expenses $ 5,271,172
Reduction of expenses by investment adviser (273,794)
Fees paid indirectly (56,100)
-----------
Net expenses $ 4,941,278
-----------
Net investment income $10,029,166
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,029,166 $ 7,957,386
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,559,182) $ (952,277)
From net investment income (Class B) (8,040,982) (6,950,327)
From net investment income (Class C) (429,002) (54,782)
-------------- --------------
Total distributions declared to shareholders $ (10,029,166) $ (7,957,386)
-------------- --------------
Fund share (principal) transactions at net asset value
of $1.00 per share -
Net proceeds from sale of shares $2,376,194,909 $1,510,970,601
Net asset value of shares issued to shareholders in
reinvestment of distributions 7,800,528 6,339,137
Cost of shares reacquired (2,373,905,725) (1,398,974,685)
-------------- --------------
Total increase in net assets $ 10,089,712 $ 118,335,053
Net assets:
At beginning of period 295,706,640 177,371,587
-------------- --------------
At end of period $ 305,796,352 $ 295,706,640
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, NINE MONTHS ENDED YEAR ENDED
--------------------------------------- AUGUST 31, NOVEMBER 30,
1997 1996 1995 1994 1993*
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
<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) $ 0.05 $ 0.04 $ 0.05 $ 0.02 $ 0.01
Less distributions declared to shareholders
from net investment income (0.05) (0.04) (0.05) (0.02) (0.01)
------ ------ ------ ------ ------
Net asset value - end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total return 4.64% 4.75% 4.91% 2.89%+ 2.28%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.93% 0.84% 0.90% 0.86%+ 0.92%+
Net investment income 4.54% 4.62% 4.94% 3.11%+ 2.26%+
Net assets at end of period (000 omitted) $45,007 $37,872 $10,852 $2,156 $49
* For the period from the commencement of the Fund's offering of Class A shares, September 7, 1993, through November 30,
1993.
+ Annualized.
## For the 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 the ratios would have been:
Net investment income $ 0.04 $ 0.04 $ 0.05 $ 0.02 $ 0.01
Ratios (to average net assets):
Expenses## 1.03% 0.94% 1.00% 0.96%+ 1.02%+
Net investment income 4.44% 4.52% 4.84% 3.01%+ 2.16%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED AUGUST 31, ENDED NOVEMBER 30,
-------------------------------------------- AUGUST 31, -------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Net investment income(S) $ 0.03 $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Less distributions declared to
shareholders from net
investment income (0.03) (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 $ 1.00
====== ====== ====== ====== ====== ======
Total return 3.58% 3.64% 3.81% 1.79%+ 1.16% 1.79%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.95% 1.92% 1.93% 1.94%+ 2.00% 2.22%
Net investment income 3.53% 3.58% 3.69% 1.88%+ 1.19% 1.83%
Net assets at end of period
(000 omitted) $244,416 $251,192 $166,519 $213,635 $155,274 $125,439
+ Annualized.
## For the 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 $ 0.03 $ 0.04 $ 0.04 $ 0.01 $ 0.01 $ 0.02
Ratios (to average net assets):
Expenses## 2.05% 2.02% 2.03% 2.04%+ 2.10% 2.32%
Net investment income 3.43% 3.48% 3.59% 1.78%+ 1.09% 1.73%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
---------------------------------------------------------------------- -------------------------
1991 1990 1989 1988 1987** 1997 1996***
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------ ------
Net investment income(S) $ 0.04 $ 0.06 $ 0.07 $ 0.06 $ 0.04 $ 0.03 $ 0.01
Less distributions declared to
shareholders from net investment
income (0.04) (0.06) (0.07) (0.06) (0.04) (0.03) (0.01)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ====== ======
Total return 4.56% 6.12% 7.34% 5.85% 4.42%+ 3.60% 3.67%+
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.04% 2.23% 2.24% 2.06% 2.06%+ 1.95% 1.79%+
Net investment income 4.53% 6.06% 7.10% 5.59% 5.59%+ 3.57% 3.60%+
Net assets at end of period
(000 omitted) $161,040 $203,314 $146,885 $139,518 $83,845 $16,373 $6,642
** For the period from the commencement of the Fund's investment operations, December 29, 1986, through November 30, 1987.
*** For the period from the commencement of the Fund's offering of Class C shares, April 1, 1996 through August 31, 1996.
+ Annualized.
## For the 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 $ -- $ -- $ -- $ -- $ 0.03 $ 0.01
Ratios (to average net assets):
Expenses## 2.13% -- -- -- -- 2.05% 1.89%+
Net investment income 4.44% -- -- -- -- 3.47% 3.50%+
</TABLE>
See notes to financial statements
<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 Service
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 premiums and
original issue discounts are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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. Distributions to
shareholders are recorded on the ex-dividend date.
At August 31, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $2,141 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on August 31, 1999 ($1,587), and August 31, 2003 ($554).
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 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 (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.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
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 $19,766 for the year ended
August 31, 1997.
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 Fund's 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. Payment of the 0.10% per annum distribution fee will
commence on such date as the Trustees of the Fund may determine and payment of
the 0.25% per annum service fee will commence on the date that the value of the
net assets attributable to Class A shares first equals or exceeds $40 million.
The Fund's distribution plan provides that the Fund will pay MFD up to 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.
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 $35,181 and $15 for Class B and Class C shares, respectively, for the year
ended August 31, 1997. Fees incurred under the distribution plans during the
year ended August 31, 1997, 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 with six years of purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
C shares in the event of a shareholder redemption within 12 months of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended August 31, 1997, were $49, $1,111,045, and
$24,444 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 Fund at an effective annual
rate of 0.13%. Prior to January 1, 1997, the fee was calculated as a percentage
of the average daily net assets of each class of shares 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 $2,520,018,708 and $2,592,903,821,
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 were as follows:
Class A Shares
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1997 1996
- -------------------------------------------------------------------------------
Shares sold 464,216,561 245,119,340
Shares issued to shareholders in reinvestment
of distributions 1,204,025 783,890
Shares reacquired (458,285,289) (218,883,250)
------------- ------------
Net increase 7,135,297 27,019,980
============= ============
Class B Shares
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1997 1996
- -------------------------------------------------------------------------------
Shares sold 1,779,272,175 1,241,524,357
Shares issued to shareholders in reinvestment
of distributions 6,235,121 5,508,091
Shares reacquired (1,792,283,819) (1,162,359,397)
------------- ------------
Net increase (decrease) (6,776,523) 84,673,051
============= ============
Class C Shares
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
1997 1996*
- -------------------------------------------------------------------------------
Shares sold 132,706,173 24,326,904
Shares issued to shareholders in reinvestment
of distributions 361,382 47,156
Shares reacquired (123,336,617) (17,732,038)
------------- ------------
Net increase 9,730,938 6,642,022
============= ============
* For the period from the commencement of the Fund's offering of Class C shares,
April 1, 1996, through August 31, 1996.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
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, 1997, was $2,700.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Cash Reserve Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Cash Reserve Fund (one of the series
constituting MFS Series Trust I) as of August 31, 1997, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended August 31, 1997 and 1996, and the financial highlights for each
of the years in the three-year period ended August 31, 1997, 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, 1997 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, 1997, 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 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) CASH RESERVE FUND
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
State Street Bank and Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Deloitte & Touche LLP
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime
Executive Officer, Edmund Gibbons Ltd.; from a touch-tone telephone.
Chairman, Bank of N.T. Butterfield & Son Ltd.
For information on MFS mutual funds, call
Abby M. O'Neill - Private Investor; your financial adviser or, for an
Director, Rockefeller Financial Services, information kit, call toll free:
Inc. (investment advisers) 1-800-637-2929 any business day from 9
a.m. to 5 p.m. Eastern time (or leave a
Walter E. Robb, III - President and message anytime).
Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); INVESTOR SERVICE
President, Benchmark Consulting Group, MFS Service Center, Inc.
Inc. (office services); Trustee, Landmark P.O. Box 2281
Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and For service to speech- or
Director, Massachusetts Financial Services Company hearing-impaired, call toll free:
1-800-637-6576 any business day from 9
J. Dale Sherratt - President, Insight a.m. to 5 p.m. Eastern time. (To use this
Resources, Inc. (acquisition planning specialists) service, your phone must be equipped with
a Telecommunications Device for the Deaf.)
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand For share prices, account balances, and
Corporation exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
DISTRIBUTOR
MFS Fund Distributors, Inc. [DALBAR For the fourth year in a row,
500 Boylston Street LOGO] MFS earned a #1 ranking in the
Boston, MA 02116-3741 DALBAR, Inc. Broker/Dealer Survey,
Main Office Operations Service Quality
PORTFOLIO MANAGER Category. The firm achieved a 3.42
Geoffrey L. Kurinsky* overall score on a scale of 1 to 4 in
the 1997 survey. A total of 111 firms
TREASURER responded, offering input on the
W. Thomas London* quality of service they received from
29 mutual fund companies nationwide.
ASSISTANT TREASURERS The survey contained questions about
Mark E. Bradley* service quality in 11 categories,
Ellen Moynihan* including "knowledge of operations
James O. Yost* contact," "keeping you informed,"
"ease of doing business" with the firm.
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) CASH BULK RATE
RESERVES FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116-3741
MCR-2 10/97 45M 01/201/301
<PAGE> 154
MFS WORLD ASSET ALLOCATION FUND
SUPPLEMENT TO THE JANUARY 1, 1998 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,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: CLASS I
-------
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) ....................................................... 0.36%
-----
Total Operating Expenses ................................................... 0.96%
</TABLE>
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended August 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $10
3 years......................... 31
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP.
-1-
<PAGE> 155
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
----------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 17.56
=========
Income from investment operations # -
Net investment income $ 0.28
Net realized and unrealized gain
on investments and foreign currency transactions 1.16
---------
Total from investment operations $ 1.44
=========
Less distributions declared to shareholders -
From net investment income (0.26)
---------
Total distributions declared to shareholders (0.26)
---------
Net asset value - end of period $ 18.74
=========
Total return 8.22%++
Ratios (to average net assets)/
Supplemental data:
Expenses ## 0.97%+
Net investment income 3.43%+
Portfolio turnover 128%
Average Commission Rate $ 0.0000
Net assets at end of period
(000 omitted) $ 34
</TABLE>
- --------------------------
* For the period from the inception of Class I shares, January 7, 1997
through August 31, 1997.
+ Annualized
++ Not annualized
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor of
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
-2-
<PAGE> 156
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 4.75% of the offering price (or a contingent deferred sales
charge (a "CDSC") upon redemption of 1.00% during the first year in the case of
purchases of $1 million or more and certain purchases by retirement plans), and
are subject to an annual distribution fee and service fee up to a maximum of
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC upon redemption of 1.00% during the first year and an annual distribution
fee and service fee up to a maximum of 1.00% per annum. Class I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
-3-
<PAGE> 157
<TABLE>
<S> <C>
PROSPECTUS
JANUARY 1, 1998
CLASS A SHARES OF BENEFICIAL
INTEREST
MFS(R) WORLD ASSET CLASS B SHARES OF BENEFICIAL
ALLOCATION FUND(SM) INTEREST
(A member of the MFS Family of CLASS C SHARES OF BENEFICIAL
Funds(R)) INTEREST
</TABLE>
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS World Asset Allocation Fund (the "Fund"), a
non-diversified series of MFS Series Trust I (the "Trust"). The investment
objective of 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). 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."
(continued on next page)
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.
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> 158
(continued from previous page)
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, 1998, 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 44 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site
(http://www.sec.gov) that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary.............................................. 3
2. Condensed Financial Information.............................. 5
3. The Fund..................................................... 8
4. Investment Objective and Policies............................ 8
5. Certain Securities and Investment Techniques................. 10
6. Additional Risk Factors...................................... 20
7. Management of the Fund....................................... 23
8. Information Concerning Shares of the Fund.................... 25
Purchases.................................................. 25
Exchanges.................................................. 32
Redemptions and Repurchases................................ 33
Distribution Plan.......................................... 36
Distributions.............................................. 38
Tax Status................................................. 39
Net Asset Value............................................ 40
Description of Shares, Voting Rights and Liabilities....... 40
Performance Information.................................... 40
Expenses................................................... 41
9. Shareholder Services......................................... 42
Appendix A................................................... A-1
Appendix B................................................... B-1
Appendix C................................................... C-1
</TABLE>
2
<PAGE> 159
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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 OF THE FUND (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<S> <C> <C> <C>
Management Fees.............. 0.60% 0.60% 0.60%
Rule 12b-1 Fees.............. 0.50%(2) 1.00%(3) 1.00%(3)
Other Expenses(4)............ 0.36% 0.36% 0.36%
---- ---- ----
Total Operating Expenses..... 1.46% 1.96% 1.96%
</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 "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. During the current fiscal year, fees attributable to Class A Shares
were reduced by the distributor, and fees were paid at an effective rate of
0.47% per annum. The new fee arrangement became effective April 1, 1997.
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 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) 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
<PAGE> 160
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in the Fund, assuming (a) a 5% annual return and (b) redemption at
the end of each of the time periods indicated (unless otherwise noted):
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C
- ------------------------ ------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(1)
1 year................. $ 62 $ 60 $ 20 $ 30 $20(1)
3 years................ 91 92 62 62 62
5 years................ 123 126 106 106 106
10 years................ 214 215(2) 215(2) 229 229
</TABLE>
- ---------------
(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.
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.
4
<PAGE> 161
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to Shareholders which are incorporated by reference into
the SAI, in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
CLASS A, B AND C SHARES
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------
1997 1996 1995 1994*
-------- ------- ------- -------
CLASS A
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of period........ $ 17.68 $ 16.63 $ 15.33 $ 15.00
-------- ------- ------- -------
Income from investment operations# --
Net investment incomesec.................. $ 0.46 $ 0.43 $ 0.55 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions............................ 2.19 1.85 1.17 0.29
-------- ------- ------- -------
Total from investment operations...... $ 2.65 $ 2.28 $ 1.72 $ 0.33
-------- ------- ------- -------
Less distributions declared to shareholders --
From net investment income................ $ (0.40) $ (0.49) $ (0.37) $ --
From net realized gain on investments and
foreign currency transactions........... (1.18) (0.74) (0.05) --
-------- ------- ------- -------
Total distributions declared to
shareholders........................ $ (1.58) $ (1.23) $ (0.42) $ --
-------- ------- ------- -------
Net asset value -- end of period.............. $ 18.75 $ 17.68 $ 16.63 $ 15.33
======== ======= ======= =======
Total return++................................ 15.67% 14.23% 11.48% 2.20%++
Ratios (to average net assets)/Supplemental
datasec.:
Expenses##................................ 1.43% 1.48% 1.47% 1.50%+
Net investment income..................... 2.51% 2.45% 3.49% 2.43%+
Portfolio turnover............................ 128% 202% 118% 1%
Average commission rate###.................... $ 0.0000 $0.0219 $ -- $ --
Net assets at end of period (000 omitted)..... $111,959 $86,457 $58,663 $25,254
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares, July 22, 1994, through
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data 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.
++ 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.
sec. 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:
Net investment income.............. $ 0.45 $ 0.42 $ 0.52 $ 0.02
Ratios (to average net assets):
Expenses##...................... 1.46% 1.53% 1.67% 2.62%+
Net investment income........... 2.48% 2.40% 3.29% 1.31%+
</TABLE>
5
<PAGE> 162
FINANCIAL HIGHLIGHTS
CLASS B SHARES -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1997 1996 1995 1994**
-------- -------- ------- -------
CLASS B
<S> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value -- beginning of
period............................. $ 17.63 $ 16.58 $ 15.31 $ 15.00
-------- -------- ------- -------
Income from investment operations# --
Net investment incomesec......... $ 0.36 $ 0.32 $ 0.43 $ 0.02
Net realized and unrealized gain
on investments and foreign
currency transactions.......... 2.19 1.85 1.17 0.29
-------- -------- ------- -------
Total from investment
operations................. $ 2.55 $ 2.17 $ 1.60 $ 0.31
-------- -------- ------- -------
Less distributions declared to
shareholders --
From net investment income....... $ (0.30) $ (0.38) $ (0.28) $ --
In excess of net investment income... -- (0.74) (0.05) --
From net realized gain on
investments and foreign
currency transactions.......... (1.18) -- -- --
-------- -------- ------- -------
Total distributions declared
to shareholders............ $ (1.48) $ (1.12) $ (0.33) $ --
-------- -------- ------- -------
Net asset value -- end of period..... $ 18.70 $ 17.63 $ 16.58 $ 15.31
======== ======== ======= =======
Total return......................... 15.01% 13.58% 10.65% 2.07%++
Ratios (to average net
assets)/Supplemental datasec.:
Expenses##....................... 1.98% 2.10% 2.24% 2.57%+
Net investment income............ 1.96% 1.83% 2.75% 1.39%+
Portfolio turnover................... 128% 202% 118% 1%
Average commission rate###........... $ 0.0000 $ 0.0219 $ -- $ --
Net assets at end of period (000
omitted)........................... $166,865 $124,399 $83,601 $26,495
</TABLE>
- ---------------
<TABLE>
<C> <S>
** For the period from the inception of Class B shares, July 22, 1994, through
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data 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.
sec. 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:
Net investment income..... $ -- $ -- $ -- $ 0.01
Ratios (to average net
assets):
Expenses##............. -- -- -- 3.21%+
Net investment
income............... -- -- -- 0.75%+
</TABLE>
6
<PAGE> 163
FINANCIAL HIGHLIGHTS
CLASS C SHARES -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------
1997 1996 1995 1994***
------- ------- ------- -------
CLASS C
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value -- beginning of
period............................... $ 17.62 $ 16.58 $ 15.31 $ 15.00
------- ------- ------- -------
Income from investment operations# --
Net investment incomesec........... $ 0.36 $ 0.33 $ 0.46 $ 0.03
Net realized and unrealized gain on
investments and foreign currency
transactions..................... 2.18 1.85 1.16 0.28
------- ------- ------- -------
Total from investment
operations................... $ 2.54 $ 2.18 $ 1.62 $ 0.31
------- ------- ------- -------
Less distributions declared to
shareholders --
From net investment income......... $ (0.31) $ (0.40) $ (0.30) $ --
From net realized gain on
investments and foreign currency
transactions..................... (1.18) (0.74) (0.05) --
------- ------- ------- -------
Total distributions declared to
shareholders................. $ (1.49) $ (1.14) $ (0.35) $ --
------- ------- ------- -------
Net asset value -- end of period....... $ 18.67 $ 17.62 $ 16.58 $ 15.31
======= ======= ======= =======
Total return........................... 15.06% 13.62% 10.72% 2.07%++
Ratios (to average net
assets)/Supplemental datasec.:
Expenses##......................... 1.96% 2.03% 2.18% 2.50%+
Net investment income.............. 2.00% 1.89% 2.91% 1.68%+
Portfolio turnover..................... 128% 202% 118% 1%
Average commission rate###............. $0.0000 $0.0219 $ -- $ --
Net assets at end of period (000
omitted)............................. $58,074 $33,283 $19,325 $ 3,435
</TABLE>
- ---------------
<TABLE>
<C> <S>
*** For the period from the inception of Class C shares, July 22, 1994, through
August 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data 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.
sec. 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:
Net investment income....... $ -- $ -- $ -- $ 0.02
Ratios (to average net
assets):
Expenses##............... -- -- -- 3.18%+
Net investment income.... -- -- -- 1.00%+
</TABLE>
7
<PAGE> 164
3. 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, seven of which are offered for sale pursuant to separate prospectuses,
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. 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.
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Equity securities include: common stocks, preferred stocks and preference
stocks; securities such as bonds, warrants or rights that are convertible into
stock; and depositary receipts for those securities. These securities may be
listed on securities exchanges, traded in various over-the-counter markets or
have no organized markets. 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 -- 10%, Foreign Equity Securities -- 50%, U.S. Investment
Grade Fixed Income Securities -- 0%, U.S. High Yield Fixed Income Securities --
15% and Foreign Fixed Income Securities -- 0%. 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.
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To the extent Fund assets are allocated among most or all of the asset classes,
this allocation will reduce the impact of the poorer performing classes at any
point in time. By following this asset allocation strategy, the Fund's
performance in part will be dependent on the Adviser's skill in allocating
assets.
Although the percentage of the Fund's assets invested in foreign securities will
vary, the Fund will be invested in at least three different countries, one of
which may be the United States, except when the Adviser believes that investing
for defensive purposes is appropriate as noted below.
The risks of each asset class vary. For example, the values of equity securities
change in response to general market and economic conditions and the activities
and changing circumstances of individual issuers and the values of fixed income
securities change in response to changes in economic conditions, interest rates
and the creditworthiness of individual issuers. A significant portion of the
Fund's assets may be allocated to equity and fixed income investments in foreign
securities which involve the risks set forth under "Risk Factors" below. The
Fund may also invest in high yield fixed income securities. See "Risk Factors"
below.
The Fund may engage in certain securities transactions and investment techniques
as described under the caption "Certain Securities and Investment Techniques"
below and in the SAI. The Fund's investments are subject to certain risks, as
described in the above-referenced sections of the prospectus and the SAI, and as
described below under the caption "Additional Risk Factors."
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
Investment Techniques" in the SAI.
5. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
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 may be of any size, 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.
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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 location of its assets. The issuer's principal activities
generally are deemed to be located in a particular country if: (a) the security
is issued or guaranteed by the government of that country or any of its
agencies, authorities or instrumentalities; (b) the issuer is organized under
the laws of, and maintains a principal office in, that country; (c) the issuer
has its principal securities trading market in that country; (d) the issuer
derives 50% or more of its total revenues from goods sold or services performed
in that country; or (e) the issuer has 50% or more of its assets in that
country. See "Additional 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, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, Slovenia, the Philippines, Poland, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar) and are actively
traded in over-the-counter secondary markets. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed-rate bonds or floating-rate
bonds, are generally collateralized in full as to principal by U.S. Treasury
zero coupon bonds having the same maturity as the bonds. Brady Bonds are often
viewed as having three or four valuation components: the collateralized
repayment of principal at final maturity; the collateralized interest payments;
the uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk"). In light of the residual risk of Brady Bonds and the history of defaults
of countries issuing Brady Bonds with respect to commercial bank loans by public
and private entities, investments in Brady Bonds may be viewed as speculative.
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
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backed by the full faith and credit of the U.S. Treasury, e.g., direct
pass-through certificates of the Government National Mortgage Association
("GNMA"); some of which are supported by the right of the issuer to borrow from
the U.S. Government, e.g, obligations of Federal Home Loan Banks; some of which
are backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations, e.g., obligations of the Federal National Mortgage Association
("FNMA"). No assurance can be given that the U.S. Government will provide
financial support to these entities because it is not obligated by law, in
certain instances, to do so. U.S. Government Securities do not generally involve
the credit risks associated with other types of fixed income securities.
However, like other fixed income securities, the values of U.S. Government
Securities change as interest rates fluctuate.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card or automobile
loan receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. See the SAI for further
information on these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: Fixed income
securities in which the Fund may invest also include zero coupon bonds, deferred
interest bonds and bonds on which the interest is payable in kind ("PIK bonds").
Zero coupon and deferred interest bonds are debt obligations which are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest payment date at a rate of interest
reflecting the market rate of the security at the time of issuance. While zero
coupon bonds do not require the periodic payment of interest, deferred interest
bonds provide for a period of delay before the regular payment of interest
begins. PIK bonds are debt obligations which provide that the issuer thereof
may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates and other factors than debt obligations which make regular
payments of interest. The Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Fund's distribution obligations.
"WHEN-ISSUED" OR FORWARD DELIVERY SECURITIES: Securities may be purchased on a
"when-issued" or a "forward delivery" basis, which means that the obligations
will be delivered to the Fund at a future date usually beyond customary
settlement time. The commitment to purchase a security for which payment will be
made on a future date may be deemed a separate security. Although the Fund is
not limited in the amount of securities for which it may have commitments to
purchase on such basis, it is 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. While awaiting delivery of securities
purchased on such basis, the Fund will segregate liquid
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assets sufficient to cover its commitments. 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.
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 changes in the
value of one or more specified underlying instruments. Indexed securities may be
positively or negatively indexed (i.e., their principal value or interest rates
may increase or decrease if the underlying instrument appreciates), and may have
return characteristics similar to direct investments in the underlying
instrument or to one or more options on the underlying instrument. Indexed
securities may be more volatile than the underlying instrument itself and could
involve the loss of all or a portion of the principal amount of or interest on
the instrument.
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 "Additional 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
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securities) as the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of these securities
is likely to be substantially shorter than their stated final maturity as a
result of unscheduled principal prepayments. Prepayments on underlying mortgages
result in a loss of anticipated interest, and all or a part of a premium if any
has been paid, and the actual yield (or total return) to the Fund may be
different than the quoted yield on the securities. Mortgage prepayments
generally increase with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates rise the value of
a mortgage pass-through security generally will decline; however, when interest
rates are declining, the value of mortgage pass-through securities with
prepayment features may not increase as much as that of other fixed-income
securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U.S. Government (in the case of securities guaranteed by
the GNMA); or guaranteed by agencies or instrumentalities of the U.S. Government
(such as the FNMA) or the Federal Home Loan Mortgage Corporation ("FHLMC"), and
not guaranteed by the U.S. Government. Mortgage pass-through securities may also
be issued by nongovernmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may be
supported by various forms of insurance or guarantees.
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.
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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.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements in order
to earn income on available cash or as a temporary defensive measure. Under a
repurchase agreement, the Fund acquires securities subject to the seller's
agreement to repurchase at a specified time and price. If the seller becomes
subject to a proceeding under the bankruptcy laws or its assets are otherwise
subject to a stay order, the Fund's right to liquidate the securities may be
restricted (during which time the value of the securities could decline). As
discussed in the SAI, the Fund has adopted certain procedures intended to
minimize risk.
RESTRICTED SECURITIES: The Fund may also purchase securities that are not
registered under the Securities Act of 1933, as amended (the "1933 Act")
("restricted securities"), including those that can be offered and sold to
"qualified institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A
securities"). A determination is made, 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, retains oversight,
focusing on factors, such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in the Fund 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.
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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. However, the writing of options constitutes only a
partial hedge up to the amount of the premium, less any transaction costs. In
contrast, if the price of the security underlying the Option moves adversely to
the Fund's position, the Option may be exercised and the Fund will be required
to purchase or sell the security at a disadvantageous price, resulting in losses
which may only be partially offset by the amount of the premium. The Fund may
also write combinations of put and call Options on the same security, known as
"straddles." Such transactions can generate additional premium income but also
present increased risk.
The Fund may purchase put or call Options in anticipation of declines in the
value of portfolio securities or increases in the value of securities to be
acquired. In the event that the expected changes occur, the Fund may be able to
offset the resulting adverse effect on its portfolio, in whole or in part,
through the Options purchased. The risk assumed by the Fund in connection with
such transactions is limited to the amount of the premium and related
transaction costs associated with the Option, although the Fund may be required
to forfeit such amounts in the event that the prices of securities underlying
the Options do not move in the direction or to the extent anticipated.
The Fund may also enter into options on the yield "spread," or yield
differential between two securities, a transaction referred to as a "yield
curve" option, for hedging and non-hedging purposes. In contrast to other types
of options a yield curve option is based on the difference between the yields of
designated securities rather than the actual prices of the individual
securities. Yield curve options written by the Fund will be "covered" but could
involve additional risks, as discussed in the SAI.
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
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the value of securities to be acquired. When the Fund writes an option on a
stock index, and the value of the index moves adversely to the holder's
position, the option will not be exercised, and the Fund will either close out
the option at a profit or allow it to expire unexercised. The Fund will thereby
retain the amount of the premium, less related transaction costs, which will
increase its gross income and offset part of the reduced value of portfolio
securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by the Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to the Fund's option position, the option may be exercised, and the
Fund will experience a loss which may only be partially offset by the amount of
the premium received.
The Fund may also purchase put or call options on stock indices in order,
respectively, to hedge its investments against a decline in value or to attempt
to reduce the risk of missing a market or industry segment advance. The Fund's
possible loss in either case will be limited to the premium paid for the option,
plus related transaction costs.
FUTURES CONTRACTS: The Fund may enter into contracts for the purchase or sale
for future delivery of fixed income securities or foreign currencies or
contracts based on indexes of securities or currencies (including any index of
U.S. or foreign securities) as such instruments become available for trading
("Futures Contracts"). Such transactions will be entered into for hedging
purposes, in order to protect the Fund's current or intended investments from
the effects of changes in interest or exchange rates or declines in a securities
market, as well as for non-hedging purposes to the extent permitted by
applicable law. The Fund will incur brokerage fees when it purchases and sells
Futures Contracts, and will be required to maintain margin deposits. In
addition, Futures Contracts entail risks. Although the Adviser believes that use
of such contracts will benefit the Fund, if its investment judgment about the
general direction of interest or exchange rates or a securities market is
incorrect, the Fund's overall performance may be poorer than if it had not
entered into any such contract and the Fund may realize a loss. The Fund will
not enter into any Futures Contract if immediately thereafter the value of
securities and other obligations underlying all such Futures Contracts would
exceed 50% of the value of its total assets.
OPTIONS ON FUTURES CONTRACTS: The Fund may also purchase and write options on
Futures Contracts ("Options on Futures Contracts") for the purpose of protecting
against declines in the value of portfolio securities or against increases in
the cost of securities to be acquired. Purchases of Options on Futures Contracts
may present less risk in hedging the portfolio of the Fund than the purchase or
sale of the underlying Futures Contracts, since the potential loss is limited to
the amount of the premium paid for the option, plus related transaction costs.
The writing of such options, however, does not present less risk than the
trading of Futures Contracts, and will constitute only a partial hedge, up to
the amount of the premium received, less related 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
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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, which require the 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 notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend
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<PAGE> 175
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 or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which involve
certain risks. See the SAI 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,
1997, 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 Conduct Rules of the National Association of Securities
Dealers, Inc. (the "NASD") and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the other
investment company clients of MFD 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. Except with respect to the Fund's policy on borrowing and investing
in illiquid securities, the Fund's investment limitations, policies and rating
standards are adhered to at the time of purchase or utilization of assets; a
subsequent change in circumstances will not be considered to result in a
violation of policy.
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<PAGE> 176
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 "Certain Securities and Investment Techniques" in the SAI.
NON-DIVERSIFIED STATUS: The Fund has registered as a "non-diversified"
investment company. As a result, the Fund is limited as to the percentage of its
assets which may be invested in the securities of any one issuer only by its
investment restrictions and the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"). U.S. Government
securities which are generally considered free of credit risk and are assured as
to payment of principal and interest if held to maturity are not subject to any
investment limitation. Since the Fund may invest a relatively high percentage of
its assets in a limited number of issuers, the Fund may be more susceptible to
any single economic, political or regulatory occurrence and to the financial
conditions of the issuers in which it invests.
EMERGING GROWTH COMPANIES: The Fund may invest in securities of emerging growth
companies. Investing in emerging growth companies involves greater risk than is
customarily associated with investing in more established companies. Emerging
growth companies often have limited product lines, markets or financial
resources, and they may be dependent on management comprised of only a few
people. The securities of emerging growth companies may have limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Similarly, many of the securities offering the capital appreciation
sought by the Fund will involve a higher degree of risk than would established
growth stocks. The Fund will seek to reduce risk by investing its assets in a
number of markets and issuers, performing credit analyses of potential
investments and monitoring current developments and trends in both the economy
and financial markets.
FOREIGN SECURITIES: Transactions involving foreign equity or debt securities or
foreign currencies, and transactions entered into in foreign countries, involve
considerations and risks not typically associated with investing in U.S.
markets. These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad) or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different or less stringent accounting standards and thinner
trading markets. Foreign securities markets may also be less liquid, more
volatile and less subject to governmental supervision than in the United States.
Investments in foreign countries could be 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
20
<PAGE> 177
temporary periods when a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result in losses to the Fund due to subsequent
declines in values of the portfolio securities, a decrease in the level of
liquidity in the Fund's portfolio or, if the Fund has entered into a contract to
sell the security, possible liability to the purchaser. Certain markets may
require payment for securities before delivery and in such markets the Fund
bears the risk that the securities will not be delivered and that the Fund's
payments will not be returned. Securities prices in emerging markets can be
significantly more volatile than in the more developed nations of the world,
reflecting the greater uncertainties of investing in less established markets
and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions of repatriation
on assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic price movements.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. The Fund could be adversely
affected by delays in, or a refusal to grant, any required governmental approval
for repatriation of capital, as well as by the application to the Fund of any
restrictions on investments.
Investment in certain foreign emerging market debt obligations may be restricted
or controlled to varying degrees. These restrictions or controls may at times
preclude investment in certain foreign emerging market debt obligations and
increase the expenses of the Fund.
AMERICAN DEPOSITARY RECEIPTS: The Fund may also invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. Because ADR's trade on
United States securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
such as changes in exchange rates and more limited information about foreign
issuers.
FOREIGN CURRENCIES: To the extent the Fund invests in securities not
denominated in U.S. dollars, the value of the Fund's foreign investments, and
the value of dividends and interest earned by the Fund on such investments, may
be significantly affected by 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
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<PAGE> 178
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.
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 up to
70% of its net assets (and expects to invest not more than 50% of its net
assets) 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 to this Prospectus, and for a chart indicating the composition of the
Fund's portfolio for the fiscal year ended August 31, 1997, with the debt
securities separated into ranking categories, see Appendix C to this Prospectus.
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 "Additional 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
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<PAGE> 179
less liquid than the market for investment grade fixed income securities.
Furthermore, the liquidity of these lower rated securities may be affected by
the market's perception of their credit quality. Therefore, the Adviser's
judgment may at times play a greater role in valuing these securities than in
the case of investment grade fixed income securities, and it also may be more
difficult during times of certain adverse market conditions to sell these lower
rated securities to meet redemption requests or to respond to changes in the
market.
While the Adviser may refer to ratings issued by established credit rating
agencies, it is not the Fund's policy to rely exclusively on ratings issued by
these rating agencies, but rather to supplement such ratings with the Adviser's
own independent and ongoing review of credit quality.
OPTIONS, FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES: 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 for hedging
purposes 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. The trading of such
instruments for non-hedging purposes involves greater risks and could result in
losses that are not offset by gains or other positions.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement, dated June 2, 1994 (the "Advisory Agreement"). Under the
Advisory Agreement,
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<PAGE> 180
the Adviser provides the Fund with overall investment advisory services. 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 -- Stephen
Pesek, a Vice President of the Adviser who has been employed as a portfolio
manager by the Adviser since 1994; from 1987 to 1994, Mr. Pesek worked at
Fidelity Investments as an analyst; and John W. Ballen; (ii) Foreign Equity
Securities -- David R. Mannheim, a Senior 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 -- Robert J.
Manning, a Senior Vice President of the Adviser who has been employed as a
portfolio manager by the Adviser since 1984; and (v) Foreign Fixed Income
Securities -- Leslie J. Nanberg. Mr. Swanson supervises quantitative support and
provides overall oversight of the Fund's investments. Each individual listed
above is responsible, however, for managing the assets in his/her particular
asset class. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For its services and facilities, the
Adviser receives a management fee computed and paid monthly at the annual rate
of 0.60% of the Fund's average daily net assets for the Fund's then-current
fiscal year. For the Fund's fiscal year ended August 31, 1997, MFS received fees
under the Advisory Agreement of $1,842,326 (0.60% of the Fund's average daily
net assets).
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds"), to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, MFS Union Standard Trust, MFS Special Value Trust, MFS/Sun Life
Series Trust, and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., 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 $69.4 billion on behalf of approximately 2.7 million investor
accounts as of November 29, 1997. As of such date, the MFS organization managed
approximately $20.1 billion of assets invested in fixed income securities,
approximately $44.2 billion of assets in equity securities and approximately
$4.1 billion of assets in securities of
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<PAGE> 181
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 is a subsidiary of Sun Life
of Canada (U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of
Sun Life Assurance Company of Canada ("Sun Life"). The Directors of MFS are A.
Keith Brodkin, Jeffrey L. Shames, 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, Ellen M. Moynihan, Mark E. Bradley, and James R. Bordewick, Jr. all of
whom are officers of MFS, are also officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997 as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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.
8. 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. As used in the Prospectus and any appendices thereto
the term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD. Dealers may also charge their customers fees relating to 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.
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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 $100,000....................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.......... 4.00 4.17 3.20
$250,000 but less than $500,000.......... 2.95 3.04 2.25
$500,000 but less than $1,000,000........ 2.20 2.25 1.70
$1,000,000 or more....................... None** None** See Below**
- -------------------------------------------------------------------------------------
</TABLE>
* Because of rounding in the calculation of offering price, actual sales
charges may be more or less than those calculated using the percentages
above.
** A CDSC will apply to such purchases, as discussed below.
MFD allows discounts to dealers (which are alike for all dealers) from the
applicable public offering price as shown in the above table. In the case of the
maximum sales charge, the dealer retains 4% and MFD retains approximately 3/4 of
1% of the public offering price. The sales charge may vary depending on the
number of shares of the Fund as well as certain other MFS Funds owned or being
purchased, the existence of an agreement to purchase additional shares during a
13-month period (or 36-month period for purchases of $1 million or more) or
other special purchase programs. A description of the Right of Accumulation,
Letter of Intent and Group Purchase privileges by which the sales charge may be
reduced is set forth in the SAI.
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if prior to July 1, 1996: (a) the plan had established an account
with the Shareholder Servicing Agent and (b) the sponsoring organization had
demonstrated to the satisfaction of MFD that either (i) the employer had at
least 25 employees or (ii) the aggregate purchases by the retirement plan of
Class A shares of the 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 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
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an aggregate amount of at least $500,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds. THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE PURCHASE THAT THE PLAN
HAS A MARKET VALUE OF $500,000 OR MORE INVESTED IN SHARES OF ANY CLASS OR
CLASSES OF THE MFS FUNDS. THE SHAREHOLDER SERVICING AGENT HAS NO OBLIGATION
INDEPENDENTLY TO DETERMINE WHETHER SUCH A PLAN QUALIFIES UNDER THIS
CATEGORY; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- -------------------------------------
<C> <S>
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
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<PAGE> 184
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have pursuant
to a purchase order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of the MFS Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the Plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 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
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<PAGE> 185
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 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 under ERISA
or is liquidated or dissolved; or (iii) is acquired by, merged into, or
consolidated with any other entity.
CONVERSION OF CLASS B SHARES. Class B shares of the Fund that remain
outstanding for approximately eight years will convert to Class A shares of the
same Fund. Shares purchased through the reinvestment of distributions paid in
respect of Class B shares will be treated as Class B shares for purposes of the
payment of the distribution and service fees under the Fund's Distribution Plan.
See "Distribution Plan" below. However, for purposes of conversion to Class A
shares, all shares in a shareholder's account that were purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares
(and which have not converted to Class A shares as provided in the following
sentence) will be held in a separate sub-account. Each time any Class B shares
in the shareholder's account (other than those in the sub-account) convert to
Class A shares, a portion of the Class B shares then in the sub-account will
also convert to Class A shares. The portion will be determined by the ratio that
the shareholder's Class B shares not acquired through reinvestment of dividends
and distributions that are converting to Class A shares bear to the
shareholder's total Class B shares not acquired through reinvestment. The
conversion of Class B shares to Class A shares is subject to the continuing
availability of a ruling from the Internal Revenue Service or an opinion of
counsel that such conversion will not constitute a taxable event for federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
CLASS C SHARES: Class C shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption of 1.00% during
the first year. Class C shares do not
29
<PAGE> 186
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 224-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
30
<PAGE> 187
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each 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 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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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.
31
<PAGE> 188
RESTRICTIONS ON ACTIVITIES OF NATIONAL BANKS. The Glass-Steagall Act prohibits
national banks from engaging in the business of underwriting, selling or
distributing securities. Although the scope of the prohibition has not been
clearly defined, MFD believes that such Act should not preclude banks from
entering into agency agreements with MFD. If, however, a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services in
respect of shareholders who invested in the Fund through a national bank. It is
not expected that shareholders would suffer any adverse financial consequence as
a result of these occurrences. In addition, state securities laws on this issue
may differ from the interpretation of federal law expressed herein and banks and
financial institutions may be required to register as broker-dealers pursuant to
state law.
------------------------
A shareholder whose shares are held in the name of, or controlled by, a dealer
might not receive many of the privileges and services from the Fund (such as
Right of Accumulation, Letter of Intent and certain recordkeeping services) that
the Fund ordinarily provides.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with the Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charges or CDSC will be imposed in connection with an exchange
from shares of an MFS Fund to shares of any other MFS Fund, except with respect
to exchanges from an MFS money market fund to another MFS Fund which is not an
MFS money market fund (discussed below). With respect to an exchange involving
shares subject to a CDSC, the CDSC will be unaffected by the exchange and the
holding period for purposes of calculating the CDSC will carry over to the
acquired shares.
EXCHANGES FROM AN MFS MONEY MARKET FUND: Special rules apply with respect to
the imposition of an initial sales charge or a CDSC for exchanges from an MFS
money market fund to another MFS Fund which is not an MFS money market fund.
These rules are described under the caption "Exchanges" in the Prospectuses of
those MFS money market funds.
EXCHANGES INVOLVING THE MFS FIXED FUND: Class A shares of any MFS Fund held by
certain qualified retirement plans may be exchanged for units of participation
of the MFS Fixed Fund (a bank collective investment fund) (the "Units"), and
Units may be exchanged for Class A shares of any MFS Fund. With respect to
exchanges between Class A shares subject to a CDSC and Units, the CDSC will
carry over to the acquired shares or Units and will be deducted from the
redemption proceeds when such shares or Units are subsequently redeemed,
assuming the CDSC is then payable (the period during which the Class A shares
and the Units were held will be aggregated for purposes of calculating the
applicable CDSC). In the event that a shareholder initially purchases Units and
then exchanges into Class A shares subject to an initial sales charge of an MFS
Fund, the initial sales charge shall be due upon such exchange, but will not be
imposed with respect to any subsequent exchanges between such Class A shares and
Units with
32
<PAGE> 189
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 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.
33
<PAGE> 190
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.
34
<PAGE> 191
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 during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC, and (ii) the amount of 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
35
<PAGE> 192
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares 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 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
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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 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 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 Distribution Plan do not exceed 0.50% per
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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 0.50%,
1.00% and 1.00% per annum, respectively.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and also may make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options" below. Distributions
paid by the Fund with respect to Class A shares will generally be greater
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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 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 (as well as the rate category or
categories under which such gains are taxable), the portion, if any,
representing a return of capital (which is free of current taxes but which
results in a basis reduction), and the amount, if any, of federal income tax
withheld. In certain circumstances, the Fund may also elect to "pass through" to
shareholders foreign income taxes paid by the Fund. Under those circumstances,
the Fund will notify shareholders of their pro rata portion of the foreign
income taxes paid by the Fund; shareholders may be eligible for foreign tax
credits or deductions with respect to those taxes, but will be required to treat
the amount of the taxes as an amount distributed to them and thus includable in
their gross income for federal income tax purposes. Fund distributions will
reduce the Fund's net asset value per share. Shareholders who buy shares 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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.
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NET ASSET VALUE
The net asset value per share of each class of shares of the Fund is determined
each day during which the Exchange is open for trading. This determination is
made once each day as of the close of regular trading on the Exchange by
deducting the amount of the liabilities attributable to the class from the value
of the assets attributable to the class and dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued on the basis of their market values or otherwise at their fair values, as
described in the SAI. All investments and assets are expressed in U.S. dollars
based upon current currency exchange rates. The net asset value per share of
each class of shares is effective for orders received by the dealer prior to its
calculation and received by MFD prior to the close of that business day.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Fund, one of 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
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category from various sources, such as Lipper Analytical Securities Corporation,
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.
The Fund offers multiple classes of shares which were initially offered for sale
to, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class. See the SAI for further
information on the calculation of total rate of return for share classes with
different class inception 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, 1997, 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;
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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.
9. SHAREHOLDER SERVICES
Shareholders with questions concerning the shareholder services described below
or concerning other aspects of the Fund, should contact the Shareholder
Servicing Agent (see back cover for address and phone number).
ACCOUNT AND CONFIRMATION STATEMENTS -- Each shareholder will receive
confirmation statements showing the transaction activity in his account. At the
end of each calendar year, each shareholder will receive income tax information
regarding reportable dividends and distributions for that year, including
whether any portion represents a return of capital (see "Tax Status").
DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts) and may be changed as often as
desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares. This option will be assigned if no other option is
specified;
-- Dividends in cash; capital gain distributions reinvested in
additional shares;
-- Dividends and capital gain distributions in cash.
Reinvestments (net of any tax withholding) will be made in additional full and
fractional shares of the same class of shares at the net asset value in effect
at the close of business on the record date. Dividends and capital gain
distributions in amounts less than $10 will automatically be reinvested in
additional shares of the Fund. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash, and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, 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
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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 Class A, B and C shares of
that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
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 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.
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DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may exchange their shares for the same class of shares of
other MFS Funds (and in the case of Class C shares, for shares of MFS Money
Market Fund) under the Automatic Exchange Plan, a dollar cost averaging program.
The Automatic Exchange Plan provides for automatic monthly or quarterly
exchanges of funds from the shareholder's account in an MFS Fund for investment
in the same class of shares of other MFS Funds selected by the shareholder
provided that such shares are available for sale. Under the Automatic Exchange
Plan, exchanges of at least $50 each may be made to up to 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, 1998 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 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). As used in this
Appendix, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B shares and Class C shares, as applicable, are waived:
1. DIVIDEND REINVESTMENT
- Shares acquired through dividend or capital gain reinvestment; and
- Shares acquired by automatic reinvestment of distributions of dividends
and capital gains of any MFS Fund in the MFS Family of Funds ("MFS
Funds") pursuant to the Distribution Investment Program.
2. CERTAIN ACQUISITIONS/LIQUIDATIONS
- Shares acquired on account of the acquisition or liquidation of assets of
other investment companies or personal holding companies.
3. AFFILIATES OF AN MFS FUND/CERTAIN DEALERS. Shares Acquired By:
- Officers, eligible directors, employees (including retired employees) and
agents of Massachusetts Financial Services Company ("MFS"), Sun Life
Assurance Company of Canada ("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;
- 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")
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4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan (repayment of loans, however, will
constitute new sales for purposes of assessing sales charges);
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or
certain participant expenses) of the 401(a) or ESP Plan (e.g.,
participant account fees), provided that the Plan sponsor subscribes to
the MFS 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.
A-2
<PAGE> 203
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to
the MFS FUNDamental 401(k) Plan or another similar recordkeeping system
made available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program
or the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper
Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT INVESTMENTS AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund, "supermarket" account or
a similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds
(the "Initial Purchase") (this waiver applies to the shares acquired from
the Initial Purchase and all shares of Eligible Funds subsequently
acquired by the shareholder); provided that the dealer through which the
Initial Purchase is made enters into an agreement with MFD to accept
delayed payment of commissions with respect to the Initial Purchase and
all subsequent investments by the shareholder in the Eligible Funds
subject to such requirements as may be established from time to time by
MFD (for a schedule of the amount of commissions paid by MFD to the
dealer on such investments, see "Purchases -- Class A Shares -- Purchases
Subject to a CDSC" in the Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for
A-3
<PAGE> 204
Massachusetts Investors Trust, Massachusetts Investors Growth Stock Fund,
MFS Municipal Bond Fund, MFS Municipal Limited Maturity Fund, MFS Money
Market Fund, MFS Government Money Market Fund and MFS Cash Reserve Fund.
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals
from qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
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 shares and Class C
shares is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
A-4
<PAGE> 205
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-5
<PAGE> 206
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.
B-1
<PAGE> 207
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.
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-2
<PAGE> 208
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.
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
B-3
<PAGE> 209
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.
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+'.
B-4
<PAGE> 210
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-5
<PAGE> 211
APPENDIX C
PORTFOLIO COMPOSITION CHART
MFS WORLD ALLOCATION FUND
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
The table below shows the percentages of the Fund's assets at August 31, 1997
invested in bonds assigned to the various rating categories by S&P, Moody's
(provided only for bonds not rated by S&P), Fitch (provided only for bonds not
rated by S&P or Moody's) and Duff & Phelps (provided only for bonds not rated by
S&P, Moody's or Fitch) and in unrated bonds determined by MFS to be of
comparable quality. For split rated bonds, the highest of S&P, Moodys's, Fitch
or Duff & Phelps is used. When neither an S&P or Moody's rating is available,
secondary sources are selected in the following order: Fitch and Duff & Phelps.
When neither an S&P or Moody's rating is available, secondary sources are
selected in the following order: Fitch and Duff & Phelps.
<TABLE>
<CAPTION>
UNRATED
SECURITIES OF
COMPILED COMPARABLE
RATING RATINGS QUALITY TOTAL
- ------------------------------------- -------- ------------- ------
<S> <C> <C> <C>
AAA/Aaa.............................. -- -- --
AA/Aa................................ -- 5.07% 5.07%
A/A.................................. 0.25% -- 0.25%
BBB/Baa.............................. 0.7% -- 0.7%
BB/Ba................................ 4.22% -- 4.22%
B/B.................................. 8.80% 0.48% 9.28%
CCC/Caa.............................. -- -- --
CC/Ca................................ -- -- --
C/C.................................. -- -- --
Default.............................. -- -- --
----- ---- -----
TOTAL............................ 13.97% 5.55% 19.52%
----- ---- -----
</TABLE>
The chart does not necessarily indicate what the composition of the Fund's
portfolio will be in subsequent years. Rather, the Fund's Investment objective,
policies and restrictions indicate the extent to which the Fund may purchase
securities in the various categories.
C-1
<PAGE> 212
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
<PAGE> 213
-------------------
Bulk Rate
U.S. Postage
Paid
MFS
-------------------
[MFS LOGO]
We invented the mutual fund[SM]
MFS(R) WORLD ASSET ALLOCATION FUND
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 214
LOGO
<TABLE>
<S> <C>
MFS(R) WORLD ASSET STATEMENT OF
ALLOCATION FUNDSM ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1998
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions.................................................... 2
2. Investment Objective, Policies and Restrictions................ 2
Certain Securities and Investment Techniques................. 2
3. Management of the Fund......................................... 13
Trustees..................................................... 13
Officers..................................................... 14
Trustee Compensation Table................................... 15
Investment Adviser........................................... 16
Administrator................................................ 16
Custodian.................................................... 16
Shareholder Servicing Agent.................................. 16
Distributor.................................................. 17
4. Portfolio Transactions and Brokerage Commissions............... 18
5. Shareholder Services........................................... 19
Investment and Withdrawal Programs........................... 19
Exchange Privilege........................................... 21
Tax-Deferred Retirement Plans................................ 22
6. Tax Status..................................................... 22
7. Determination of Net Asset Value and Performance............... 24
8. Distribution Plan.............................................. 26
9. Description of Shares, Voting Rights and Liabilities........... 27
10. Independent Auditors and Financial Statements.................. 28
APPENDIX A -- Performance Information.......................... A-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, 1998. 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> 215
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS World Asset Allocation
Fund, is a series of MFS
Series Trust I (the
"Trust"), a Massachusetts
business trust.
"MFS" or the "Adviser" -- Massachusetts Financial
Services Company, a Delaware
corporation.
"MFD" -- MFS Fund Distributors, Inc.,
a Delaware corporation.
"Prospectus" -- The Prospectus of the Fund,
dated January 1, 1998, 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.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
FOREIGN SECURITIES: The Fund may invest in foreign securities as discussed in
the Prospectus. Investments in foreign issues involve considerations and
possible risks not typically associated with investments in securities issued by
domestic companies or with debt securities issued by foreign governments. There
may be less publicly available information about a foreign company than about a
domestic company, and many foreign companies are not subject to accounting,
auditing and financial reporting standards and requirements comparable to those
to which U.S. companies are subject. Foreign securities markets, while growing
in volume, have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. Fixed brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States. There is also less government supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.
AMERICAN DEPOSITARY RECEIPTS: The Fund may invest in American Depositary
Receipts ("ADRs") which are certificates issued by a U.S. depositary (usually a
bank) and represent a specified quantity of shares of an underlying non-U.S.
stock on deposit with a custodian bank as collateral. ADRs may be sponsored or
unsponsored. A sponsored ADR is issued by a depositary which has an exclusive
relationship with the issuer of the underlying security. An unsponsored ADR may
be issued by any number of U.S. depositaries. Under the terms of most sponsored
arrangements, depositaries agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities. The depositary of an unsponsored ADR, on the other hand, is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through voting rights to ADR holders in
respect of the deposited securities. The Fund may invest in either type of ADR.
Although the U.S. investor holds a substitute receipt of ownership rather than
direct stock certificates, the use of the depositary receipts in the United
States can reduce costs and delays as well as potential currency exchange and
other difficulties. The Fund may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
which settles at the Fund's custodian in five days. The Fund may also execute
trades on the U.S. markets using existing ADRs. A foreign issuer of the security
underlying an ADR is generally not subject to the same reporting requirements in
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. ADRs may also be subject to exchange rate risks if the underlying
foreign securities are denominated in foreign currency.
MORTGAGE PASS-THROUGH SECURITIES: The Fund may invest in mortgage pass-through
securities as described in the Prospectus. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities (such as securities
issued by the Government National Mortgage Association ("GNMA")) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgages in the mortgage pool, net
of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is the
GNMA. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment
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of principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers)
and backed by pools of Federal Housing Authority-insured or Veterans
Administration-guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities. GNMA securities
are often purchased at a premium over the maturity value of the underlying
mortgages. This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by the full
faith and credit of the U.S. Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages (i.e.,
mortgages not insured or guaranteed by any governmental agency) from a list of
approved seller/servicers which include state and federally-chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.
FHLMC was created by Congress in 1970 as a corporate instrumentality of the U.S.
Government for the purpose of increasing the availability of mortgage credit for
residential housing. FHLMC issues Participation Certificates which represent
interest in conventional mortgages (i.e., not federally insured or guaranteed)
from FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.
CORPORATE ASSET-BACKED SECURITIES: The Fund may invest in corporate asset-backed
securities. These securities, issued by trusts and special purpose corporations,
are backed by a pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables, Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES: The
Fund may invest a portion of its assets in collateralized mortgage obligations
or "CMOs," which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
certificates issued by the GNMA, FNMA or FHLMC, but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively hereinafter referred to as "Mortgage Assets"). The Fund may also
invest a portion of its assets in multiclass pass-through securities which are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multiclass
pass-through securities. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the United States government or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or a part of the premium if any has been paid. Interest is paid or accrues on
all classes of the CMOs on a monthly, quarterly or semiannual basis. The
principal of and interest on
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the Mortgage Assets may be allocated among the several classes of a series of a
CMO in innumerable ways. In a common structure, payments of principal, including
any principal prepayments, on the Mortgage Assets are applied to the classes of
the series of a CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class of
CMOs until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Certain CMOs may be stripped
(securities which provide only the principal or interest factor of the
underlying security). See "Stripped Mortgage-Backed Securities" below for a
discussion of the risks of investing in these stripped securities and of
investing in classes consisting primarily of interest payments or principal
payments.
The Fund may also invest in parallel pay CMOs and Planned Amortization Class
CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of
principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or final
distribution date of each class, which, as with other CMO structures, must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. PAC Bonds generally require payments of a specified amount of
principal on each payment date. PAC Bonds are always parallel pay CMOs with the
required principal payment on such securities having the highest priority after
interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES: The Fund may invest a portion of its assets
in stripped mortgage-backed securities ("SMBS"), which are derivative multiclass
mortgage securities.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the mortgage assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest only or "IO"
class) while the other class will receive all of the principal (the principal
only or "PO" class). The yield to maturity on an IO is extremely sensitive to
the rate of principal payments (including prepayments) on the related underlying
Mortgage Assets, and a rapid rate of principal payments may have a material
adverse effect on such security's yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities. The market
value of the class consisting primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
REPURCHASE AGREEMENTS: As described in the Prospectus, the Fund may enter into
repurchase agreements with sellers who are member firms (or subsidiaries
thereof), of the New York Stock Exchange (the "Exchange") or members of the
Federal Reserve System, recognized primary U.S. Government securities dealers or
institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Fund purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a standard rate due to the Fund together with the repurchase price
on repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the U.S. Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, the Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. The Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, the Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
LENDING OF PORTFOLIO SECURITIES: The Fund may seek to increase its income by
lending portfolio securities to entities deemed creditworthy by the Adviser.
Such loans would be required to be secured continuously by collateral in cash,
U.S. Treasury securities or an irrevocable letter of credit maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund would have the right to call a loan and obtain the securities
loaned at any time on customary industry settlement notice (which will usually
not exceed five days). During the existence of a loan, the Fund would continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation based on investment of
cash collateral 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. The Fund records these transactions as sale and purchase transactions,
rather than as borrowing transactions. 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 liquid assets sufficient to cover any commitments or
to limit any potential risk. However, although the Fund does not intend to make
such purchases for speculative purposes and intends to adhere to the provisions
of the SEC policy, purchases of securities on such basis may involve more risk
than other types of purchases. For example, the Fund may have to sell assets
which have been set aside in order to meet redemptions. Also, if the Fund
determines it necessary to sell the "when-issued" or "forward delivery"
securities before delivery, it may incur a loss because of market fluctuations
since the time the commitment to purchase such securities was made.
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
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the Fund upon exercise of the Option, and, unless the price of the underlying
security rises or declines sufficiently, the Option may expire worthless to the
Fund. In addition, in the event that the price of the security in connection
with which an Option was purchased moves in a direction favorable to the Fund,
the benefits realized by the Fund as a result of such favorable movement will be
reduced by the amount of the premium paid for the Option and related transaction
costs.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed 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 liquid assets 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" 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 liquid assets in a
segregated account with its custodian. The Fund may cover put options on stock
indices by maintaining liquid assets 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 liquid assets in a
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segregated account with its custodian. Put and call options on stock indices may
also be covered in such other manner as may be in accordance with the rules of
the exchange on which, or the counterparty with which, the option is traded and
applicable laws and regulations.
The Fund will receive a premium from writing a put or call option on a stock
index, which increases the Fund's gross income in the event the option expires
unexercised or is closed out at a profit. If the value of an index on which the
Fund has written a call option falls or remains the same, the Fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the securities it owns.
If the value of the index rises, however, the Fund will realize a loss in its
call option position, which will reduce the benefit of any unrealized
appreciation in the Fund's stock investment. By writing a put option, the Fund
assumes the risk of a decline in the index. To the extent that the price changes
of securities owned by the Fund correlate with changes in the value of the
index, writing covered put options on indexes will increase the Fund's losses in
the event of a market decline, although such losses will be offset in part by
the premium received for writing the option.
The Fund may also purchase put options on stock indices to hedge its investments
against a decline in value. By purchasing a put option on a stock index, the
Fund will seek to offset a decline in the value of securities it owns through
appreciation of the put option. If the value of the Fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
Fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will largely depend on the
accuracy of the correlation between the changes in value of the index and the
changes in value of the Fund's security holdings.
The purchase of call options on stock indices may be used by the Fund to attempt
to reduce the risk of missing a broad market advance, or an advance in an
industry or market segment, at a time when the Fund holds uninvested cash or
short-term debt securities awaiting investment. When purchasing call options for
this purpose, the Fund will also bear the risk of losing all or a portion of the
premium paid if the value of the index does not rise. The purchase of the call
options on stock indices when the Fund is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and
involves risks of loss and of increased volatility similar to those involved in
purchasing calls on securities the Fund owns.
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
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diluting dividend earnings. To the extent the Fund enters into Futures Contracts
for this purpose, the assets in the segregated asset account maintained to cover
the Fund's obligations with respect to such Futures Contracts will consist of
liquid assets from the portfolio of the Fund in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts, thereby assuring that the
transactions are unleveraged.
Futures Contracts on foreign currencies may be used in a similar manner, in
order to protect against declines in the dollar value of portfolio securities
denominated in foreign currencies, or increases in the dollar value of
securities to be acquired.
A Futures Contract on an index of securities provides for the making and
acceptance of a cash settlement based on changes in value of the underlying
index. The 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
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profits which will increase its gross income. Where exchange rates do not move
in the direction or to the extent anticipated, however, the Fund may sustain
losses which will reduce its gross income. Such transactions, therefore, could
be considered speculative.
The Fund has established procedures, which require the use of segregated assets
or "cover" in connection with the purchase and sale of such contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts.
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 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 liquid assets with its Custodian with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If the Fund enters into a swap agreement on other than a
net basis, it will maintain cash or liquid assets with a value equal to the full
amount of the Fund's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If MFS
is incorrect in its forecasts of such factors, the investment performance of the
Fund would be less than what it would have been if these investment techniques
had not been used. If a swap agreement calls for payments by the Fund, the Fund
must be prepared to make such payments when due. In addition, if the counter-
party's creditworthiness declined, the value of the swap agreement would be
likely to decline, potentially resulting in losses. If the counterparty
defaults, the Fund's risk of loss consists of the net amount of payments that
the Fund is contractually entitled to receive. The Fund anticipates that it will
be able to eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting agreement with
the same or another counterparty.
RISK FACTORS: IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE FUND'S
PORTFOLIO -- The Fund's ability effectively to hedge all or a portion of its
portfolio through transactions in options, Futures Contracts, and Forward
Contracts will depend on the degree to which price movements in the underlying
instruments correlate with price movements in the relevant portion of the Fund's
portfolio. If the values of portfolio securities being hedged do not move in the
same amount or direction as the instruments underlying options, Futures
Contracts or Forward Contracts traded, the Fund's hedging strategy may not be
successful and the Fund could sustain losses on its hedging strategy which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the instrument underlying an option, Future
Contract or Forward Contract traded and the portfolio securities being hedged,
which
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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") 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
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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 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,
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authorities or instrumentalities and repurchase agreements collateralized by
such obligations).
Except with respect to Investment Restriction (1) above and nonfundamental
investment policy (1) below, 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman and Director
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman
(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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November 1997) 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
13
<PAGE> 227
WALTER E. ROBB, III (born 8/18/26)
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* (born 12/16/42)
Massachusetts Financial Services Company, Senior Executive Vice President,
Secretary and Director
JEFFREY L. SHAMES* (born 6/2/55)
Massachusetts Financial Services Company, President and Director
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. Address: 36080
Shaker Blvd., Hunting Valley, 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
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President and 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 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 below is certain information concerning the cash compensation paid to
the Trustees and benefits accrued and estimated benefits payable, under the
retirement plan.
14
<PAGE> 228
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.................... $3,725 $508 7 $247,168
A. Keith Brodkin..................... 0 0 N/A 0
Marshall N. Cohan.................... 4,175 626 7 149,258
Lawrence H. Cohn..................... 3,500 559 17 136,508
The Hon. Sir J. David Gibbons........ 3,725 559 7 136,508
Abby M. O'Neill...................... 3,725 508 8 123,758
Walter E. Robb, III.................. 4,175 626 7 149,258
Arnold D. Scott...................... 0 0 N/A 0
Jeffrey L. Shames.................... 0 0 N/A 0
J. Dale Sherratt..................... 5,300 626 19 149,258
Ward Smith........................... 5,300 626 11 149,258
</TABLE>
(1) For fiscal year ended August 31, 1997.
(2) Based on normal retirement age of 75. See the table below for the estimated
annual benefits payable upon retirement by the Fund to a Trustee based on
his or her estimated credited years of service.
(3) For calendar year 1996. All Trustees receiving compensation served as
Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS fund complex
(having aggregate net assets at December 31, 1996, of approximately $38.5
billion).
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>
$3,150 $473 $ 788 $ 1,103 $1,575
3,686 553 922 1,290 1,843
4,222 633 1,056 1,478 2,111
4,758 714 1,190 1,665 2,379
5,294 794 1,324 1,853 2,647
5,830 875 1,458 2,041 2,915
</TABLE>
(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.
As of November 29, 1997, the Trustees and officers, as a group, owned less than
1% of the Fund's shares outstanding on that date.
As of November 29, 1997, Merrill Lynch Pierce Fenner & Smith Inc., Attn: Fund
Administration, 4800 Deer Lake Drive E., 3rd Floor, Jacksonville, FL 32246 was
the record owner of 5.41% of the outstanding Class A shares of the Fund, 10.99%
of the outstanding Class B shares of the Fund and 8.48% of the outstanding Class
C shares of the Fund. As of November 29, 1997, MFS Defined Contribution Plan,
c/o Mark Leary, Massachusetts Financial Services, 500 Boylston Street, Boston,
MA 02116-3740 was the record owner of approximately 99.69% of Class I shares of
the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless as
to liability to the Trust or its shareholders, it is determined that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or with respect to any
matter, unless it is adjudicated that they did not act in good faith in the
reasonable belief that their actions were in the best interests of the Trust. In
the case of settlement, such indemnification will not be provided unless it has
been determined pursuant to the Trust's Declaration of Trust that they have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
15
<PAGE> 229
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 an
indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada ("Sun
Life").
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997 as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Administrative Services
Agreement of $25,004.
INVESTMENT ADVISORY AGREEMENT
The Adviser manages the Fund pursuant to an Investment Advisory Agreement, dated
June 2, 1994 (the "Advisory Agreement"). Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For these services and facilities, the Adviser receives
a management fee computed and paid monthly at the annual rate of 0.60% of the
Fund's average daily net assets for the Fund's then-current fiscal year. For the
fiscal years ended August 31, 1997, 1996 and 1995, MFS received fees under the
Fund's Advisory Agreement of $1,842,326, $1,218,613 and $748,715, respectively.
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 State Street 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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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
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 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 perform-
16
<PAGE> 230
ing transfer agent functions and the keeping of records in connection with the
issuance, transfer and redemption of each class of shares of the Fund. For these
services, the Shareholder Servicing Agent will receive a fee calculated as a
percentage of the average daily net assets of the Fund at an effective annual
rate of 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 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. 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, 1997, MFD received sales charges of $96,516
and dealers received sales charges of $489,033 (as their concession on gross
sales charges of $585,549) for selling Class A shares of the Fund; the Fund
received $20,828,777 representing the aggregate net asset value of such shares.
For the same time period, the CDSC imposed on redemption of Class A, B and C
shares was $2,458, $219,072 and $13,120, respectively. 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 Sales Charge ("CDSC") imposed on redemption of Class A and B shares
was $1,592 and $108,698, respectively.
The Distribution 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 vote of a majority of the
Fund's shares (as defined in "Investment Restrictions") and, in either case, by
a
17
<PAGE> 231
majority of the Trustees who are not parties to the Distribution Agreement or
interested persons of any such party. The Distribution Agreement terminates
automatically if it is assigned and may be terminated without penalty by either
party on not more than 60 days' nor less than 30 days' notice.
4. PORTFOLIO TRANSACTIONS AND
BROKERAGE COMMISSIONS
Specific decisions to purchase or sell securities for the Fund are made by
persons affiliated with the Adviser. Any such person may serve other clients of
the Adviser, or any subsidiary of the Adviser in a similar capacity. Changes in
the Fund's investments are reviewed by the Board of Trustees.
The primary consideration in placing portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and broker-dealers through which it seeks this result. In the
United States and in some other countries debt securities are traded principally
in the over-the-counter market on a net basis through dealers acting for their
own account and not as brokers. In other countries both debt and equity
securities are traded on exchanges at fixed commission rates. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's mark-up or mark-down. The Adviser normally seeks
to deal directly with the primary market makers or on major exchanges unless, in
its opinion, better prices are available elsewhere. Subject to the requirement
of seeking execution at the best available price, securities transactions may,
as authorized by the Advisory Agreement, be bought from or sold to dealers who
have furnished statistical, research and other information or services to the
Adviser. At present no arrangements for the recapture of commission payments are
in effect.
Consistent with the foregoing primary consideration, the Conduct Rules 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 $50,980 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, 1997, the Fund paid brokerage commissions
of $779,486 on total transactions of $323,997,893. For the fiscal year ended
August 31, 1996, the Fund paid brokerage commissions of $674,353 on total
transac-
18
<PAGE> 232
tions 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.
5. SHAREHOLDER SERVICES
INVESTMENT AND WITHDRAWAL PROGRAMS -- The Fund makes available the following
programs designed to enable shareholders to add to their investment or withdraw
from it with a minimum of paper work. These are described below and in certain
cases, in the Fund's Prospectus. The programs involve no extra charge to
shareholders (other than a sales charge in the case of certain Class A share
purchases) and may be changed or discontinued at any time by a shareholder or
the Fund.
LETTER OF INTENT: If a shareholder (other than a group purchaser described
below) anticipates purchasing $100,000 or more of Class A shares of the Fund
alone or in combination with shares of Class B or Class C of the Fund or any of
the classes of other MFS Funds or the MFS Fixed Fund (a bank collective
investment fund) within a 13-month period (or 36-month period in the case of
purchases of $1 million or more), the shareholder may obtain Class A shares of
the Fund at the same reduced sales charge as though the total quantity were
invested in one lump sum by completing the Letter of Intent section of the
Fund's Account Application or filing a separate Letter of Intent application
(available from the Shareholder Servicing Agent) within 90 days of the
commencement of purchases. Subject to acceptance by 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 Class A, B and C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 255-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of the fund are available for sale. Such investments will be
subject to additional purchase minimums. Distributions will be invested at net
asset value (exclusive of any sales charge) and not subject to any CDSC.
Distributions will be invested at the close of business on the payable date for
the distribution. A shareholder
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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 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
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telephone (an "Exchange Change Request") are received by the Shareholder
Servicing Agent in proper form (i.e., if in writing -- signed by the record
owner(s) exactly as shares are registered; if by telephone -- proper account
identification is given by the dealer or shareholder of record). Each Exchange
Change Request (other than termination of participation in the program) must
involve at least $50. Generally, if an Exchange Change Request is received by
telephone or in writing before the close of business on the last business day of
a month, the Exchange Change Request will be effective for the following month's
exchange.
A shareholder's right to make additional investments in any of the MFS Funds, to
make exchanges of shares from one MFS Fund to another and to withdraw from an
MFS Fund, as well as a shareholder's other rights and privileges are not
affected by a shareholder's participation in the Automatic Exchange Plan. The
Automatic Exchange Plan is part of the Exchange Privilege. For additional
information regarding the Automatic Exchange Plan, including treatment of any
CDSC, see "Exchange Privilege" below.
REINSTATEMENT PRIVILEGE: Shareholders of the Fund and shareholders of the other
MFS Funds (except MFS Money Market Fund, MFS Government Money Market Fund and
holders of Class A shares of MFS Cash Reserve Fund in the case where shares of
such funds are acquired through direct purchase or reinvested dividends) who
have redeemed their shares have a one-time right to reinvest the redemption
proceeds in the same class of shares of any of the MFS Funds (if shares of the
fund are available for sale) at net asset value (without a sales charge) and, if
applicable, with credit for any CDSC paid. In the case of proceeds reinvested in
shares of MFS Money Market Fund, MFS Government Money Market Fund and Class A
shares of MFS Cash Reserve Fund, the shareholder has the right to exchange the
acquired shares for shares of another MFS Fund at net asset value pursuant to
the exchange privilege described below. Such a reinvestment must be made within
90 days of the redemption and is limited to the amount of the redemption
proceeds. If the shares credited for any CDSC paid are then redeemed within six
years of the initial purchase in the case of Class B shares or within 12 months
of the initial purchase in the case of 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
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shares of the Fund, subject to the conditions, if any, imposed upon such
unitholders by the MFS Fixed Fund.
Any state income tax advantages for investment in shares of each state specific
series of MFS Municipal Series Trust may only benefit residents of such states.
Investors should consult with their own tax advisers to be sure this is an
appropriate investment, based on their residency and each state's income tax
laws.
The exchange privilege (or any aspect of it) may be changed or discontinued and
is subject to certain limitations, including certain restrictions on purchases
by market timer accounts (see "Purchases" in the Prospectus).
TAX-DEFERRED RETIREMENT PLANS -- Except as noted below, shares of the Fund may
be purchased by all types of tax-deferred retirement plans. MFD makes available
through investment dealers plans and/or custody agreements for the following:
Individual Retirement Accounts (IRAs) (for individuals and their nonemployed
spouses who desire to make limited contributions to a tax deferred retirement
program and, if eligible, to receive a federal income tax deduction for
amounts contributed);
Simplified Employee Pension (SEP-IRA) Plans;
Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
403(b) Plans (deferred compensation arrangements for employees of public
school systems and certain non-profit organizations); and
Certain qualified corporate pension and profit-sharing plans.
The plan documents provided by MFD designate a trustee or custodian (unless
another trustee or custodian is designated by the individual or group
establishing the plan) and contain specific information about the plans. Each
plan provides that dividends and distributions will be reinvested automatically.
For further details with respect to any plan, including fees charged by the
trustee, custodian or MFD, tax consequences and redemption information, see the
specific documents for that plan. Plan documents other than those provided by
MFD may be used to establish any of the plans described above. Third party
administrative services, available for some corporate plans, may limit or delay
the processing of transactions.
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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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. Net capital gain distributions
may be taxable to shareholders that are individuals, estates, or trusts at a
maximum rate of 20%, 25%, or 28%, depending upon the source of the gain. 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
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the shares have been held for more than twelve months and otherwise as a
short-term capital gain or loss; a long-term capital gain will be eligible for
reduced tax rates if the shares were held by an individual, an estate, or a
trust for more than 18 months. However, any loss realized upon a disposition of
shares in the Fund held for six months or less will be treated as a long-term
capital loss to the extent of any distributions of net capital gain made with
respect to those shares. Any loss realized upon a 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 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 coupon bonds, 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. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might have
otherwise have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries that may entitle the Fund to a reduced
rate of tax or an exemption from tax on such income; the Fund intends to qualify
for treaty reduced rates 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% (or any
lower rate permitted under an applicable treaty) on taxable dividends and other
payments to Non-U.S. Persons that are subject to withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Fund by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions. The Fund is also
required in certain circumstances to apply backup withholding at the rate of 31%
on taxable dividends and redemption proceeds paid to any shareholder (including
a Non-U.S. Person) who does not furnish to the Fund certain information and
certifications, or who is otherwise subject to backup withholding. Backup
withholding
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will not, however, be applied to payments that have been subject to 30%
withholding.
As long as the Fund qualifies as a regulated investment company under the Code,
the Fund will not be required to pay Massachusetts income or excise taxes.
Distributions of the Fund that are derived from interest on obligations of the
U.S. Government and certain of its agencies and instrumentalities (but generally
not from capital gains realized upon the disposition of such obligations) may be
exempt from state and local taxes. The Fund intends to advise shareholders of
the extent, if any, to which its distributions consist of such interest.
Shareholders are urged to consult their tax advisers regarding the possible
exclusion of such portion of their dividends for state and local income tax
purposes as well as regarding the tax consequences of an investment in the Fund.
7. DETERMINATION OF NET ASSET VALUE AND
PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays or the days on which they are observed: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.) This
determination is made once each day as of the close of regular trading on the
Exchange by deducting the amount of the liabilities attributable to the class
from the value of the assets attributable to the class and dividing the
difference by the number of shares of the class outstanding. Bonds and other
fixed income securities (other than short-term obligations) of U.S. issuers in
the Fund's portfolio are valued on the basis of valuations furnished by a
pricing service which utilizes both dealer supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or
over-the-counter prices, since such valuations are believed to reflect the fair
value of such securities. Forward Contracts will be valued using a pricing model
taking into consideration market data from an external pricing source. Use of
the pricing services has been approved by the Fund's Board of Trustees. All
other securities, futures contracts and options in the Fund's portfolio (other
than short-term obligations) for which the principal market is one or more
securities or commodities exchanges (whether domestic or foreign) will be valued
at the last reported sale price or at the settlement price prior to the
determination (or if there has been no current sale, at the closing bid price)
on the primary exchange on which such securities, futures contracts or options
are traded; but if a securities exchange is not the principal market for
securities, such securities will, if market quotations are readily available, be
valued at current bid prices, unless such securities are reported on the NASDAQ
system, in which case they are valued at the last sale price or, if no sales
occurred during the day, at the last quoted bid price. Short-term obligations
with a remaining maturity in excess of 60 days will be valued based upon dealer
supplied valuations. Other short-term obligations in the Fund's portfolio are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio investments for which there are no such quotations
or valuations are valued at fair value as determined in good faith by or at the
direction of the Board of Trustees.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the Exchange.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the close of regular trading on the
Exchange which will not be reflected in the computation of the Fund's net asset
value unless the Trustees deem that such event would materially affect the net
asset value in which case an adjustment would be made.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. A share's net asset value is effective for orders
received by the dealer prior to its calculation and received by 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) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the maximum sales charge (currently 4.75%) and/or (iii) total rates of return
which represent aggregate performance over a period or year-by-year performance,
and which may or may not reflect the effect of the maximum or other sales charge
or CDSC. The Fund offers multiple classes of shares which were initially offered
for sale to, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of shares
which has a later class inception date than another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from its
inception date and (ii) the performance of the Fund's oldest class from its
inception date up to the class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of each
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Fund's classes of shares differ. In calculating total rate of return for a newer
class of shares in accordance with certain formulas required by the SEC, the
performance will be adjusted to take into account the fact that the newer class
is subject to a different sales charge than the oldest class (e.g., if the newer
class is Class A shares, the total rate of return quoted will reflect the
deduction of the initial sales charge applicable to Class A shares; if the newer
class is Class B shares, the total rate of return quoted will reflect the
deduction of the CDSC applicable to Class B share). However, the performance
will not be adjusted to take into account the fact that the newer class of
shares bears different class specific expenses than the oldest class of shares
(e.g., Rule 12b-1 fees). Therefore, the total rate of return quoted for a newer
class of shares will differ from the return that would be quoted had the newer
class of shares been outstanding for the entire period over which the
calculation is based (i.e., the total rate of return quoted for the newer class
will be higher than the return that would have been quoted had the newer class
of shares been outstanding for the entire period over which the calculation is
based if the class specific expenses for the newer class are higher than the
class specific expenses of the oldest class, and the total rate of return quoted
for the newer class will be lower than the return that would be quoted had the
newer class of shares been outstanding for this entire period if the class
specific expenses for the newer class are lower than the class specific expenses
of the oldest class).
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
PERFORMANCE RESULTS: The performance results for Class A shares presented in
Appendix A 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, 1996. It has been assumed that dividend and
capital gain distributions were reinvested in additional shares. These
performance results, as well as any yield or total rate of return quotation
provided by the Fund, should not be considered as representative of the
performance of the Fund in the future since the net asset value and public
offering price of shares of the Fund will vary based not only on the type,
quality and maturities of the securities held in the Fund's portfolio, but also
on changes in the current value of such securities and on changes in the
expenses of the Fund. These factors and possible differences in the methods used
to calculate yields and total rates of return should be considered when
comparing the yield and total rate of return of the Fund to yields and total
rates of return published for other investment companies or other investment
vehicles. Total rate of return reflects the performance of both principal and
income. The current net asset value of shares and account balance information
may be obtained by calling 1-800-MFS-TALK (637-8355).
YIELD: Any yield quotation for a class of shares of the Fund will be based on
the annualized net investment income per share of that class of the Fund over a
30-day period. The yield is calculated by dividing the net investment income per
share allocated to a particular class of the Fund earned during the period by
the maximum offering price per share of such class on the last day of that
period. The resulting figure is then annualized. Net investment income per share
of a class is determined by dividing (i) the dividends and interest earned by
the Fund allocated to the class during the period, minus accrued expenses of
such class for the period, by (ii) the average number of shares of such class
entitled to receive dividends during the period multiplied by the maximum
offering price per share of such class on the last day of the period. The Fund's
yield calculations assume a maximum sales charge of 4.75% in the case of Class A
shares and no payment of any CDSC in the case of Class B and Class C shares.
The yield calculations assume no CDSC is paid. Yield quotations for each class
of shares are presented in Appendix A attached hereto under the heading
"Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which 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 A attached
hereto under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Inves-
25
<PAGE> 239
tor, 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(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); and issues regarding
financial and health care management for elderly.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS becomes money manager of MFS(R) Union Standard Trust, the first
Trust to invest in companies deemed to be union-friendly by an Advisory
Board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders of
experts.
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
26
<PAGE> 240
increase or that the other benefits referred to above will be realized.
The Distribution Plan is described in the Prospectus under the caption
"Distribution Plan," which is incorporated herein by reference. The following
information supplements this Prospectus discussion.
SERVICE FEES. With respect to Class A shares, no service fees will be paid to
any insurance company which has entered into an agreement with the Fund and MFD
that permits such insurance company to purchase Class A shares from the Fund at
their net asset value in connection with annuity agreements issued in connection
with the insurance company's separate accounts. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees.
MFD or its affiliates shall be entitled to receive any service fee payable under
the Distribution Plan for which there is no dealer of record or for which
qualification standards have not been met as partial consideration for personal
services and/or account maintenance services performed by MFD or its affiliates
for shareholder accounts.
DISTRIBUTION FEES: The purpose of distribution payments to MFD under the
Distribution Plan is to compensate MFD for its distribution services to the
Fund. MFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASS OF SHARES FUND BY MFD BY DEALERS
<S> <C> <C> <C>
Class A Shares $ 490,166 $ 31,646 $ 458,520
Class B Shares $ 1,525,599 $ 25,618 $1,499,981
Class C Shares $ 507,377 $ 317 $ 507,060
</TABLE>
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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.
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 twelve 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) and two of the Trust's other series, as well as Class A, B and I shares
for one of the Trust's other series, Class A and I shares for eight other series
of the Trust and Class A, B and C shares for one of the Trust's other series.
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
27
<PAGE> 241
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, 1997, the Statement of Assets and Liabilities at
August 31, 1997, the Statement of Operations for the year ended August 31, 1997,
the Statement of Changes in Net Assets for the two years ended August 31, 1997
and 1996, 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.
28
<PAGE> 242
APPENDIX A
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
December 31, 1996................................... 11,187 580 1,549 13,316
</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 as of August 31, 1997.
<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...................... 10.18% 12.27%(1) N/A 1.65% 2.03%
Class A shares without sales charge................... 15.67% 14.05%(1) N/A N/A N/A
Class B shares with CDSC.............................. 11.01% 12.56%(1) N/A N/A N/A
Class B shares without CDSC........................... 15.01% 13.31%(1) N/A 1.23% 1.60%
Class C shares with CDSC.............................. 14.06% 13.36%(1) N/A N/A N/A
Class C shares without CDSC........................... 15.06% 13.36%(1) N/A 1.23% 1.68%
Class I shares........................................ 15.87%(2) 14.11%(2) N/A 2.24% 3.04%(3)
</TABLE>
(1) From the inception date of Class A, Class B and Class C shares on July 22,
1994.
(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
7, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.
(3) The current distribution rate for Class I shares is calculated by
annualizing the last dividend.
A-1
<PAGE> 243
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 02101
SHAREHOLDER SERVICING AGENT
MFS Service Center, Inc.
500 Boylston Street, Boston, MA 02116
Toll free: (800)225-2606
Mailing Address:
P.O. Box 2281, Boston, MA 02107-9906
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
MFS(R) WORLD ASSET
ALLOCATION FUNDSM
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO] MAA-13-1/97/500 88/288/388
<PAGE> 244
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) WORLD ASSET ALLOCATION FUND(SM)
[Graphic omitted]
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders .................................................... 1
Portfolio Allocation ...................................................... 3
U.S. Stock Market ....................................................... 3
International Stock Markets ............................................. 4
U.S. High-Yield Corporate Bond Market ................................... 5
U.S. Government Bond Market ............................................. 6
International Bond Markets .............................................. 6
Portfolio Managers' Profiles .............................................. 7
Fund Facts ................................................................ 9
Performance Summary ....................................................... 9
Tax Form Summary .......................................................... 11
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 22
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 39
The MFS Family of Funds(R) ................................................ 40
Trustees and Officers ..................................................... 41
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 15.67%, CLASS B SHARES
15.01%, CLASS C SHARES 15.06%, AND CLASS I SHARES 15.87%. (SEE PERFORMANCE
SUMMARY FOR MORE INFORMATION.)
o WHILE GOOD NEWS IN THE UNITED STATES HAS DOMINATED ECONOMIC REPORTS, THE
WORLD ECONOMIC SITUATION IS ALSO FAVORABLE, WITH GROWTH RESUMING IN EUROPE
AND SIGNS OF LIFE IN LATIN AMERICA.
o WE BELIEVE RELATIVE VALUATIONS IN THE U.S. STOCK MARKET ARE NEAR THEIR
ALL- TIME HIGHS AND, HENCE, ARE VULNERABLE TO BAD NEWS OR UNFAVORABLE
TRENDS. AS A RESULT, WE HAVE MAINTAINED OUR OVEREMPHASIS ON INTERNATIONAL
STOCKS AND HAVE UNDERWEIGHTED U.S. STOCKS.
o IN BONDS, WE HAVE SEEN VALUE ONLY IN THE U.S. HIGH-YIELD CORPORATE MARKET,
WHICH HAS BENEFITED FROM THE ONGOING STRENGTH OF THE U.S. ECONOMY. WE HAVE
ALSO RECEIVED INCOME AND CAPITAL GAINS FROM OUR PRUDENT USE OF EMERGING
MARKET DEBT.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 15.67%, Class B shares 15.01%, Class C shares 15.06%, and
Class I shares 15.87%. These returns assume the reinvestment of distributions
but exclude the effects of any sales charges and compare to returns of 40.78%
for the Standard & Poor's 500 Composite Index, a popular, unmanaged index of
common stock total return performance; 8.90% for the Morgan Stanley Capital
International EAFE (Europe, Australia, Far East) Index, an index of
international stocks; 10.06% for the Lehman Brothers Aggregate Bond Index, an
index of government and corporate bonds including U.S. Treasury, government-
agency, corporate, and mortgage-backed securities; and -2.81% for the J.P.
Morgan Non-Dollar Government Bond Index, an international bond index.
The past 12 months have been notable for the upward force and strength
of the world's stock markets, particularly that of the United States. Three
factors stand out as reasons for this extraordinary surge in values. First,
inflation, the biggest risk to financial strength, remains in abeyance, if not
in retreat. We have just achieved the seventh consecutive monthly reduction in
the U.S. producer price index, a remarkable achievement not seen in nearly a
generation. Second, earnings from U.S. companies have surpassed Wall Street's
expectations, and these companies are still benefiting from shrinking costs
and streamlined operations. Third, and very important, the continued push to
invest individual investors' retirement money in the equity market continues
to force demand and prices upward.
While good news in the United States has dominated economic reports, the world
economic situation is also favorable. Growth has resumed in Europe, while
Latin America is showing signs of life. In Asia, however, growth trends may
continue to be weaker than previously expected.
During this time, we have managed the Fund with an eye toward balancing risk
and opportunity. We believe relative valuations in the U.S. stock market are
near their all-time highs and, hence, are vulnerable to bad news or
unfavorable trends. As a result, we have maintained our overemphasis (relative
to world market weightings) on international stocks (now approximately 47% of
the portfolio) and have underweighted U.S. stocks (only 8% during most of this
period). While this mix of assets may have caused us to trail certain indexed
measures of performance, we have continued to experience favorable returns,
with little day-to-day volatility. As a byproduct of this overarching view, we
have held a high cash position, ranging from 25% to 35% of the Fund's assets,
as a reserve for future deployment in the event of a market fall.
In the world of bonds, we have seen value only in the U.S. high-yield
corporate market, which has benefited from the ongoing strength of the U.S.
economy. We have made occasional forays into the U.S. government market, which
can present value on a trading basis. We have also received income and capital
gains from our use of emerging market debt on an infrequent, but well-
researched basis. The Fund has benefited from a broad choice of assets that
change frequently, the mix of which is driven by both an internal model and by
the judgment of the investment managers on the Asset Allocation Committee.
What follows is a closer view of our work from the various submanagers.
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 15, 1997
<PAGE>
PORTFOLIO ALLOCATION AS OF AUGUST 31, 1997
International Stocks ................................. 46.9%
Cash & Short-Term Securities ......................... 26.1%
High-Yield Bonds ..................................... 17.3%
Domestic Stocks ...................................... 8.0%
International Bonds .................................. 1.7%
For a more complete breakdown, refer to the Portfolio of Investments.
U.S. STOCK MARKET - 8.0%
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 Computer Associates International (software), Stone
Container (paper manufacturing), and Teradyne (semiconductor equipment).
Currently, our top three sectors are technology (23.5% of U.S. equities),
health care (13.8%), and retailing (12.6%). Our current outlook continues to
be cautious. Given the current level of interest rates, equity valuations are
high and leave no margin for error.
- -- John F. Brennan, Jr.
FIVE LARGEST HOLDINGS AS OF 8/31/97 % of Net Assets
- ------------------------------------------------------------------------------
MCI Communications Corp. (Utilities - Telephone) 0.7%
- ------------------------------------------------------------------------------
Tyco International Ltd. (Consumer Goods and Services) 0.7%
- ------------------------------------------------------------------------------
Rite Aid Corp. (Stores) 0.5%
- ------------------------------------------------------------------------------
Oracle Systems Corp. (Computer Software - Systems) 0.4%
- ------------------------------------------------------------------------------
CVS Corp. (Stores) 0.3%
- ------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKETS - 46.9%
Internationally, we emphasize stock selection as opposed to country or
industry selection. Priority is placed on companies that we believe will
generate above-average earnings growth and that are trading at attractive
valuations, regardless of their home country.
Broad regional exposures in international stocks were as follows: 60% in Europe,
33% in Asia/Pacific, and 7% in the Americas. The largest individual country
exposures were to the United Kingdom (26% of the international equity
portfolio), Japan (20%), and the Netherlands (6%). Roughly 14% of our
international holdings were in emerging markets, 9% of which were in Southeast
Asia (including Hong Kong and Singapore), 4% in Latin America, and the remainder
in Central Europe.
Over the past three months, the European weighting has increased by roughly 6%
at the expense of our Asia/Pacific weighting. This was the result of recent
purchases in Europe, notably in the United Kingdom; sales in Asia/Pacific,
specifically South Korea and Hong Kong; and the recent poor performance of
Southeast Asian stock markets and currency devaluations. While the Southeast
Asian markets have come under significant pressure in the past one to two
months, we believe that -- for the most part -- the Southeast Asian companies in
the Fund have not seen a fundamental impact on their businesses. Companies like
Indosat, an Indonesian telecommunications firm, could actually see their
earnings increase due to the devaluation of the rupee. We are closely monitoring
developments in that part of the world and, when appropriate, are taking the
opportunity to increase holdings in companies that we believe have attractive
fundamentals and trade at depressed valuations.
Our overall focus remains on companies that we believe will generate
above-average and sustainable growth, regardless of the state of the global
economy. Examples of large holdings that fit this description are British
Aerospace; Canon, a Japanese office equipment company; QBE Insurance,
an Australian insurer; and Sparbanken Sverige, a Swedish banking company.
- -- David Mannheim
FIVE LARGEST HOLDINGS AS OF 8/31/97 % of Net Assets
- ------------------------------------------------------------------------------
Canadian National Railway Co. (Railroads - Canada) 1.8%
- ------------------------------------------------------------------------------
PowerGen PLC (Utilities - Electric - United Kingdom) 1.4%
- ------------------------------------------------------------------------------
British Aerospace PLC (Aerospace and Defense - United Kingdom) 1.4%
- ------------------------------------------------------------------------------
ASDA Group PLC (Supermarkets - United Kingdom) 1.4%
- ------------------------------------------------------------------------------
Canon, Inc. (Special Products and Services - Japan) 1.2%
- ------------------------------------------------------------------------------
U.S. HIGH-YIELD CORPORATE BOND MARKET - 17.3%
Our overall investment strategy is to seek companies that have improving
credit quality and whose high-yield bonds offer attractive expected returns.
We look for companies that have successful management teams, leadership
positions within their industries, consistent operating results, and
reasonable leverage. During the first half of 1997, the high-yield market
remained one of the best-performing fixed-income asset classes. The market's
strength was due in part to a strong economy and a subsequent low default
rate, which has averaged only 1.8% over the past 12 months. Demand for high-
yield bonds has been exceptionally strong, with net inflows into high-yield
mutual funds over the past year exceeding the levels recorded in any prior
year. Although the spread between high-yield bonds and U.S. Treasury notes
narrowed to a record low 2.80% from 3.22% at the beginning of the year, we
believe the environment for owning high-yield bonds remains favorable due to
the general outlook for moderate economic growth and low inflation.
Given the tight level of spreads and the length of this economic expansion, we
have concentrated our holdings in the bonds of what we regard as better- quality
companies because we do not think investors are adequately compensated for the
risks associated with lower-tier credits. Two industries of note in which we are
overweighted are consumer products and general industrials. In the consumer
products sector, we are invested in such brand name companies as Westpoint
Stevens and Sealy. Our general industrial holdings are a diversified group of
niche manufacturing companies that are typically leaders in their fields. Such
companies include International Knife, a dominant manufacturer of industrial
cutting blades, and Hayes Wheels, a global supplier of automotive wheels. We
reduced our weighting in the energy sector because we felt that the relatively
low yields currently available in that sector were not appropriate compensation
for the commodity risk associated with these investments.
- -- Robert J. Manning
FIVE LARGEST HOLDINGS AS OF 8/31/97 % of Net Assets
- --------------------------------------------------------------------------------
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 (Metals and Minerals) 0.6%
- ------------------------------------------------------------------------------
Borden Incorporated, 9.25s, 2019 (Food and Beverage Products) 0.6%
- ------------------------------------------------------------------------------
Iron Mountain, Inc., 10.125s, 2006 (Information, Paging and Technology) 0.5%
- ------------------------------------------------------------------------------
Sterling Chemicals, Inc., 11.25s, 2007 (Chemicals) 0.5%
- ------------------------------------------------------------------------------
Thermadyne Industries Holdings Corp., 10.75s, 2003 (Special Products and
Services) 0.5%
- ------------------------------------------------------------------------------
U.S. GOVERNMENT BOND MARKET
Activity in the U.S. government bond market remained fairly quiet over the
past 12 months as interest rates on 10-year U.S. Treasury securities remained
in the range of 6% to 7%. Looking forward, we expect that the combination of
steady economic growth and low inflation will cause rates to remain relatively
stable. Based on our neutral view and our positive outlook for many of the
other sectors, the Fund currently has no exposure to the U.S. government bond
market. If we see signs of a slowdown in the economy that suggest there is a
potential for lower rates, we will begin allocating assets to this sector.
- -- Geoffrey L. Kurinsky
INTERNATIONAL BOND MARKETS
Given the prospects for global economic recovery, with yields at cyclical lows,
we reduced the global fixed-income allocation to zero in favor of domestic
fixed-income securities in the first quarter of this year. Over the past 12
months, continued fiscal austerity, combined with easing monetary policy and
subdued inflation throughout Europe, brought about a substantial decline in
interest rates. Within Europe, yield convergence continued to occur between
Germany and the higher-yielding markets. For example, the 10-year yield spreads
of Spain and Italy versus Germany declined by 195 (1.95%) and 235 (2.35%) basis
points, respectively. The U.S. dollar appreciated substantially over the past
year, gaining nearly 20% against the German mark and most other European
currencies. Monetary conditions in Japan remained extremely accommodative, while
the currency crisis in Southeast Asia has potentially lengthened the recovery
time for that region's economy. Local currency depreciation has actually caused
the yen to appreciate on a trade- weighted basis, even though it has depreciated
by nearly 10% over the past 12 months. Lastly, within the dollar bloc,
Australian and Canadian yield spreads versus the United States have declined
significantly. Canadian 10-year yields are currently over 30 basis points
(0.30%) below those in the United States. The Australian economy has languished
somewhat due to soft commodity prices, and its central bank has lowered interest
rates five times in the past year, by a total of 250 basis points (2.50%).
- -- Leslie J. Nanberg
PORTFOLIO MANAGERS' PROFILES
The Asset Allocation Committee consists of Messrs. Swanson and Nanberg as well
as A. Keith Brodkin and Jeffrey L. Shames, Chairman and President of MFS,
respectively, and John W. Ballen, Executive Vice President and Chief Equity
Officer at MFS. The individuals responsible for managing the assets in the
asset classes are as follows:
John F. Brennan, Jr., has been a member of the MFS investment staff since
1985. A graduate of the University of Rhode Island and the Stanford University
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 in 1995. Mr. Brennan manages the U.S. stock portion of the portfolio.
Geoffrey L. Kurinsky began his career at MFS in 1987 in the Fixed Income
Department. A graduate of the University of Massachusetts and the Boston
University Graduate School of Management, he was named Assistant Vice
President in 1988, Vice President in 1989, and Senior Vice President in 1993.
He manages the U.S. government bond portion of the portfolio.
David Mannheim began his career at MFS in 1988 as a research specialist and
was promoted to Assistant Vice President - Investments in 1991,
Vice President - Investments in 1992, and Senior Vice President in 1997. Mr.
Mannheim is a graduate of Amherst College and of the Massachusetts Institute
of Technology Sloan School of Management. He manages the international stock
portion of the portfolio.
Robert J. 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 the
Boston College Graduate School of Management, he was named Vice President -
Investments in 1988 and Senior Vice President in 1993. In 1997, he was named
High Yield Fixed Income Department head. Mr. Manning manages the U.S. high-
yield corporate bond portion of the portfolio.
Leslie J. Nanberg is Senior Vice President and Chief Fixed Income Officer for
MFS. Mr. Nanberg joined MFS in 1980. He was named Assistant Vice President -
Investments in 1981, Vice President - Investments in 1983, and Senior Vice
President in 1986. Mr. Nanberg is a graduate of the University of Illinois,
Northwestern University, and the Northwestern University Graduate School of
Management. He is a Chartered Financial Analyst and is a member of the Boston
Security Analysts Society, Inc., as well as the Financial Analysts Federation.
Mr. Nanberg manages the international bond portion of the portfolio.
James T. Swanson joined MFS in 1985 as Vice President - Investments and was
named Senior Vice President in 1989. He was named portfolio manager of MFS(R)
World Asset Allocation Fund(SM) upon its inception in July 1994. He is a
graduate of Colgate University and the Harvard University Graduate School of
Business Administration.
- --------------------------------------------------------------------------------
FUND FACTS
OBJECTIVE: 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: CLASS A: JULY 22, 1994
CLASS B: JULY 22, 1994
CLASS C: JULY 22, 1994
CLASS I: JANUARY 7, 1997
SIZE: $336.9 MILLION NET ASSETS AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS World Asset Allocation Fund - Class A shares in comparison
to various market indicators. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are
unmanaged and do not reflect any fees or expenses. The performance of other
share classes will be greater than or less than the line shown, based on the
differences in charges and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from August 1, 1994, through August 31, 1997)
MFS
World Asset Lehman J.P. Morgan
Allocation S&P 500 Brothers MSCI Non-Dollar Consumer
Fund Composite Aggregate EAFE Government Price
Class A Index Bond Index Index Bond Index Index-U.S.
----------- --------- ---------- ----- ----------- ----------
7/94 $ 9,500 $10,000 $10,000 $10,000 $10,000 $10,000
8/95 $10,900 $13,100 $11,400 $10,400 $11,600 $10,300
8/96 $12,400 $15,500 $11,800 $11,200 $12,700 $10,600
8/97 $14,337 $21,805 $13,018 $12,197 $12,656 $10,858
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<CAPTION>
1 Year 3 Years Life of Fund*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS World Asset Allocation Fund (Class A)
including 4.75% sales charge (SEC results) +10.18% +11.96% +12.27%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class A)
at net asset value +15.67% +13.78% +14.05%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B)
with CDSC (SEC results) +11.01% +12.28% +12.56%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class B)
at net asset value +15.01% +13.06% +13.31%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class C)
with CDSC (SEC results) +14.06% +13.12% +13.36%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class C)
at net asset value +15.06% +13.12% +13.36%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS World Asset Allocation Fund (Class I)
at net asset value +15.87% +13.85% +14.11%
- -----------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index** +40.78% +26.58% +28.52%
- -----------------------------------------------------------------------------------------------------------------------------------
MSCI EAFE Index** + 8.90% + 5.68% + 6.60%
- -----------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index** +10.06% + 8.43% + 8.86%
- -----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Govt. Bond Index+ - 2.81% + 7.34% + 6.95%
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index++** + 2.19% + 2.55% + 2.69%
- -----------------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations, July 22, 1994,
through August 31, 1997.
** Source: CDA/Wiesenberger.
+ Source: Lipper Analytical Services, Inc.
++ The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures
the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B
share SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
Class C shares have no initial sales charge but, along with Class B shares,
have higher annual fees and expenses than Class A shares. Class C share
purchases are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class I shares, which became available on January 7, 1997, have no initial
sales charge or Rule 12b-1 fees and are only available to certain
institutional investors.
Class I share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class
I share performance generally would have been higher than Class A share
performance. The Class A share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
Stocks - 56.5%
<CAPTION>
- ------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 8.0%
Aerospace - 0.2%
Allied Signal, Inc. 6,200 $ 511,888
- ------------------------------------------------------------------------------------------------
Automotive
Hayes Wheels International, Inc. 2,900 $ 94,250
- ------------------------------------------------------------------------------------------------
Business Machines
Texas Instruments, Inc. 900 $ 102,263
- ------------------------------------------------------------------------------------------------
Business Services - 0.2%
Computer Sciences Corp.* 2,950 $ 219,406
CUC International, Inc.* 8,700 204,450
Ikon Office Solutions, Inc. 7,800 202,800
--------------
$ 626,656
- ------------------------------------------------------------------------------------------------
Cellular Telephones - 0.1%
Telephone & Data Systems, Inc. 5,100 $ 201,450
- ------------------------------------------------------------------------------------------------
Chemicals - 0.1%
Air Products & Chemicals, Inc. 2,200 $ 179,438
du Pont (E.I.) de Nemours & Co., Inc. 4,200 261,712
--------------
$ 441,150
- ------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.2%
First Data Corp. 2,600 $ 106,763
Microsoft Corp.* 3,400 449,437
--------------
$ 556,200
- ------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.8%
Bay Networks, Inc.* 5,900 $ 208,713
BMC Software, Inc.* 4,600 288,075
Cadence Design Systems, Inc.* 1,500 71,344
Compaq Computer Corp.* 4,600 301,300
Computer Associates International, Inc. 7,900 528,312
Oracle Systems Corp.* 36,600 1,395,375
--------------
$ 2,793,119
- ------------------------------------------------------------------------------------------------
Construction Services - 0.1%
Champion International Corp. 5,900 $ 349,206
- ------------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.1%
Colgate-Palmolive Co. 4,100 $ 257,275
Philip Morris Cos., Inc. 22,100 964,112
Tyco International Ltd.* 29,710 2,330,342
--------------
$ 3,551,729
- ------------------------------------------------------------------------------------------------
Containers - 0.2%
Corning, Inc. 5,300 $ 280,238
Stone Container Corp. 21,800 376,050
--------------
$ 656,288
- ------------------------------------------------------------------------------------------------
Electronics - 0.5%
Altera Corp.* 2,100 $ 111,825
Analog Devices, Inc.* 9,000 298,125
Atmel Corp.* 5,500 194,562
Intel Corp. 4,000 368,500
International Rectifier Corp. 5,900 134,594
Kulicke & Soffa Industries, Inc.* 6,200 284,812
Teradyne, Inc.* 8,100 451,069
--------------
$ 1,843,487
- ------------------------------------------------------------------------------------------------
Entertainment - 0.5%
Clear Channel Communications, Inc.* 6,700 $ 455,181
Harrah's Entertainment, Inc.* 12,600 282,712
LIN Television Corp.* 18,500 877,594
--------------
$ 1,615,487
- ------------------------------------------------------------------------------------------------
Financial Institutions - 0.2%
American Express Co. 4,100 $ 318,775
Associates First Capital Corp., "A" 3,900 226,444
--------------
$ 545,219
- ------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.1%
Archer-Daniels-Midland Co. 7,980 $ 172,568
- ------------------------------------------------------------------------------------------------
Insurance - 0.3%
Chubb Corp. 2,890 $ 193,269
CIGNA Corp. 1,700 311,737
Conseco, Inc. 5,200 223,600
Lincoln National Corp. 4,300 287,831
PennCorp Financial Group, Inc. 2,000 64,125
--------------
$ 1,080,562
- ------------------------------------------------------------------------------------------------
Medical and Health Products - 0.5%
Boston Scientific Corp.* 4,300 $ 303,150
Bristol-Myers Squibb Co. 12,200 927,200
Mckesson Corp.## 2,500 234,219
Pfizer, Inc. 1,800 99,675
Schering Plough Corp. 5,300 254,400
--------------
$ 1,818,644
- ------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.4%
AmeriSource Health Corp., "A"* 5,100 $ 255,319
Medtronic, Inc. 2,200 198,825
St. Jude Medical, Inc.* 16,200 616,612
United Healthcare Corp. 8,100 393,863
--------------
$ 1,464,619
- ------------------------------------------------------------------------------------------------
Office Equipment - 0.1%
Office Depot, Inc.* 12,000 $ 221,250
- ------------------------------------------------------------------------------------------------
Oil Services - 0.1%
Noble Drilling Corp. 7,700 $ 218,969
- ------------------------------------------------------------------------------------------------
Oils - 0.1%
Texaco, Inc. 2,300 $ 265,075
- ------------------------------------------------------------------------------------------------
Pollution Control - 0.1%
Waste Management, Inc. 15,700 $ 502,400
- ------------------------------------------------------------------------------------------------
Railroads - 0.2%
Burlington Northern Santa Fe Railway Co. 3,100 $ 284,231
Wisconsin Central Transportation Corp.* 8,000 248,000
--------------
$ 532,231
- ------------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.2%
Hilton Hotels Corp. 9,100 $ 279,256
Promus Hotel Corp.* 10,000 388,125
--------------
$ 667,381
- ------------------------------------------------------------------------------------------------
Stores - 0.8%
CVS Corp. 20,800 $ 1,172,600
Rite Aid Corp. 32,600 1,632,037
--------------
$ 2,804,637
- ------------------------------------------------------------------------------------------------
Supermarkets
Safeway, Inc.* 2,508 $ 127,726
- ------------------------------------------------------------------------------------------------
Telecommunications - 0.2%
3Com Corp.* 2,200 $ 109,862
Ascend Communications, Inc.* 2,900 123,069
Cellular Communications International* 2,500 90,000
Cisco Systems, Inc.* 3,400 256,275
Lucent Technologies, Inc. 1,600 124,600
--------------
$ 703,806
- ------------------------------------------------------------------------------------------------
Utilities - Telephone - 0.7%
MCI Communications Corp. 83,200 $ 2,371,200
Sprint Corp. 2,900 136,300
--------------
$ 2,507,500
- ------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 26,975,760
- ------------------------------------------------------------------------------------------------
Foreign Stocks - 48.5%
Australia - 1.7%
Q.B.E. Insurance Group Ltd. (Insurance) 632,141 $ 3,412,550
Seven Network Ltd. (Entertainment) 615,300 2,475,475
--------------
$ 5,888,025
- ------------------------------------------------------------------------------------------------
Canada - 1.8%
Canadian National Railway Co. (Railroads) 119,100 $ 5,917,781
- ------------------------------------------------------------------------------------------------
Chile - 0.9%
Chilectra SA, ADR (Utilities - Electric) 98,000 $ 3,021,546
- ------------------------------------------------------------------------------------------------
Finland - 1.1%
Huhtamaki Oy Group (Food Company) 36,000 $ 1,421,276
TT Tieto Oy (Computer Software - Systems) 24,200 2,177,456
--------------
$ 3,598,732
- ------------------------------------------------------------------------------------------------
France - 2.1%
TOTAL SA, "B" (Oils)* 18,000 $ 1,681,799
Televison Francaise (Broadcasting) 26,000 2,113,335
Union des Assurances Federales SA (Insurance) 32,000 3,310,397
--------------
$ 7,105,531
- ------------------------------------------------------------------------------------------------
Germany - 2.0%
adidas AG (Apparel and Textiles) 23,000 $ 2,757,763
Henkel Kgaa (Consumer Goods and Services) 53,500 2,693,030
Volkswagen AG (Automotive) 1,950 1,395,320
--------------
$ 6,846,113
- ------------------------------------------------------------------------------------------------
Greece - 0.5%
Hellenic Telecommunication Organization SA
(Telecommunications) 68,370 $ 1,516,529
- ------------------------------------------------------------------------------------------------
Hong Kong - 2.2%
Asia Satellite Telecommunications Holdings Ltd.
(Telecommunications)* 80,000 $ 222,992
Hong Kong Electric Holdings Ltd. (Utilities -
Electric) 357,000 1,248,500
Li & Fung Ltd. (Wholesale) 1,250,000 1,274,250
Liu Chong Hing Bank (Banks and Credit Cos.) 554,000 1,476,299
Peregrine Investment Holdings (Brokerage) 653,000 1,213,470
Wing Hang Bank Ltd. (Banks and Credit Cos.) 452,400 1,926,591
--------------
$ 7,362,102
- ------------------------------------------------------------------------------------------------
Indonesia - 0.7%
PT Indosat (Telecommunications) 178,000 $ 367,000
PT Indosat, ADR (Telecommunications) 68,300 1,481,256
PT Semen Gresik (Building Materials) 595,000 613,402
--------------
$ 2,461,658
- ------------------------------------------------------------------------------------------------
Ireland - 0.1%
Elan Corp., PLC, ADR (Health Products)* 6,200 $ 282,100
- ------------------------------------------------------------------------------------------------
Italy - 0.6%
INA - Instituto Nazionale delle Assicurazioni
(Insurance) 463,000 $ 674,360
Telecom Italia S.p.A., Saving Shares
(Telecommunications) 853,000 1,423,316
--------------
$ 2,097,676
- ------------------------------------------------------------------------------------------------
Japan - 10.1%
Bridgestone Corp. (Tire and Rubber) 98,000 $ 2,169,652
Canon, Inc. (Special Products and Services) 145,000 4,003,726
DDI Corp. (Telecommunications) 575 3,003,731
Eisai Co. Ltd. (Pharmaceuticals) 107,000 2,031,748
Fuji Photo Film Co. (Photographic Products) 53,000 2,039,133
Kinki Coca-Cola Bottling Co. (Beverages) 56,000 696,518
Kirin Beverage Corp. (Beverages) 111,000 1,794,770
Nippon Broadcasting (Broadcasting) 20,000 1,477,610
Nitto Denko Corp. (Industrial Goods and Services) 140,000 2,426,202
Osaka Sanso Kogyo Ltd. (Chemicals) 320,000 676,608
Rohm Co. (Electronics) 18,000 1,865,672
Sony Corp. (Electronics) 42,000 3,656,713
Takeda Chemical Industries (Pharmaceuticals) 110,000 2,927,859
TDK Corp. (Special products and Services) 40,000 3,071,308
Ushio, Inc. (Electronics) 226,000 2,342,445
--------------
$ 34,183,695
- ------------------------------------------------------------------------------------------------
Malaysia - 0.5%
New Straits Times Press Berhad (Printing and
Publishing) 126,000 $ 560,952
UMW Holdings Berhad (Automobiles) 462,000 1,241,995
--------------
$ 1,802,947
- ------------------------------------------------------------------------------------------------
Mexico - 0.1%
TV Azteca, SA de C V (Broadcasting)* 22,800 $ 410,400
- ------------------------------------------------------------------------------------------------
Netherlands - 3.0%
Ahrend Kon (Office Equipment) 67,938 $ 2,216,817
Akzo Nobel (Chemicals) 22,500 3,479,882
IHC Caland NV (Machinery/Industrial) 25,334 1,448,188
Royal Dutch Petroleum (Oils) 56,000 2,835,717
--------------
$ 9,980,604
- ------------------------------------------------------------------------------------------------
Peru - 0.4%
Telefonica del Peru SA, ADR (Telecommunications) 62,000 $ 1,449,250
- ------------------------------------------------------------------------------------------------
Philippines - 0.1%
Alsons Cement Corp. (Building Materials)*## 3,479,250 $ 323,651
- ------------------------------------------------------------------------------------------------
Poland - 0.2%
Kghm Polska Miedz Sa (Metals and Minerals)## 58,100 $ 697,200
- ------------------------------------------------------------------------------------------------
Portugal - 1.9%
Banco Espirito Santo e Comercial de Lisboa SA
(Banks and Credit Cos.) 63,900 $ 1,567,882
Banco Totta E Acores (Financial Institutions) 145,000 2,601,141
Telecel - Comunicacaoes Pessoais SA
(Telecommunication) 29,300 2,131,197
--------------
$ 6,300,220
- ------------------------------------------------------------------------------------------------
Singapore - 1.0%
Hong Leong Finance Ltd. (Finance)+ 897,000 $ 1,750,675
Mandarin Oriental International, Ltd.
(Restaurants and Lodgings) 1,365,999 1,529,919
--------------
$ 3,280,594
- ------------------------------------------------------------------------------------------------
Spain - 1.4%
Acerinox SA (Iron and Steel) 14,000 $ 2,298,342
Repsol SA (Oils) 58,000 2,286,424
--------------
$ 4,584,766
- ------------------------------------------------------------------------------------------------
Sweden - 2.5%
Astra AB (Pharmaceuticals) 206,000 $ 3,102,587
Skandia Foersaekrings AB (Insurance) 56,000 2,161,723
Sparbanken Sverige AB (Banks and Credit Cos.) 142,000 3,073,235
--------------
$ 8,337,545
- ------------------------------------------------------------------------------------------------
Switzerland - 0.8%
Novartis AG (Pharmaceuticals) 2,007 $ 2,834,298
- ------------------------------------------------------------------------------------------------
United Kingdom - 12.3%
Danka Business Systems, ADR (Business Services) 1,000 $ 46,750
ASDA Group PLC (Supermarkets) 2,030,000 4,761,568
Avis Europe PLC (Auto Rental)## 630,000 1,439,487
British Aerospace PLC (Aerospace and Defense) 204,000 4,773,600
British Petroleum PLC (Oil and Gas) 238,736 3,334,832
British Petroleum PLC, ADR (Oil and Gas) 5,833 493,618
Capital Radio PLC (Broadcasting) 71,000 581,028
Carlton Communicatons PLC (Broadcasting) 387,000 3,079,204
Corporate Services Group (Business Services) 502,000 1,578,137
Grand Metropolitan (Food and Beverage Products) 430,000 3,947,443
Jarvis Hotels PLC (Restaurants and Lodging)*+ 517,800 1,300,558
Kwik-Fit Holdings PLC (Retail) 482,000 2,343,195
Lloyds TSB Group PLC (Banks and Credit Cos.) 253,457 2,920,256
PowerGen PLC (Utilities - Electric)* 378,997 4,790,446
Storehouse PLC (Retail)* 733,971 2,711,803
Tomkins PLC (Diversified Operations) 680,000 3,294,763
--------------
$ 41,396,688
- ------------------------------------------------------------------------------------------------
Venezuela - 0.5%
Compania Anonima Nacional Telefonos de Venezuela,
ADR (Telecommunications)* 41,000 $ 1,691,250
- ------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 163,370,901
- ------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $170,531,331) $ 190,346,661
- ------------------------------------------------------------------------------------------------
Warrants - 0.5%
- ------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------
Warrants - 0.5%
Foreign Stocks
Peregrine Investment Holdings (Hong Kong)* 46,800 $ 23,252
Ciba Specialty Chemicals (Switzerland)* 19,432 1,672,816
- ------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $1,429,855) $ 1,696,068
- ------------------------------------------------------------------------------------------------
Preferred Stock - 0.4%
- ------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------
Entertainment - 0.4%
Time-Warner, Inc., "K", 10.25s##
(Identified Cost, $1,093,406) 1,078 $ 1,226,119
- ------------------------------------------------------------------------------------------------
Bonds - 14.5%
- ------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- ------------------------------------------------------------------------------------------------
U.S. Bonds - 12.7%
Aerospace - 0.5%
BE Aerospace, Inc., 9.875s, 2006 $ 1,250 $ 1,328,125
Howmet Corp., 10s, 2003 250 270,000
--------------
$ 1,598,125
- ------------------------------------------------------------------------------------------------
Automotive - 0.4%
Hayes Wheels International, Inc., 9.125s, 2007## $ 1,500 $ 1,518,750
- ------------------------------------------------------------------------------------------------
Building - 1.0%
American Standard, Inc., 0s to 1998, 10.5s to 2005 $ 750 $ 744,375
Building Materials Corp., 0s to 1999, 11.75s to 2004 1,525 1,406,812
Nortek, Inc., 9.25s, 2007 250 251,875
Nortek, Inc., 9.875s, 2004 900 909,000
--------------
$ 3,312,062
- ------------------------------------------------------------------------------------------------
Chemicals - 1.2%
Harris Chemical North America, Inc., 10.25s, 2001 $ 1,500 $ 1,569,375
NL Industries, Inc., 11.75s, 2003 750 823,125
Sterling Chemicals, Inc., 11.25s, 2007 1,500 1,614,375
--------------
$ 4,006,875
- ------------------------------------------------------------------------------------------------
Consumer Goods and Services - 2.0%
E & S Holdings Corp., 10.375s, 2006 $ 800 $ 803,000
FoodBrands America, Inc., 10.75s, 2006 750 872,145
Kindercare Learning Center, Inc., 9.5s, 2009 650 632,125
Panamsat LP/Capital Corp., 0s to 1998, 11.375s to 2003 1,500 1,477,890
Polymer Group, Inc., 9s, 2007## 1,500 1,518,750
Sealy Corp., 10.25s, 2003 1,000 1,055,000
Westpoint Stevens, Inc., 9.375s, 2005 500 521,250
--------------
$ 6,880,160
- ------------------------------------------------------------------------------------------------
Containers - 1.4%
Gaylord Container Corp., 9.75s, 2007## $ 1,500 $ 1,522,500
Silgan Holdings, Inc., 9s, 2009## 1,500 1,522,500
Stone Container Corp., 9.875s, 2001 1,500 1,518,750
--------------
$ 4,563,750
- ------------------------------------------------------------------------------------------------
Entertainment - 0.3%
AMC Entertainment, Inc., 9.5s, 2009## $ 100 $ 100,500
Cinemark USA, Inc., 9.625s, 2008 1,000 1,010,000
--------------
$ 1,110,500
- ------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.6%
Borden Incorporated, 9.25s, 2019 $ 2,000 $ 2,028,620
- ------------------------------------------------------------------------------------------------
Information, Paging, and Technology - 0.9%
Comcast Cellular Holdings, Inc., 9.5s, 2007## $ 1,500 $ 1,552,500
Iron Mountain, Inc., 10.125s, 2006 1,500 1,620,000
--------------
$ 3,172,500
- ------------------------------------------------------------------------------------------------
Machinery - 0.2%
AGCO Corp., 8.5s, 2006 $ 750 $ 776,250
- ------------------------------------------------------------------------------------------------
Media - 0.7%
Cablevision Systems Corp., 9.25s, 2005 $ 750 $ 772,500
Chancellor Radio Broadcasting Corp., 8.75s, 2007## 750 757,500
Jones Intercable, Inc., 8.875s, 2007 750 776,250
--------------
$ 2,306,250
- ------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.3%
Tenet Healthcare Corp., 8.625s, 2007 $ 240 $ 247,200
Tenet Healthcare Corp., 10.125s, 2005 560 614,600
--------------
$ 861,800
- ------------------------------------------------------------------------------------------------
Metals and Minerals - 1.2%
Alaska Steel Corp., 9.125s, 2006 $ 1,000 $ 1,052,500
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 2,000 2,070,000
WCI Steel, Inc., 10s, 2004 750 789,375
--------------
$ 3,911,875
- ------------------------------------------------------------------------------------------------
Oil Services
Falcon Drilling, Inc., 8.875s, 2003 $ 150 $ 157,125
- ------------------------------------------------------------------------------------------------
Oils - 0.2%
Gulf Canada, 9.25s, 2004 $ 500 $ 528,160
- ------------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.1%
Red Roof Inns, Inc., 9.625s, 2003 $ 250 $ 256,875
- ------------------------------------------------------------------------------------------------
Retail - 0.2%
Revlon, Inc., 10.5s, 2003 $ 800 $ 846,000
- ------------------------------------------------------------------------------------------------
Special Products and Services - 0.7%
IMO Industries, Inc., 11.75s, 2006 $ 750 $ 811,875
Thermadyne Industries Holdings Corp., 10.75s, 2003 1,520 1,580,800
--------------
$ 2,392,675
- ------------------------------------------------------------------------------------------------
Supermarkets - 0.7%
Dominick's Finer Foods, Inc., 10.875s, 2005 $ 700 $ 784,000
Pathmark Stores, Inc., 9.625s, 2003 750 723,750
Ralph's Grocery Co., 10.45s, 2004 800 872,000
--------------
$ 2,379,750
- ------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 42,608,102
- ------------------------------------------------------------------------------------------------
Foreign Bonds - 1.8%
Canada - 0.2%
Rogers Cantel, Inc., 9.375s, 2008 (Cellular Telephones) $ 750 $ 795,000
- ------------------------------------------------------------------------------------------------
Greece - 0.3%
Hellenic Republic, 11.1s, 2003 GRD 90,000 $ 321,812
Hellenic Republic, 12.6s, 2003 116,500 416,978
Hellenic Republic, 13.4s, 2003 30,000 107,071
--------------
$ 845,861
- ------------------------------------------------------------------------------------------------
Indonesia - 1.3%
APP International Finance Co., 10.25s, 2000 (Finance) $ 1,000 $ 1,012,500
APP International Finance Co., 11.75s, 2005 (Finance) 1,500 1,578,750
PT Indah Kiat International Finance Co BV,
11.875s, 2002 (Forest & Paper Products) 1,250 1,380,500
PT Indah Kiat, Pulp & Paper, 8.875s, 2000 (Forest &
Paper Products)## 500 488,750
--------------
$ 4,460,500
- ------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 6,101,361
- ------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $48,491,821) $ 48,709,463
- ------------------------------------------------------------------------------------------------
Contingent Promissory Note - 5.1%
- ------------------------------------------------------------------------------------------------
Cargill, interest rate linked to commodity index, matures in
2002 (Illiquid)
(Identified Cost, $17,085,000) $ 17,000 $ 17,085,000
- ------------------------------------------------------------------------------------------------
Convertible Bond - 0.3%
- ------------------------------------------------------------------------------------------------
U.S. Bonds - 0.3%
Automotive - 0.3%
Exide Corp., 2.9s, 2005## (Identified Cost, $995,583) $ 1,600 $ 1,016,000
- ------------------------------------------------------------------------------------------------
Short-Term Obligations - 27.3%
- ------------------------------------------------------------------------------------------------
Federal Home Loan Bank Consolidated Discount Note, due 9/03/97 $ 6,175 $ 6,173,151
Federal Home Loan Mortgage Corp., due 9/05/97 - 10/07/97 49,255 49,125,357
Federal Home Loan Mortgage Discount Notes, due 9/09/97 - 10/15/97 21,335 21,243,288
Federal National Mortgage Assn., due 9/16/97 3,800 3,791,371
Federal National Mortgage Assn. Discount Notes, due 9/26/97 100 99,626
Student Loan Marketing Discount Note, due 9/02/97 11,540 11,538,256
- ------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 91,971,049
- ------------------------------------------------------------------------------------------------
Call Options Purchased
- ------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------
Finnish Markkaa/Deutsche Marks
January/2.8804 FIM 163,592 $ 13,135
Swedish Kronor/Deutsche Marks
November/4.1 SEK 154,334 7,101
- ------------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $172,669) $ 20,236
- ------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $331,770,714) $ 352,070,596
- ------------------------------------------------------------------------------------------------
Call Options Written - (0.4)%
- ------------------------------------------------------------------------------------------------
DESCRIPTION/EXPIRATION MONTH/STRIKE PRICE
- ------------------------------------------------------------------------------------------------
Swiss Francs/Deutsche Marks
March/0.847 (Premiums Received, $386,669) CHF 55,447 $ (1,452,059)
- ------------------------------------------------------------------------------------------------
Put Options Written - (0.1)%
- ------------------------------------------------------------------------------------------------
Finnish Markkaa/Deutsche Marks January/3.00 FIM 170,385 $ (361,402)
Norweigan Krone/Deutsche Marks October/4.25 NOK 114,683 (26,968)
- ------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $298,290) $ (388,370)
Other Assets, Less Liabilities - (4.0)% $ (13,299,190)
- ------------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 336,930,977
- ------------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GRD = Greek Drachma
CAD = Canadian Dollars HKD = Hong Kong Dollars
CHF = Swiss Francs IEP = Irish Punts
DEM = Deutsche Marks ITL = Italian Lire
DKK = Danish Kroner JPY = Japanese Yen
ECU = European Currency Units NOK = Norwegian Krone
ESP = Spanish Pesetas NZD = New Zealand Dollars
FIM = Finnish Markkaa PTE = Portuguese Escudos
FRF = French Francs SEK = Swedish Kronor
GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $331,770,714) $352,070,596
Cash 108,548
Foreign Currency, at value (identified cost, $119,823) 110,509
Net receivable for forward foreign currency exchange
contracts to sell 6,234,288
Receivable for Fund shares sold 481,907
Receivable for investments sold 1,409,824
Interest and dividends receivable 1,793,011
Other assets 3,016
Deferred organization expenses 17,219
------------
Total assets $362,228,918
------------
Liabilities:
Payable for Fund shares reacquired $ 169,906
Payable for investments purchased 18,319,540
Net payable for forward foreign currency exchange
contracts to purchase 3,734,409
Net payable for forward foreign currency exchange
contracts closed or subject to master netting 758,751
Written options outstanding, at value (premiums received,
$684,959) 1,840,429
Payable to affiliates -
Management fee 16,916
Shareholder servicing agent fee 3,665
Distribution fee 310,019
Accrued expenses and other liabilities 144,306
------------
Total liabilities $ 25,297,941
------------
Net assets $336,930,977
============
Net assets consist of:
Paid-in capital $293,242,936
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 20,876,226
Accumulated undistributed net realized gain on
investments and foreign currency transactions 20,006,806
Accumulated undistributed net investment income 2,805,009
------------
Total $336,930,977
============
Shares of beneficial interest outstanding 18,008,304
==========
Class A shares:
Net asset value per share
(net assets of $111,958,701 / 5,971,079 shares of
beneficial interest outstanding) $18.75
======
Offering price per share (100 / 95.25 of net asset value
per share) $19.69
======
Class B shares:
Net asset value and offering price per share
(net assets of $166,864,816 / 8,924,447 shares of
beneficial interest outstanding) $18.70
======
Class C shares:
Net asset value and offering price per share
(net assets of $58,073,642 / 3,110,973 shares of
beneficial interest outstanding) $18.67
======
Class I shares:
Net asset value per share
(net assets of $33,818 / 1,805 shares of beneficial
interest outstanding) $18.74
======
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
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 8,663,691
Dividends 3,861,826
Foreign taxes withheld (468,115)
-----------
Total investment income $12,057,402
-----------
Expenses -
Management fee $ 1,842,326
Trustees' compensation 41,064
Shareholder servicing agent fee 282,462
Shareholder servicing agent fee (Class A) 46,165
Shareholder servicing agent fee (Class B) 99,975
Shareholder servicing agent fee (Class C) 20,333
Distribution and service fee (Class A) 516,917
Distribution and service fee (Class B) 1,525,599
Distribution and service fee (Class C) 507,377
Administrative fee 25,004
Custodian fee 206,257
Printing 90,526
Auditing fee 54,448
Postage 53,163
Amortization or organization expenses 6,782
Legal fee 4,561
Miscellaneous 198,262
-----------
Total expenses $ 5,521,221
Fees paid indirectly (13,352)
Reduction of expenses by distributor (Class A) (26,751)
-----------
Net expenses $ 5,481,118
-----------
Net investment income $ 6,576,284
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $20,363,050
Written option transactions 383,949
Foreign currency transactions 754,571
-----------
Net realized gain on investments and
foreign currency transactions $21,501,570
-----------
Change in unrealized appreciation (depreciation) -
Investments $11,999,783
Written options (1,202,201)
Translation of assets and liabilities
in foreign currencies 2,923,978
-----------
Net unrealized gain on investments and
foreign currency translation $13,721,560
-----------
Net realized and unrealized gain on
investments and foreign currency $35,223,130
-----------
Increase in net assets from operations $41,799,414
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 6,576,284 $ 4,164,411
Net realized gain on investments and foreign currency
transactions 21,501,570 21,499,473
Net unrealized gain (loss) on investments and foreign
currency translation 13,721,560 (1,720,591)
------------- -------------
Increase in net assets from operations $ 41,799,414 $ 23,943,293
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,207,631) $ (2,008,957)
From net investment income (Class B) (2,457,334) (2,218,582)
From net investment income (Class C) (857,364) (565,751)
From net investment income (Class I) (256) --
From net realized gain on investments and foreign currency
transactions (Class A) (5,984,967) (2,800,463)
From net realized gain on investments and foreign currency
transactions (Class B) (9,094,467) (4,012,442)
From net realized gain on investments and foreign currency
transactions (Class C) (2,927,754) (929,505)
------------- -------------
Total distributions declared to shareholders $ (23,529,773) $ (12,535,700)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 184,908,298 $ 91,720,629
Net asset value of shares issued to shareholders in
reinvestment of distributions 20,249,659 10,664,692
Cost of shares reacquired (130,635,200) (31,243,387)
------------- -------------
Increase in net assets from Fund share transactions $ 74,522,757 $ 71,141,934
------------- -------------
Total increase in net assets $ 92,792,398 $ 82,549,527
Net assets:
At beginning of year 244,138,579 161,589,052
------------- -------------
At end of year (including accumulated undistributed net
investment income of $2,805,009 and $1,613,207,
respectively) $ 336,930,977 $ 244,138,579
============= =============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994*
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $17.68 $16.63 $15.33 $15.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.46 $ 0.43 $ 0.55 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 2.19 1.85 1.17 0.29
------ ------ ------ ------
Total from investment operations $ 2.65 $ 2.28 $ 1.72 $ 0.33
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.40) $(0.49) $(0.37) $ --
From net realized gain on investments and foreign
currency transactions (1.18) (0.74) (0.05) --
------ ------ ------ ------
Total distributions declared to shareholders $(1.58) $(1.23) $(0.42) $ --
------ ------ ------ ------
Net asset value - end of period $18.75 $17.68 $16.63 $15.33
====== ====== ====== ======
Total return(+) 15.67% 14.23% 11.48% 2.20%++
Ratios (to average net assets)/Supplemental data:(S)
Expenses## 1.43% 1.48% 1.47% 1.50%+
Net investment income 2.51% 2.45% 3.49% 2.43%+
Portfolio turnover 128% 202% 118% 1%
Average Commission Rate### $ 0.0000 $0.0219 $ -- $ --
Net assets at end of period (000 omitted) $111,959 $86,457 $58,663 $25,254
*For the period from the commencement of the Fund's investment operations, July 22, 1994,
through August 31, 1994.
+Annualized.
++Not annualized.
#Per share data 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.
(+)Total returns for Class A shares do not include the applicable sales charge. If the sales
charge had been included the results would have been lower.
(S)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:
Net investment income $ 0.45 $ 0.42 $ 0.52 $ 0.02
Ratios (to average net assets):
Expenses## 1.46% 1.53% 1.67% 2.62%+
Net investment income 2.48% 2.40% 3.29% 1.31%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994**
- ------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $17.63 $16.58 $15.31 $15.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.36 $ 0.32 $ 0.43 $ 0.02
Net realized and unrealized gain on investments
and foreign currency transactions 2.19 1.85 1.17 0.29
------ ------ ------ ------
Total from investment operations $ 2.55 $ 2.17 $ 1.60 $ 0.31
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.30) $(0.38) $(0.28) $ --
In excess of net investment income -- (0.74) (0.05) --
From net realized gain on investments and foreign
currency transactions (1.18) -- -- --
------ ------ ------ ------
Total distributions declared to shareholders $(1.48) $(1.12) $(0.33) $ --
------ ------ ------ ------
Net asset value - end of period $18.70 $17.63 $16.58 $15.31
====== ====== ====== ======
Total return 15.01% 13.58% 10.65% 2.07%++
Ratios (to average net assets)/Supplemental data:(S)
Expenses## 1.98% 2.10% 2.24% 2.57%+
Net investment income 1.96% 1.83% 2.75% 1.39%+
Portfolio turnover 128% 202% 118% 1%
Average Commission Rate### $ 0.0000 $ 0.0219 $ -- $ --
Net assets at end of period (000 omitted) $166,865 $124,399 $ 83,601 $ 26,495
**For the period from the commencement of the Fund's offering of Class B shares, July 22,
1994, through August 31, 1994.
+Annualized.
++Not annualized.
#Per share data 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.
(S)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:
Net investment income $ -- -- -- $ 0.01
Ratios (to average net assets):
Expenses## -- -- -- 3.21%+
Net investment income -- -- -- 0.75%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997 1996 1995 1994***
- ---------------------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $17.62 $16.58 $15.31 $15.00
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.36 $ 0.33 $ 0.46 $ 0.03
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 2.18 1.85 1.16 0.28
------ ------ ------ ------
Total from investment operations $ 2.54 $ 2.18 $ 1.62 $ 0.31
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.31) $(0.40) $(0.30) $ --
From net realized gain on investments and foreign
currency transactions (1.18) (0.74) (0.05) --
------ ------ ------ ------
Total distributions declared to shareholders $
$(1.49) $(1.14) $(0.35) --
------ ------ ------ ------
Net asset value - end of period $18.67 $17.62 $16.58 $15.31
====== ====== ====== ======
Total return 15.06% 13.62% 10.72% 2.07%++
Ratios (to average net assets)/Supplemental data:(S)
Expenses## 1.96% 2.03% 2.18% 2.50%+
Net investment income 2.00% 1.89% 2.91% 1.68%+
Portfolio turnover 128% 202% 118% 1%
Average Commission Rate### $0.0000 $0.0219 $ -- $ --
Net assets at end of period (000 omitted) $58,074 $33,283 $19,325 $ 3,435
***For the period from the commencement of the Fund's offering of Class C shares, July 22,
1994, through August 31, 1994.
+Annualized.
++Not annualized.
#Per share data 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.
(S)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
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1997****
- ------------------------------------------------------------------------------
CLASS I
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $17.56
------
Income from investment operations# -
Net investment income $ 0.28
Net realized and unrealized gain on investments and
foreign currency transactions 1.16
------
Total from investment operations $ 1.44
------
Less distributions declared to shareholders -
From net investment income (0.26)
------
Total distributions declared to shareholders (0.26)
------
Net asset value - end of period $18.74
======
Total return 8.22%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.97%+
Net investment income 3.43%+
Portfolio turnover 128%
Average commission rate $0.0000
Net assets at end of period (000 omitted) $34
+Annualized.
++Not annualized.
****For the period from the commencement of the Fund's offering of Class I
shares, January 7, 1997, through August 31, 1997.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS World Asset Allocation Fund (the Fund) is a non-diversified series of MFS
Series Trust I (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
(2) Significant Accounting Policies
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 - 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 foreign currency
and translated into U.S. dollars at the closing daily exchange rate. Options
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued
by brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Equity
securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices.
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 result 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 Fund
operations.
Written Options - The Fund may also write call or put options in exchange for
a premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the options contract. When a
written option expires, the Fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security 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 part of an income-producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
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 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 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. The Fund 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 as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premiums
and original issue discounts are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividends received in cash are recorded on the ex-dividend date. 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. 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 additions 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
expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. This fee is reduced according to an
expense offset arrangement with State Street Bank, 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.
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, 1997, $138,103 was reclassified from
accumulated net realized gain on investments to undistributed net investment
income due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share. At August 31, 1997, accumulated undistributed net investment income
(realized gain on investments and foreign currency transactions) under book
accounting were different from tax accounting due to temporary differences in
accounting for foreign currency transactions.
Capital gains taxes have been provided on unrealized and realized gains from
securities transactions in countries where such a capital gains tax is
applicable. Realized and unrealized gain is reported net of any capital gains
tax in the Statement of Operations.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
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 effective annual rate
of 0.60% of average daily net assets.
Administrator - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As
a partial reimbursement for the cost of providing these services, the Fund
pays MFS an administrative fee up to 0.015% per annum of the Fund's average
daily net assets, provided that the administrative fee is not assessed on Fund
assets that exceed $3 billion.
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 of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$17,093 for the year ended August 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$96,516 for the year ended August 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund. The Trustees have adopted a
distribution plan for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.50%
per annum of its average daily net assets attributable to Class A 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% of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer, a distribution fee to MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for
accounts not attributable to a securities dealer which amounted to $31,646 for
the year ended August 31, 1997. Fees incurred under the distribution plan
during the year ended August 31, 1997, were 0.47% of average daily net assets
attributable to Class A shares on an annualized basis. The Fund began paying
distribution fees at a rate of 0.50% per annum of the Fund's average daily net
assets attributable to Class A, as of April 1, 1997. Prior to that, service
fees with securities dealers were reduced by a maximum of 0.10% per annum. The
Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B and Class C
shares, and will pay to such securities dealers all of the distribution fee
attributable to Class C shares. The service fee is intended to be additional
consideration for services rendered by the dealer with respect to Class B and
Class C shares. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $25,618 and $317 for Class B and Class C
shares, respectively, for the year ended August 31, 1997. Fees incurred under
the distribution plan during the year ended August 31, 1997, were 1.00% of
average daily net assets attributable to Class B and Class C shares on an
annualized basis respectively.
Purchases over $1 million of Class A shares and certain purchases by
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
twelve months of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended August 31,
1997, were $2,458, $219,072, and $13,120 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 fund's average daily net assets at an effective annual
rate of 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15%, up to 0.22%, and up to 0.15%
attributable to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities $ 25,919,164 $ 26,108,204
============ ============
Investments (non-U.S. government securities) $388,044,067 $339,689,070
============ ============
</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:
<TABLE>
<S> <C>
Aggregate cost $331,358,035
============
Gross unrealized appreciation $ 31,312,814
Gross unrealized depreciation (10,600,253)
------------
Net unrealized appreciation $ 20,712,561
============
</TABLE>
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,682,250 $104,763,615 1,942,820 $34,004,181
Shares issued to shareholders in
reinvestment of distributions 420,579 7,433,254 250,334 4,239,097
Shares reacquired (5,021,414) (93,197,777) (830,481) (14,577,459)
--------- ------------ --------- -----------
Net increase 1,081,415 $ 18,999,092 1,362,673 $23,665,819
========= ============ ========= ===========
Class B Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold 2,743,292 $ 50,100,639 2,433,897 $42,393,057
Shares issued to shareholders in
reinvestment of distributions 554,995 9,772,491 308,270 5,200,860
Shares reacquired (1,428,097) (26,314,959) (728,702) (12,706,594)
--------- ------------ --------- -----------
Net increase 1,870,190 $ 33,558,171 2,013,465 $34,887,323
========= ============ ========= ===========
Class C Shares
YEAR ENDED AUGUST 31, 1997 YEAR ENDED AUGUST 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold 1,647,309 $ 30,004,358 877,452 $15,323,391
Shares issued to shareholders in
reinvestment of distributions 173,083 3,043,659 72,545 1,224,735
Shares reacquired (598,498) (11,114,875) (226,844) (3,959,334)
--------- ------------ --------- -----------
Net increase 1,221,894 $ 21,933,142 723,153 $12,588,792
========= ============ ========= ===========
Class I Shares
FOR THE PERIOD
JANUARY 7, 1997 TO
AUGUST 31, 1997
----------------------------
SHARES AMOUNT
- ----------------------------------------------------------------------
Shares sold 2,194 $ 39,686
Shares issued to shareholders in
reinvestment of distributions 13 255
Shares reacquired (402) (7,589)
--------- ------------
Net increase 1,805 $ 32,352
========= ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1997 was $2,564.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts, interest rate swap contracts, and futures contracts. The
notional or contractual amounts of these instruments represent the investment
the Fund has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
<TABLE>
Written Option Transactions
<CAPTION>
1997 CALLS 1997 PUTS
--------------------------------- ---------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Japanese Government Bonds -- $ -- 681,000 $ 55,463
Options written -
Australian Dollars 7,547 50,977 -- --
Deutsche Marks -- -- 52,920 88,720
Deutsche Marks/British Pounds 48,820 156,032 30,698 64,578
Finnish Markka/Deutsche Marks -- -- 170,385 142,065
Japanese Government Bonds 203,000 14,634 1,472,000 130,559
Japanese Yen 9,360,128 803,752 6,130,600 390,779
Norwegian Krona/Deutsche Marks -- -- 114,683 156,225
Swiss Francs/Deutsche Marks 75,349 520,889 -- --
Options terminated in closing transactions -
Australian Dollars (7,547) (50,977) -- --
Deutsche Marks -- -- (52,920) (88,720)
Deutsche Marks/British Pounds (48,820) (156,032) (30,698) (64,578)
Japanese Government Bonds (203,000) (14,634) (2,153,000) (186,022)
Japanese Yen (5,715,453) (657,027) (4,087,079) (279,458)
Swiss Francs/Deutsche Marks (19,902) (134,220) -- --
Options expired -
Japanese Yen (3,644,675) (146,725) (2,043,521) (111,321)
--------- --------- --------- ---------
OUTSTANDING, END OF PERIOD 55,447 $ 386,669 285,068 $ 298,290
========= ========= ========= =========
Options outstanding at end of period consist of:
Finnish Markka/Deutsche Marks -- $ -- 170,385 $ 142,065
Norwegian Krona/Deutsche Marks -- -- 114,683 156,225
Swiss Francs/Deutsche Marks 55,447 386,669 -- --
--------- --------- --------- ---------
OUTSTANDING, END OF PERIOD 55,447 $ 386,669 285,068 $ 298,290
========= ========= ========= =========
</TABLE>
At August 31, 1997, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
<CAPTION>
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
1/07/98 CAD 9,483,802 $ 6,960,589 $ 6,885,105 $ 75,484
1/07/98 CHF 9,985,173 6,683,069 6,793,587 (110,518)
1/07/98 DEM 9,160,289 5,392,434 5,105,293 287,141
1/07/98 DKK 6,258 965 915 50
1/07/98 - 1/15/98 ECU 19,743,367 22,666,530 21,530,673 1,135,857
1/07/98 FRF 42,407,932 7,318,148 7,021,929 296,219
1/07/98 GBP 33,027,984 54,136,508 53,226,793 909,715
1/07/98 JPY 5,179,097,266 46,308,986 43,763,793 2,545,193
1/07/98 NOK 104,080,474 13,557,440 13,983,453 (426,013)
1/07/98 NZD 27,237,308 18,614,006 17,253,077 1,360,929
1/07/98 SEK 52,239,957 6,802,253 6,642,022 160,231
------------ ------------ -----------
$188,440,928 $182,206,640 $ 6,234,288
============ ============ ===========
Purchases
1/07/98 AUD 19,774,936 $ 14,924,145 $ 14,515,495 $ (408,650)
9/30/97 - 1/07/98 CAD 18,967,605 13,868,034 13,733,641 (134,393)
1/07/98 CHF 30,892,366 21,746,765 21,018,161 (728,604)
8/29/97 - 1/07/98 DEM 34,811,960 20,167,318 19,400,751 (766,567)
1/07/98 ECU 12,704,344 13,557,441 13,854,297 296,856
1/07/98 ESP 945,236,067 6,502,411 6,201,608 (300,803)
1/07/98 GBP 6,314,781 10,560,523 10,176,689 (383,834)
1/07/98 GRD 1,957,336,206 6,978,026 6,873,946 (104,080)
9/02/97 HKD 300,873 38,832 38,817 (15)
9/03/97 ITL 39,051,207 22,166 22,086 (80)
1/07/98 JPY 1,125,263,046 10,218,980 9,508,564 (710,416)
1/07/98 NOK 104,080,474 14,476,733 13,983,453 (493,280)
9/02/97 - 9/04/97 PTE 122,904,841 673,070 672,527 (543)
------------ ------------ -----------
$133,734,444 $130,000,035 $(3,734,409)
============ ============ ===========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $1,484,453 with Swiss Bank, $581,268 with Bankers Trust,
$523,570 with Deutsche Bank, $417,134 with Chase Manhattan, $366,203 with
Goldman Sachs and a net receivable of $2,031,854 with C.S. First Boston and
$582,023 with Merrill Lynch at August 31, 1997.
At August 31, 1997, 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,
1997, the Fund owned the following restricted securities (constituting .9% of
net assets) which 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 brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hong Leong Finance Ltd. 6/12/95 897,000 $2,824,159 $1,750,675
Jarvis Hotels PLC 7/02/96 517,800 1,325,552 1,300,558
---------- ----------
$4,149,711 $3,051,233
========== ==========
</TABLE>
<PAGE>
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), including the schedule of portfolio
investments, as of August 31, 1997, and the related statement of operations
for the year then ended, 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 three 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 at August 31, 1997, by correspondence with the custodian and brokers or
by 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 as of August 31, 1997, the results of its
operations for the year then ended, 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 three 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.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) WORLD ASSET ALLOCATION FUNDSM
<S> <C>
TRUSTEES SECRETARY
Stephen E. Cavan*
A. Keith Brodkin* - Chairman and President
ASSISTANT SECRETARY
Richard B. Bailey* - Private Investor; James R. Bordewick, Jr.*
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company
AUDITORS
Marshall N. Cohan - Private Investor Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION For MFS stock and bond
Surgery, Brigham and Women's Hospital; market outlooks, call toll free: 1-800-637-4458
Professor of Surgery, Harvard Medical School anytime from a touch-tone telephone.
The Hon. Sir J. David Gibbons, KBE - Chief For information on MFS mutual funds, call your
Executive Officer, Edmund Gibbons Ltd.; financial adviser or, for an information kit,
Chairman, Bank of N.T. Butterfield & Son Ltd. call toll free: 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time (or leave a
Abby M. O'Neill - Private Investor; message anytime).
Director, Rockefeller Financial Services, Inc.
(investment advisers) INVESTOR SERVICE
MFS Service Center, Inc.
Walter E. Robb, III - President and Treasurer, P.O. Box 2281
Benchmark Advisors, Inc. (corporate financial Boston, MA 02107-9906
consultants); President, Benchmark
Consulting Group, Inc. (office services); For general information, call toll free:
Trustee, Landmark Funds (mutual funds) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, For service to speech- or hearing-impaired, call
Massachusetts Financial Services Company toll free: 1-800-637-6576 any business day from
9 a.m. to 5 p.m. Eastern time. (To use this
Jeffrey L. Shames* - President and Director, service, your phone must be equipped with a
Massachusetts Financial Services Company Telecommunications Device for the Deaf.)
J. Dale Sherratt - President, Insight Resources, For share prices, account balances, and
Inc. (acquisition planning specialists) exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
Ward Smith - Former Chairman (until 1994), telephone.
NACCO Industries; Director, Sundstrand
Corporation WORLD WIDE WEB
www.mfs.com
INVESTMENT ADVISER
Massachusetts Financial Services Company [Dalbar For the fourth year in a row, MFS
500 Boylston Street Logo] earned a #1 ranking in the DALBAR,
Boston, MA 02116-3741 Inc. Broker/Dealer Survey, Main Office
Operations Service Quality Category.
DISTRIBUTOR The firm achieved a 3.42 overall score on a
MFS Fund Distributors, Inc. scale of 1 to 4 in the 1997 survey. A total of
500 Boylston Street 111 firms responded, offering input on the
Boston, MA 02116-3741 quality of service they received from 29 mutual
fund companies nationwide. The survey contained
ASSET ALLOCATION COMMITTEE* questions about service quality in 11
A. Keith Brodkin categories, including "knowledge of operations
Jeffrey L. Shames contact," "keeping you informed," and "ease of
John W. Ballen doing business" with the firm.
Leslie J. Nanberg
James T. Swanson
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) WORLD ASSET BULK RATE
ALLOCATION FUND(SM) U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MAA-2 10/97 35.5M 88/288/388/888
<PAGE> 245
MFS RESEARCH GROWTH AND INCOME FUND
Supplement to the January 1, 1998 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,
1998, and contains a description of Class I shares.
Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.
EXPENSE SUMMARY
<TABLE>
CLASS I
<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............................................................ 0.65%
Rule 12b-1 Fees............................................................ None
Other Expenses (after fee reduction)(1)(2)(3).............................. 0.60%
Total Operating Expenses (after fee reduction)(3).......................... 1.25%
</TABLE>
- ------------------
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
period ended August 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Fund's expenses). Any such fee reductions are not
reflected under "Other Expenses."
(3) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed 0.60%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be 0.65%
and 1.30%, respectively. See "Other Information" below.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
<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.
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.
CONSOLIDATED FINANCIAL INFORMATION
The following information has been audited and should be read in
conjunction with the financial statements included in the Fund's Annual Report
to Shareholders which are incorporated by reference into the SAI in reliance
upon the report of the Fund's independent auditors, given upon their authority
as experts in accounting and auditing. The Fund's independent auditors are
Ernst & Young LLP.
-1-
<PAGE> 246
Financial Statements - Class I Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31, 1997**
- --------------------------------------------------------------------------------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.01
-------
Income from investment operations# -
Net investment income@ $ 0.08
Net realized and unrealized gain on investments and
foreign currency transactions 2.11
-------
Total from investment operations $ 2.19
=======
Less distributions declared -
From net investment income (0.04)
-------
Net asset value - end of period $ 14.16
=======
Total return 19.01%++
Ratios (to average net assets)/Supplemental data@:
Expenses## 1.18%+
Net investment income 0.87%+
Portfolio turnover 106%
Average commission rate $0.0423
Net assets at end of period (000 omitted) $ 825
</TABLE>
** For the period from the inception of Class I shares, January 2, 1997,
through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
@ The investment advisor voluntarily agreed to maintain the expenses of the
Fund at not more than 1.25% of the average daily net assets. To the extent
actual expenses were over/under the limitation, the net investment income
per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $ 0.08
Ratios (to average net assets):
Expenses## 1.22%+
Net investment income 0.83%+
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c)
invests at least $10 million in Class I shares of the Fund either alone
or in combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it
- 2 -
<PAGE> 247
believes, in its sole discretion, that the bank trust department will make
additional investments, on behalf of its trust clients, which will cause
its total investment to equal or exceed $100,000 within a reasonable period
of time.
In no event will the fund, MFS, MFD or any of their affiliates pay any
sales commissions or compensation to any third party in connection with the
sale of Class I shares; the payment of any such sales commission or compensation
would, under the Fund's policies, disqualify the purchaser as an eligible
investor of Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge
up to a maximum of 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 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 I shares are offered
at net asset value without an initial sales charge or CDSC and are not subject
to a distribution or service fee. Class C shares and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.60% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
-3-
<PAGE> 248
MFS(R) RESEARCH GROWTH PROSPECTUS
AND INCOME FUND JANUARY 1, 1998
CLASS A SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS B SHARES OF BENEFICIAL INTEREST
CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
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
objectives of the Fund are 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 "Information
Concerning Shares of the Fund -- 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.
(continued on next page)
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.
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> 249
(continued from previous page)
This Prospectus sets forth concisely the information concerning the Fund and the
Trust that a prospective investor ought to know before investing. The Trust, on
behalf of the Fund, has filed with the Securities and Exchange Commission (the
"SEC") a Statement of Additional Information (the "SAI"), dated January 1, 1998,
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 37 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................... 3
2. Condensed Financial Information............................... 5
3. The Fund...................................................... 7
4. Investment Objectives and Policies............................ 7
5. Certain Securities and Investment Techniques.................. 8
6. Additional Risk Factors....................................... 14
7. Management of the Fund........................................ 17
8. Information Concerning Shares of the Fund..................... 18
Purchases................................................... 18
Exchanges................................................... 25
Redemptions and Repurchases................................. 26
Distribution Plan........................................... 29
Distributions............................................... 31
Tax Status.................................................. 31
Net Asset Value............................................. 32
Expenses.................................................... 32
Description of Shares, Voting Rights and Liabilities........ 33
Performance Information..................................... 34
9. Shareholder Services.......................................... 35
Appendix A -- Waivers of Sales Charges........................ A-1
</TABLE>
2
<PAGE> 250
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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 "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)
0.35% per annum of the average daily net assets attributable to Class A
shares. The Class A distribution fee of 0.10% is currently being waived on a
voluntary basis and may be imposed at the discretion of MFD. Distribution
expenses paid under this Plan, together with the initial sales charge, may
cause long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
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,
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 "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) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed 0.60% per annum of the
Fund's average daily net
3
<PAGE> 251
assets during the current fiscal year. Otherwise, "Other Expenses" for the
Fund would be 0.65% per annum for Class A, Class B and Class C shares,
respectively.
(6) Absent any fee reductions, "Total Operating Expenses" for the Fund would be
1.55%, 2.30% and 2.30% per annum for Class A, B and C shares, respectively.
See "Information Concerning Shares of the Fund -- Expenses" below.
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)
1 year......................... $ 72 $ 63 $ 23 $ 33 $ 23
3 years........................ 102 100 70 70 70
5 years........................ 135 140 120 120 120
10 years........................ 226 239(2) 239(2) 258 258
</TABLE>
- ---------------
(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.
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.
4
<PAGE> 252
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since the inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
----------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1997 1996*
---------- ------------
<S> <C> <C>
Per share data (for a share outstanding
throughout the period):
Net asset value -- beginning of period............... $ 11.13 $ 10.00
------- -------
Income from investment operations# --
Net investment incomesec......................... $ 0.07 $ 0.05
Net realized and unrealized gain on investments
and foreign currency transactions.............. 3.02 1.08
------- -------
Total from investment operations..................... $ 3.09 $ 1.13
------- -------
Less distributions declared to shareholders --
From net investment income....................... (0.06) --
From net realized gain on investments
and foreign currency transactions.............. (0.04) --
------- -------
Total distributions declared to shareholders......... (0.10) --
------- -------
Net asset value -- end of period..................... $ 14.12 $ 11.13
------- -------
Total return++....................................... 36.22% 11.30%++
Ratios (to average net assets)/Supplemental datasec.:
Expenses##....................................... 1.50% 1.50%+
Net investment income............................ 0.56% 0.65%+
Portfolio turnover................................... 106% 58%
Average commission rate.............................. $0.0423 $0.0113
Net assets at end of period (000 omitted)............ $33,567 $ 492
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares on January 2, 1996,
through August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
++ Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been
lower.
sec. The investment adviser voluntarily agreed to maintain the expenses of the
Fund at not more than 1.50% of the average daily net assets. To the extent
actual expenses were over/under the limitation, the net investment income
(loss) per share and the ratios would have been:
Net investment income (loss)................... $ 0.07 $ (0.13)
Ratios (to average net assets):
Expenses##.................................... 1.55% 4.58%+
Net investment income (loss).................. 0.51% (1.86)%+
</TABLE>
5
<PAGE> 253
FINANCIAL HIGHLIGHTS
MFS MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS B CLASS C
------------ ------------
PERIOD ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1997* 1997*
------------ ------------
<S> <C> <C>
Per share data (for a share outstanding
throughout the period):
Net asset value -- beginning of period................... $ 12.01 $ 12.00
------- -------
Income from investment operations# --
Net investment losssec............................... $ (0.02) $ (0.02)
Net realized and unrealized gain on investments
and foreign currency transactions.................. 2.13 2.11
------- -------
Total from investment operations......................... $ 2.11 $ 2.09
------- -------
Less distributions declared --
From net investment income........................... (0.01) (0.01)
------- -------
Net asset value -- end of period......................... $ 14.11 $ 14.08
------- -------
Total return............................................. 17.56%++ 17.41%++
Ratios (to average net assets)/Supplemental data sec.:
Expenses##........................................... 2.25%+ 2.25%+
Net investment loss.................................. (0.22)%+ (0.21)%+
Portfolio turnover....................................... 106% 106%
Average commission rate.................................. $0.0423 $0.0423
Net assets at end of period (000 omitted)................ $43,069 $ 7,433
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class B and Class C shares on January 2,
1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
sec. The investment adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 2.25% of the average daily net assets. To the extent actual
expenses were over/under the limitation, the net investment loss per share and
the ratios would have been:
Net investment loss................................ $ (0.02) $ (0.02)
Ratios (to average net assets):
Expenses##........................................ 2.30%+ 2.30%+
Net investment loss............................... (0.27)%+ (0.26)%+
</TABLE>
6
<PAGE> 254
3. 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.
4. INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives are long-term growth of capital, current income
and growth of income. The investment objectives and polices of the Fund may,
unless otherwise specifically stated, be changed by the Trustees of the Trust
without a vote of the shareholders. A change in the Fund's objectives may result
in the Fund having an investment objectives different from the objectives which
shareholders considered appropriate at the time of investment in the Fund. Any
investment involves risk and there is no assurance that the investment
objectives 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
7
<PAGE> 255
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 "Certain Securities and 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 securities transactions and investment techniques
as described under the caption "Certain Securities and 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
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"). A determination is made, 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, retains
oversight, focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A Securities could have the effect of
decreasing the level of liquidity in 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.
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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 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.
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, the Fund will normally segregate liquid assets
sufficient to cover its commitments. Although the Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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
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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.
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 may be of any size, 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.
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 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, the
source of its revenues and the location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities
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may be more volatile than the underlying instrument itself and could involve the
loss of all or a portion of the principal amount or interest on the investment.
SWAPS AND RELATED TRANSACTIONS -- As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
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, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions. Swaps, caps, floors and collars are
highly specialized activities which involve certain risks.
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. However, the writing of
options constitutes only a partial hedge, up to the amount of the premium, less
any transaction cost. In contrast, 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
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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
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
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(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."
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
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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 which require 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.
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 "Certain Securities and 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 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
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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 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
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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 the fiscal year ended August 31, 1997, the Fund had a portfolio
turnover rate of over 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 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 Conduct Rules
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
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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). Except
with respect to the Fund's policies on borrowing and investing in illiquid
securities, 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 FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated January 2, 1996. Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. The Fund is
managed by a committee comprised of various equity research analysts. 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 fiscal year
ended August 31, 1997, the adviser received management fees under the Advisory
Agreement of $210,333 (equivalent to 0.65% of the Fund's average daily net
assets). Prior to January 1, 1997, 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(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 Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $69.4
billion on behalf of approximately 2.7 million investor accounts as of November
30, 1997. As of such date, the MFS organization managed approximately $20.1
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $44.2 billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, 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.
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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, James R. Bordewick, Jr., Ellen Moynihan and Mark E. Bradley, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
This Prospectus offers Class A, Class B and Class C shares, which bear sales
charges and distribution fees in different forms and amounts, as described
below:
CLASS A SHARES -- Class A shares are generally offered at net asset value plus
an initial sales charge, but in certain cases are offered at net asset value
without an initial sales charge but subject to a CDSC.
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PURCHASES SUBJECT TO INITIAL SALES CHARGE. Class A shares are offered at net
asset value plus an initial sales charge as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> SALES CHARGE* AS
PERCENTAGE OF: DEALER
ALLOWANCE AS A
OFFERING NET AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $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
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i) the
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of the Funds in the MFS Funds would be in
an aggregate amount of at least $250,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent (the
"MFS Participant Recordkeeping System"); (b) the plan establishes an account
with the Shareholder Servicing Agent on or after July 1, 1996; and (c) the
aggregate purchases by the retirement plan of Class A shares of the MFS
Funds will be in
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<PAGE> 267
an aggregate amount of at least $500,000 within a reasonable period of time,
as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE 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; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- ------------------------------------
<C> <S>
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" below 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
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<PAGE> 268
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have pursuant
to a purchase order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of the MFS Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 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" below 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
21
<PAGE> 269
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 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 up to $1,000,000 per transaction.
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<PAGE> 270
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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
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<PAGE> 271
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Funds
may have different and/or more restrictive policies with respect to market
timers than the Fund. These policies are disclosed in the prospectuses of these
other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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> 272
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.
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.
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<PAGE> 273
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.
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
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<PAGE> 274
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 and
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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 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,
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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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares 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
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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 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 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
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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. The Class A distribution fee of 0.10%
is currently being waived on a voluntary basis and may be imposed at the
discretion of MFD. Prior to January 1, 1997, MFD waived its right to receive
distribution and service fees for Class A shares.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. If the Fund earns less than
projected, or otherwise distributes more than its earnings for the year, a
portion of the distributions may constitute a return of capital. The Fund may
make one or more distributions during the calendar year to its shareholders from
any long-term capital gains and may also make one or more distributions during
the calendar year to its shareholders from short-term capital gains.
Shareholders may elect to receive dividends and capital gain distributions in
either cash or additional shares of the same class with respect to which a
distribution is made. See "Tax Status" and "Shareholder Services -- Distribution
Options" below. Distributions paid by the Fund with respect to Class A shares
will generally be greater than those paid with respect to Class B and Class C
shares because expenses attributable to Class B and Class C shares will
generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). Because the Fund intends to distribute all of
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
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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 (as well as the rate category or categories under which such gain is
taxable), 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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
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shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the 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 sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage, transaction costs and class
specific expenses, do not exceed 0.60% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or 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).
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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.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund 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 Securities Corporation 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, and purchased by, the public on
different dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the newer
class. See the SAI for further information on the calculation of total rate of
return for share classes with different class inception dates.
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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, 1997, 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").
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
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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.
RIGHT OF ACCUMULATION: A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of the Fund
may be sold at net asset value (and 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).
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds
36
<PAGE> 284
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, 1998, 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.
37
<PAGE> 285
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B 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;
- 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.
A-1
<PAGE> 286
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and
Repurchases -- General -- Involuntary Redemptions/Small Accounts" in the
Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(a) PLANS ("401(a) PLANS") AND SECTION 403(b) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan;
- 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.
A-2
<PAGE> 287
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
A-3
<PAGE> 288
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed
payment of commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds subject to
such requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases subject to a
CDSC" in the Prospectus). The Eligible Funds are all funds included in the
MFS Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
A-4
<PAGE> 289
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-5
<PAGE> 290
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK WORLD
- ---------------------------------------------------- ---------------------------------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging
Markets Equity Fund
Massachusetts Investors Growth Stock Fund
MFS(R) International Growth Fund(3)
MFS(R) Mark Emerging Growth Fund
MFS(R) International Growth and
MFS(R) Equity Income Fund Income Fund(4)
MFS(R) Growth Opportunities Fund MFS(R) World Asset Allocation Fund sm
MFS(R) Large Cap Growth Fund(1) MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
MFS(R) Mid Cap Growth Fund(2) MFS(R) World Growth Fund
MFS(R) New Discovery Fund MFS(R) World Total Return Fund
MFS(R) Research Fund
NATIONAL TAX-FREE BOND
MFS(R) Research Growth and Income Fund ---------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Strategic Growth Fund
MFS(R) Municipal High Income Fund
MFS(R) Union StandardRegistration Mark Equity Fund
MFS(R) Municipal Income Fund
MFS(R) Value Fund
STATE TAX-FREE BOND
STOCK AND BOND ---------------------------------------------------------
- ---------------------------------------------------- Alabama, Arkansas, California, Florida,
MFS(R) Total Return Fund Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
MFS(R) Utilities Fund Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
BOND
- ---------------------------------------------------- MONEY MARKET
MFS(R) Bond Fund ---------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Money Market Fund
MFS(R) Government Securities Fund
MFS(R) Money Market Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- ---------------------------------------------------- (1) Formerly MFSRegistration Mark Capital Growth Fund.
MFS(R) Government Limited Maturity Fund (2) Formerly MFSRegistration Mark OTC Fund.
(3) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Limited Maturity Fund International Growth Fund.
(4) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Municipal Limited Maturity Fund International Growth and Income Fund.
</TABLE>
<PAGE> 291
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
<PAGE> 292
----------------
Bulk Rate
[MFS INVESTMENT MANAGEMENT U.S. Postage
WE INVENTED THE MUTUAL FUND(TM) LOGO] Paid
MFS
----------------
MFS(R) RESEARCH GROWTH & INCOME FUND
500 Boylston Street, Boston,MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial records
because it provides important facts
about your investment.
MRG-1-1/98/146M
<PAGE> 293
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
<TABLE>
MFS(R) RESEARCH GROWTH STATEMENT OF
AND INCOME FUND ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1998
- --------------------------------------------------------------------------------------------------
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objectives, Policies and Restrictions...................................... 2
Certain Securities and Investment Techniques....................................... 2
3. Management of the Fund................................................................ 14
Trustees........................................................................... 15
Officers........................................................................... 15
Investment Adviser................................................................. 16
Administrator...................................................................... 16
Custodian.......................................................................... 16
Shareholder Servicing Agent........................................................ 17
Distributor........................................................................ 17
4. Portfolio Transactions and Brokerage Commissions...................................... 18
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs................................................. 19
Exchange Privilege................................................................. 21
Tax-Deferred Retirement Plans...................................................... 22
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.................................. 27
10. Independent Auditors and Financial Statements......................................... 28
Appendix A -- Performance Quotations.................................................. A-1
</TABLE>
MFS(R) 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 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,
1998. 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> 294
1. DEFINITIONS
"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, 1998, as
amended or supplemented
from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES 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 Objectives and
Policies," "Certain Securities and Investment Techniques" and "Additional Risk
Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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 liquid assets (if consistent with the Fund's
investment policies) sufficient to cover any commitments or to limit any
potential risk. Although the Fund
2
<PAGE> 295
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. Indexed securities may be more volatile than the underlying
instrument itself and could involve the loss of all or a portion of the
principal amount of the investment.
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 agree-
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ments 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 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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded, and applicable
laws and regulations. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
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 liquid assets. 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 written. Buy-and-write
transactions using in-the-money call op-
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tions 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 liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets 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 liquid assets in a segregated account
with its custodian. Put and call options on stock indices may also be covered in
such other manner as may be in accordance with the rules of 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.
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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 liquid assets 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 purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures
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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, liquid assets, 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 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
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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 liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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 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
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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, 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.
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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 liquid assets 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 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
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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 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-
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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, 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 Investment Company
Act of 1940, as amended (the "1940
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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) and nonfundamental investment
policy(1), these investment restrictions and policies are adhered to at the time
of purchase or utilization of assets; a subsequent change in circumstances will
not be considered to result in a violation of policy.
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. Currently, the 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 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;
(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; or
(10) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of 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 (born 8/4/35)
Massachusetts Financial Services Company, Chairman
RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November 1997)
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 8/18/26)
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;
Address: 36080 Shaker Blvd., Hunting Valley, 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
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young LLP, Senior Tax Manager (prior to September 1994)
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.
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 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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE RETIREMENT
FEES BENEFIT ESTIMATED TOTAL
FROM ACCRUED AS CREDITED TRUSTEE FEES
THE PART OF FUND YEARS OF FROM FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Walter E. Robb, III.... $0 $0 6 $149,258
Marshall N. Cohan...... 0 0 6 149,258
Sir David Gibbons...... 0 0 6 136,508
Richard B. Bailey...... 0 0 6 247,168
Ward Smith............. 0 0 10 149,258
Abby M. O'Neill........ 0 0 7 123,758
Dr. Lawrence Cohn...... 0 0 16 136,508
J. Dale Sherratt....... 0 0 18 149,258
</TABLE>
- ---------------
(1) For the fiscal year ending August 31, 1997.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1996. All Trustees served
as Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS complex (having
aggregate net assets at December, 1996 of approximately $38.5 billion).
For the period from the commencement of investment operations on January 2, 1996
to the Fund's fiscal year ended August 31, 1997, the Trustees waived their right
to receive such fees.
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As of November 29, 1997, the Trustees and officers as a group owned less than 1%
of the Fund's shares.
As of November 29, 1997, Merrill Lynch, Pierce, Fenner & Smith Inc., FBO its
Customers, Attention: Fund Administration, 4800 Deer Lake Drive East, 3rd Floor,
Jacksonville, Florida 32246-6484 was the owner of approximately 5.05%, 7.58% and
29.24% of the outstanding Class A, Class B, and Class C shares of the Fund,
respectively; and The MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services, 500 Boylston Street, Boston, MA 02116-3740 was
the owner of approximately 99.99% of the outstanding Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to 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 an
indirect 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").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading "Management
of the Funds."
For the Fund's fiscal year ended August 31, 1997, MFS received $210,333 under
the Advisory Agreement.
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.
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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. During the period March 1, 1997
through August 31, 1997, MFS received $5,130 under the 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
16
<PAGE> 309
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 September 10, 1986,
as amended (the "Agency Agreement") with the Trust. The Shareholder Servicing
Agent's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the Fund.
For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 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
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. 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.
During the Fund's fiscal year ended August 31, 1997, MFD received sales charges
of $61,977 and dealers received sales charges of $1,069,888 (as their concession
on gross sales charges of $1,131,865), for selling Class A shares of the Fund;
the Fund received $26,024,403 representing the aggregate net asset value of such
shares.
For the period from the inception date of Class A shares 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.
For the fiscal year ended August 31, 1996, the contingent deferred sales charge
("CDSC") imposed on the redemption of Class A, Class B and Class C shares was
$0. For the fiscal year ended August 31, 1997, the CDSC imposed on the
redemption of Class A, Class B and Class C shares was $0, $12,565 and $1,795,
respectively.
The Distribution 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 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
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<PAGE> 310
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 Conduct Rules 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 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
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $50,980 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the fiscal year ended August 31, 1996, the fund paid total brokerage
commissions of $986 on total transactions of $710,876.
18
<PAGE> 311
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $142,865 on total transactions of $124,329,374.
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 shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the
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<PAGE> 312
Shareholder Servicing Agent on any business day prior to the close of regular
trading on the Exchange (generally 4:00 p.m., Eastern time), the purchase will
occur at the closing net asset value of the shares purchased on that day. The
Shareholder Servicing Agent may be liable for any losses resulting from
unauthorized telephone transactions if it does not follow reasonable procedures
designed to verify the identity of the caller. The Shareholder Servicing Agent
will request personal or other information from the caller, and will normally
also record calls. Shareholders should verify the accuracy of confirmation
statements immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if 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
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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 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
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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.
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 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 normally 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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 without regard to the length of time shareholders have held
their shares. Such capital gains may be taxable to shareholders that are
individuals, estates or trusts at maximum rates of 20%, 25%, or 28%, depending
upon the source of the gains. 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.
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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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 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 certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss with
respect to other positions in its portfolio may constitute "straddles," and may
be subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles 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. The Fund may
elect to mark-to-market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold.
Investment income received by the Fund from foreign securities may be subject to
foreign income taxes withheld at the source; the 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 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% (or any lower rate permitted
under an applicable treaty) on taxable dividends and other payments to Non-U.S.
Persons that are subject to such withholding. 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
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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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID BY FEES RETAINED FEES RECEIVED
CLASSES OF SHARES FUND BY MFD BY DEALERS
- ----------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $ 32,439 $ 520 $ 31,919
Class B Shares $153,833 $115,452 $ 38,381
Class C Shares $ 26,443 $ 19 $ 26,424
</TABLE>
GENERAL: The of the Distribution Plan will remain in effect until August 1,
1998, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties 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 be amended to increase materially the amount of permitted
distribution expenses without the approval of a majority of the respective class
of the Fund's shares (as defined in "Investment Restrictions") or may not be
materially amended in any case without a vote of the Trustees and a majority of
the Distribution Plan Qualified Trustees. The selection and nomination of
Distribution Plan Qualified Trustees shall be committed to the discretion of the
non-interested Trustees then in office. No Trustee who is not an "interested
person" has any financial interest in the Distribution Plan or in any related
agreement.
8. DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
NET ASSET VALUE: The net asset value per share of each class of the Fund is
determined each day during which the Exchange is open for trading. (As of the
date of this SAI, the Exchange is open for trading every weekday except for the
following holidays (or the days on which they are observed): New Year's Day;
Martin Luther King Day; Presidents' Day; Good Friday; Memorial Day; Independence
Day; Labor Day; Thanksgiving Day and Christmas Day.) This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Equity
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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 stock market 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 stock market 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
stock market 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) 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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later inception date than another class of shares of the Fund is based both on
(i) the performance of the Fund's newer class from its inception date and (ii)
the performance of the Fund's oldest class from its inception date up to the
Class inception date of the newer class.
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).
25
<PAGE> 318
Total rate of return quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
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.
Yield quotations for each class of shares are presented in Appendix A attached
hereto under the heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the 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.
Current distribution rate quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical 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 recommen; 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() program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); issues
26
<PAGE> 319
regarding financial and health care management for elderly family members; and
other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and twelve 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
27
<PAGE> 320
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, 1997, the Statement of Operations for the year ended August 31, 1997,
the Statement of Changes in Net Assets for the year ended August 31, 1997 and
the period ended 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.
28
<PAGE> 321
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
---------- --------------- ------------ ---------- -----
<S> <C> <C> <C> <C>
December 31, 1996* $11,385 $0 $813 $12,198
------- -- ---- -------
</TABLE>
* For the period from the class inception date of January 2, 1996 to December
31, 1996.
Explanatory Notes: The results assume that income, dividends and capital gains
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 sale charge. No adjustment has been made for income taxes, if any,
payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of August 31, 1997.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL YIELD YIELD
TOTAL RETURNS* (INCLUDING (WITHOUT CURRENT
----------------------- ANY ANY DISTRIBUTION
1 YEAR LIFE OF FUND WAIVERS) WAIVERS) RATE
------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Class A Shares with sales charge.......... 29.70% 24.72%(1) 0.48% -2.2% 0.53%
Class A Shares without sales charge....... 36.22% 28.44%(1) N/A N/A N/A
Class B Shares with CDSC.................. 31.92%(2) 26.21%(2) N/A N/A N/A
Class B Shares without CDSC............... 35.92%(2) 28.26%(2) -0.25% -2.97% 0.00%
Class C Shares with CDSC.................. 34.63%(3) 28.10%(3) N/A N/A N/A
Class C Shares without CDSC............... 35.63%(3) 28.10%(3) -0.25% -2.97% 0.01%
Class I Shares............................ 36.68%(4) 28.69%(4) 0.76% -1.99% 0.76%(5)
</TABLE>
(1) From the class inception date of January 2, 1996.
(2) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on January 2,
1997. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class C shares on January 2,
1997. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class C shares differ. Class C share performance has been
adjusted to reflect that Class C shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an initial sales charge. Class C
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(4) Class I share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class I shares on January 2,
1997. Sales charges, expenses and expense ratios, and therefore performance
for Class I and A shares differ. Class I share performance has been adjusted
to reflect that Class I shares are not subject to an initial sales charge,
whereas Class A shares generally are subject to an initial sales charge.
Class I share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class I shares.
(5) The current distribution rate for Class I shares is calculated by
annualizing the last dividend.
* Total rate of return figures would have been lower if an expense limitation
was not in place.
A-1
<PAGE> 322
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) RESEARCH GROWTH AND INCOME FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
MRG-13-1/97 500
<PAGE> 323
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) RESEARCH GROWTH AND INCOME FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Director of Research ................................ 2
Fund Facts ................................................................ 5
Performance Summary ....................................................... 5
Tax Form Summary .......................................................... 7
Portfolio Concentration ................................................... 8
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 22
Independent Auditors' Report .............................................. 28
Trustees and Officers ..................................................... 29
- --------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 36.22%, CLASS B SHARES
35.92%, CLASS C SHARES 35.63%, AND CLASS I SHARES 36.68%. (SEE
PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE FUND'S UNDERPERFORMANCE VERSUS THE STANDARD & POOR'S 500 COMPOSITE
INDEX, WHICH RETURNED 40.78% DURING THE PERIOD, CAN BE ATTRIBUTED TO
OVERWEIGHTINGS IN SOME SECTORS THAT HAD FLAT-TO-DOWN PERFORMANCE,
ALTHOUGH SPECIFIC COMPANIES IN THE FUND FROM THESE SECTORS PERFORMED
WELL.
o THE FUND IS OVERWEIGHTED IN FINANCIAL SERVICES, RETAILING, AND CONSUMER
STAPLES, AS THESE SECTORS INCLUDE SEVERAL COMPANIES THE ANALYSTS BELIEVE
CAN BENEFIT FROM A SLOW-GROWTH, LOW-INFLATION ENVIRONMENT AS WELL AS FROM
CONSOLIDATION.
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A.Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's willingness to raise interest
rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
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 15, 1997
<PAGE>
A DISCUSSION WITH THE DIRECTOR OF RESEARCH
[Photo of Kevin R. Parke]
Kevin R. Parke
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 36.22%, Class B shares 35.92%, Class C shares 35.63%, and Class
I shares 36.68%. These returns, which include the reinvestment of distributions
but exclude the effects of any sales charges, compare to a 40.78% return for the
Standard & Poor's 500 Composite Index (the S&P 500), a popular, unmanaged index
of common stock total return performance.
Q. WHAT DO YOU THINK WERE SOME OF THE MAJOR REASONS FOR THE FUND'S PERFORMANCE
OVER THE PAST YEAR?
A. The Fund's underperformance versus the S&P 500 can mainly be attributed to
sector weightings that grew out of the individual stock-selection process.
The research analysts selected what they believed were attractive companies
within the financial services, retailing, and consumer staples sectors.
While the Fund's specific companies in these sectors performed well, the
sectors in general underperformed the S&P 500 during the past year.
Conversely, the Fund was underweighted in technology, leisure, utilities
and communications, and the miscellaneous category, which consists mainly
of business services. Our companies from these sectors performed well over
the past 12 months and significantly outperformed the equivalent sectors
within the S&P 500.
Q. COULD YOU TALK ABOUT HOW THE SYSTEM OF USING A COMMITTEE OF MFS RESEARCH
ANALYSTS TO SELECT STOCKS IS USED FOR THIS PARTICULAR FUND?
A. The Fund is based upon the research analysts' best ideas within their
industries. Stocks are selected after careful, in-depth fundamental
analysis of companies' earnings outlooks. Although each analyst
incorporates general economic forecasts into his or her decision-making
process, ultimately, stocks selected for the Fund represent companies that
the analysts believe offer the best possibilities for capital appreciation
within a conservative growth and income framework regardless of the
economic outlook. These companies typically demonstrate dominant and/or
growing market share, quality new and existing products, superior
management teams, and strong financial statements. Sector and industry
weightings in the Fund are a result of the "best ideas" stock-selection
process. However, the committee of analysts review weightings regularly in
light of any changes to the outlook for specific companies.
Q. CAN YOU TALK ABOUT SOME SECTORS THE FUND IS EMPHASIZING?
A. The Fund continues to be overweighted in the financial services, retailing,
and consumer staples sectors. Given the current economic backdrop, the
analysts believe many of the companies in these sectors are well positioned
for a slow-growth, low-inflation environment. Companies such as Rite Aid,
CVS, and Safeway have benefited from improving margins, cost savings
resulting from continued consolidation, and volume growth resulting from a
robust economy. Banking and insurance companies have benefited from similar
trends.
Q. WHAT ABOUT INDIVIDUAL STOCKS? WHAT CAN YOU TELL US ABOUT SOME
OF THE FUND'S TOP HOLDINGS?
A. The Fund's largest holding is Coca-Cola. The company has an approximate 43%
share of the U.S. soft drink market and a 49% share of the international
market, and the analysts believe its ability to increase prices, diversify
geographically, and leverage its global brand image should continue to
drive volume growth in the months ahead. Another top holding is British
Petroleum, one of the largest petroleum and petrochemical groups in the
world. It appears to have the most profitable growth profile among the
integrated oil companies and a superior management team that has
successfully focused on cost controls and long-term earnings growth. In
addition, the company's ability to generate large cash flow enables it to
either strengthen its existing business through reinvestment or to boost
stock performance through share repurchasings.
Q. COULD YOU DISCUSS SOME OF THE FUND'S HOLDINGS THAT HAVE PERFORMED BETTER
THAN EXPECTED OVER THE PAST YEAR?
A. The Fund's eighth-largest holding, Tyco International, surprised us during
the past year. The company announced two acquisitions from which the
analysts expect cost and revenue synergies to contribute significant
earnings growth in the years ahead. As a result, the company's stock price
has performed even better than expected.
Q. NOW, WHAT ABOUT SOME STOCKS OR SECTORS THAT DID NOT PERFORM AS WELL AS YOU
WOULD HAVE LIKED?
A. Waste Management has not lived up to our expectations, in spite of industry
fundamentals that have been improving in recent years and an upward bias in
both collection pricing and recycled materials. Another company the Fund
owns, Browning Ferris Industries, has benefited from these new industry
dynamics while Waste Management has not. However, Waste Management recently
hired a new CEO who has announced several strategic initiatives, including
increased cost-reduction efforts and increased return on investment. Also,
senior management's compensation now is directly linked to the company's
performance, which should help in the turnaround.
Q. LOOKING BACK, HOW WOULD YOU CHARACTERIZE THE BUSINESS AND ECONOMIC
ENVIRONMENT OF THE PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. It has been a favorable environment for the companies in the Fund. In
general, corporate profits, which have exceeded inflation in a slow-growth
economic environment, continue to be the story driving stock prices,
including prices of many of the stocks in the Fund.
Q. LOOKING AHEAD, WHAT CHANGES DO YOU SEE IN THE ECONOMIC AND BUSINESS
CLIMATE, PARTICULARLY AS IT RELATES TO THE FUND, AND HOW IS THE FUND
POSITIONED FOR THOSE CHANGES?
A. The short-term outlook appears to call for more modest returns than we've
seen in the recent past. In this environment individual stock-picking,
rather than a focus on the overall market, has become the key to long-term
investment performance. It appears that selected companies in the financial
services, health care, and consumer staples industries still have
reasonable valuations and favorable opportunities for long-term growth and
superior investment returns.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The committee of MFS research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Mr. Parke.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
OBJECTIVE: THE INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM
GROWTH OF CAPITAL, CURRENT INCOME, AND GROWTH OF
INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: JANUARY 2, 1996
CLASS B: JANUARY 2, 1997
CLASS C: JANUARY 2, 1997
CLASS I : JANUARY 2, 1997
SIZE: $84.9 MILLION NET ASSETS AS OF AUGUST 31, 1997
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS(R)
Research Growth and Income Fund - Class A shares in comparison to various
market indicators. Class A share performance results reflect the deduction of
the 5.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. The performance of other share classes will be
greater than or less than the line shown, based on the differences in charges
and fees paid by shareholders investing in different classes. It is not
possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Research
Growth and S&P 500 Consumer
Income Fund - Composite Price
Class A Index Index - U.S.
-------------- --------- ------------
1/96 $ 9,425 $10,000 $10,000
8/96 $10,490 $10,745 $10,253
8/97 $14,290 $15,112 $10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund#
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Research Growth and Income Fund (Class A)
including 5.75% sales charge (SEC results) +29.70% +24.72%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class A)
at net asset value +36.22% +28.44%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class B)
with CDSC (SEC results) +31.92% +26.21%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class B)
at net asset value +35.92% +28.26%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class C)
with CDSC (SEC results) +34.63% +28.10%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class C)
at net asset value +35.63% +28.10%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Research Growth and Income Fund (Class I)
at net asset value +36.68% +28.69%
- -----------------------------------------------------------------------------------------------------------------------------
Average growth and income fund+ +35.03% +19.84%
- -----------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +40.78% +28.29%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*++ + 2.19% + 2.85%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
# For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
+ Source: Lipper Analytical Services, Inc.
++ Source: CDA/Wiesenberger.
* The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 5.75% sales charge. Class B
share SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
Class C shares have no initial sales charge but, along with Class B shares,
have higher annual fees and expenses than Class A shares. Class C share
purchases are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class I shares, which became available on January 2, 1997, have no sales
charge or Rule 12b-1 fees and are only available to certain institutional
investors.
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B and Class C shares. Because
operating expenses attributable to Class B and Class C shares are higher than
those of Class A shares, Class B and Class C share performance generally would
have been lower than Class A share performance. The Class A share performance
included within the Class B and Class C share SEC performance has been
adjusted to reflect the CDSC generally applicable to Class B and Class C
shares rather than the initial sales charge generally applicable to Class A
shares.
Class I share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class
I share performance generally would have been higher than Class A share
performance. The Class A share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
- --------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
DIVIDENDS-RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 19.1%.
- --------------------------------------------------------------------------------
<PAGE>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
TOP 10 EQUITY HOLDINGS
COCA-COLA CO. MICROSOFT CORP.
International food and beverage Computer software and systems company
company
SPRINT CORP.
BRITISH PETROLEUM PLC Long-distance telephone company
Oil exploration and production
company TYCO INTERNATIONAL LTD.
Manufacturer of fire protection,
DU PONT (E.I.) DE NEMOURS & CO., packaging, and electronic equipment
INC.
Diversified chemical company BRISTOL-MYERS SQUIBB CO.
Pharmaceutical products company
COMPAQ COMPUTER CORP.
Personal computer company UNITED TECHNOLOGIES CORP.
Aerospace, defense, and building
INTEL CORP. equipment company
Semiconductor manufacturer
LARGEST SECTORS
Financial Services 25.7%
Miscellaneous (Conglomerates, 33.2%
special services/sevices)
Consumer Staples 12.9%
Health Care 10.9%
Technology 9.5%
Utilities & Communications 7.8%
For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
Stocks - 97.1%
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 88.4%
Aerospace - 2.9%
<S> <C> <C>
Lockheed-Martin Corp. 9,980 $1,034,801
United Technologies Corp. 18,300 1,428,544
----------
$2,463,345
- -------------------------------------------------------------------------------------------------
Agricultural Products - 0.9%
Case Corp. 11,800 $ 791,338
- -------------------------------------------------------------------------------------------------
Apparel and Textiles - 0.5%
Reebok International Ltd. 10,200 $ 448,163
- -------------------------------------------------------------------------------------------------
Banks and Credit Companies - 6.4%
BankBoston Corp. 8,570 $ 712,381
Chase Manhattan Corp. 10,750 1,195,266
Comerica, Inc. 9,600 679,800
Compass Bancshares, Inc. 35,290 1,257,206
Fleet/Norstar Financial Group, Inc. 10,300 663,706
PNC Bank Corp. 10,300 445,475
Wells Fargo & Co. 1,800 457,650
----------
$5,411,484
- -------------------------------------------------------------------------------------------------
Building - 0.2%
Newport News Shipbuilding, Inc. 7,700 $ 149,188
- -------------------------------------------------------------------------------------------------
Business Machines - 0.3%
Sun Microsystems, Inc.* 6,010 $ 288,480
- -------------------------------------------------------------------------------------------------
Business Services - 0.3%
Storage Trust Realty 9,510 $ 241,316
- -------------------------------------------------------------------------------------------------
Cellular Telephones - 1.2%
Century Telephone Enterprises, Inc. 28,000 $1,016,750
- -------------------------------------------------------------------------------------------------
Chemicals - 4.5%
Air Products & Chemicals, Inc. 15,800 $1,288,687
du Pont (E.I.) de Nemours & Co., Inc. 31,840 1,984,030
Praxair, Inc. 9,700 518,344
----------
$3,791,061
- -------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 2.9%
First Data Corp. 20,875 $ 857,180
Microsoft Corp.* 12,000 1,586,250
---------------
$2,443,430
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 3.1%
Compaq Computer Corp.* 30,100 $1,971,550
Oracle Systems Corp.* 18,100 690,063
----------
$2,661,613
- -------------------------------------------------------------------------------------------------
Consumer Goods and Services - 8.7%
Colgate-Palmolive Co. 14,200 $ 891,050
Estee Lauder Cos., "A"* 11,650 553,375
Gillette Co. 14,250 1,180,078
Hertz Corp., "A"* 500 17,281
Philip Morris Cos., Inc. 31,700 1,382,912
Procter & Gamble Co. 6,900 918,131
Revlon, Inc., "A"* 11,200 544,600
Sherwin Williams Co. 12,600 345,713
Tyco International Ltd.* 19,311 1,514,707
----------
$7,347,847
- -------------------------------------------------------------------------------------------------
Electronics - 2.2%
Intel Corp. 20,600 $1,897,775
- -------------------------------------------------------------------------------------------------
Entertainment - 1.2%
Clear Channel Communications, Inc.* 9,300 $ 631,819
Jacor Communications, Inc., "A"* 8,300 365,200
----------
$ 997,019
- -------------------------------------------------------------------------------------------------
Financial Institutions - 3.5%
Advanta Corp., "B" 12,250 $ 388,938
American Express Co. 5,900 458,725
ARM Financial Group, Inc., "A"* 300 5,831
Associates First Capital Corp., "A" 8,600 499,337
Federal National Mortgage Assn. 26,500 1,166,000
Kilroy Realty Corp. 16,800 429,450
----------
$2,948,281
- -------------------------------------------------------------------------------------------------
Food and Beverage Products - 4.3%
Coca-Cola Co. 47,400 $2,716,612
Wrigley (Wm) Junior Co. 12,660 917,850
----------
$3,634,462
- -------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.9%
Kimberly-Clark Corp. 17,020 $ 807,386
- -------------------------------------------------------------------------------------------------
Insurance - 7.9%
Allstate Corp. 11,800 $ 862,137
Chubb Corp. 12,300 822,563
CIGNA Corp. 7,700 1,411,987
Conseco, Inc. 16,900 726,700
Frontier Insurance Group, Inc. 1,000 35,000
New Hartford Financial Services Group, Inc. 11,760 937,860
Lincoln National Corp. 7,200 481,950
Nationwide Financial Services, Inc., "A" 2,700 74,925
Reliastar Financial Corp. 6,877 514,056
Travelers Group, Inc. 12,800 812,800
----------
$6,679,978
- -------------------------------------------------------------------------------------------------
Medical and Health Products - 5.5%
Bristol-Myers Squibb Co. 19,900 $1,512,400
Cardinal Health, Inc. 18,000 1,192,500
Columbia/HCA Healthcare Corp. 12,800 404,000
HEALTHSOUTH Corp.* 8,500 211,969
Horizon CMS Healthcare Corp.* 23,800 489,387
Lilly (Eli) & Co. 8,000 837,000
----------
$4,647,256
- -------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 4.1%
Medtronic, Inc. 12,400 $1,120,650
St. Jude Medical, Inc.* 26,610 1,012,843
United Healthcare Corp. 27,600 1,342,050
----------
$3,475,543
- -------------------------------------------------------------------------------------------------
Metals and Minerals - 1.0%
Aluminum Cos. of America 10,730 $ 882,543
- -------------------------------------------------------------------------------------------------
Office Equipment - 0.3%
Office Depot, Inc.* 16,300 $ 300,531
- -------------------------------------------------------------------------------------------------
Oil Services - 3.7%
Baker Hughes, Inc. 11,400 $ 483,075
Burlington Resources, Inc. 17,800 901,125
Chevron Corp. 10,500 813,094
USX-Marathon Group 29,900 973,619
----------
$3,170,913
- -------------------------------------------------------------------------------------------------
Pollution Control - 1.0%
Browning Ferris Industries, Inc. 13,300 $ 464,669
Waste Management, Inc. 12,100 387,200
----------
$ 851,869
- -------------------------------------------------------------------------------------------------
Printing and Publishing - 1.2%
Tribune Co. 20,200 $ 998,638
- -------------------------------------------------------------------------------------------------
Railroads - 0.8%
Burlington Northern Santa Fe Railway Co. 7,500 $ 687,656
- -------------------------------------------------------------------------------------------------
Real Estate - 4.6%
Arden Realty, Inc. 17,100 $ 493,762
Boston Properties, Inc.* 13,500 402,469
Cornerstone Properties, Inc. 35,800 635,450
Mid-America Apartment Communities, Inc. 25,200 691,425
Sl Green Realty Corp. 18,200 433,388
Sovran Self Storage, Inc. 18,900 574,087
TriNet Corporate Realty Trust, Inc. 19,700 700,581
----------
$3,931,162
- -------------------------------------------------------------------------------------------------
Restaurants and Lodging - 2.7%
Hilton Hotels Corp. 12,900 $ 395,869
Host Marriott Corp.* 15,470 301,665
Host Marriott Financial Trust## 10,820 665,430
Innkeepers USA Trust 61,270 934,367
----------
$2,297,331
- -------------------------------------------------------------------------------------------------
Stores - 3.7%
CVS Corp. 15,000 $ 845,625
Lowes Co., Inc. 15,030 519,474
Penney (J.C.), Inc. 12,000 720,000
Rite Aid Corp. 20,700 1,036,294
----------
$3,121,393
- -------------------------------------------------------------------------------------------------
Supermarkets - 0.8%
Safeway, Inc.* 12,960 $ 660,150
- -------------------------------------------------------------------------------------------------
Telecommunications - 2.4%
Cincinnati Bell, Inc. 46,000 $1,239,125
Lucent Technologies, Inc. 10,560 822,360
----------
$2,061,485
- -------------------------------------------------------------------------------------------------
Utilities - Electric - 1.5%
CMS Energy Corp. 15,710 $ 564,578
Sierra Pacific Resources 22,700 709,375
----------
$1,273,953
- -------------------------------------------------------------------------------------------------
Utilities - Gas - 1.4%
Coastal Corp. 12,580 $ 726,495
Utilicorp United, Inc. 14,600 434,350
----------
$1,160,845
- -------------------------------------------------------------------------------------------------
Utilities - Telephone - 1.8%
Sprint Corp. 32,500 $1,527,500
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $75,067,684
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 8.7%
Hong Kong - 0.2%
Hong Kong Electric Holdings Ltd. (Utilities - Electric) 5,500 $ 19,235
Wharf Holdings Ltd. (Real Estate) 50,000 180,991
-----------
$ 200,226
- -------------------------------------------------------------------------------------------------
Italy - 0.5%
Gucci Group Designs NV (Apparel and Textiles) 6,700 $ 407,862
- -------------------------------------------------------------------------------------------------
Japan - 0.7%
Sony Corp. (Electronics) 7,000 $ 609,453
- -------------------------------------------------------------------------------------------------
Sweden - 0.7%
Sparbanken Sverige AB (Banks and Credit Cos.) 27,490 $ 594,954
- -------------------------------------------------------------------------------------------------
Switzerland - 1.1%
Novartis AG (Pharmaceuticals) 630 $ 889,690
- -------------------------------------------------------------------------------------------------
United Kingdom - 5.5%
British Aerospace PLC (Aerospace and Defense) 25,110 $ 587,575
British Petroleum PLC, ADR (Oil and Gas) 24,009 2,031,762
Grand Metropolitan (Food and Beverage Products) 82,100 753,689
Lloyds TSB Group PLC (Banks and Credit Cos.) 35,600 410,175
PowerGen PLC (Utilities - Electric)* 70,423 890,140
-----------
$ 4,673,341
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 7,375,526
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $76,869,399) $82,443,210
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 3.4%
- -------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97 $ 1,500 $ 1,499,547
Federal National Mortgage Assn., due 9/03/97 1,409 1,408,791
- -------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,908,338
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $79,777,737) $85,351,548
Other Assets, Less Liabilities - (0.5)% (457,164)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $84,894,384
- -------------------------------------------------------------------------------------------------
</TABLE>
*Non-income producing security.
##SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $79,777,737) $ 85,351,548
Cash 144,590
Foreign currency, at value (identified cost, $1,418) 1,381
Receivable for Fund shares sold 616,705
Dividends and interest receivable 88,691
Deferred organization expenses 1,450
Other assets 439
------------
Total assets $ 86,204,804
------------
Liabilities:
Payable for investments purchased $ 1,222,542
Payable for Fund shares reacquired 30,305
Payable to affiliates -
Management fee 4,553
Distribution and service fee 46,462
Accrued expenses and other liabilities 6,558
------------
Total liabilities $ 1,310,420
------------
Net assets $ 84,894,384
============
Net assets consist of:
Paid-in capital $77,170,529
Unrealized appreciation on investments and translation of
assets and liabilities
in foreign currencies 5,573,782
Accumulated undistributed net realized gain on investments
and foreign
currency transactions 2,183,301
Accumulated net investment loss (33,228)
------------
Total $ 84,894,384
============
Total shares of beneficial interest outstanding 6,015,872
=========
Class A shares:
Net asset value per share
(net assets of $33,567,266 / 2,377,727 shares of
beneficial interest outstanding) $14.12
======
Offering price per share (100 / 94.25) $14.98
======
Class B shares:
Net asset value and offering price per share
(net assets of $43,069,091 / 3,051,983 shares of
beneficial interest outstanding) $14.11
======
Class C shares:
Net asset value and offering price per share
(net assets of $7,433,005 / 527,914 shares of beneficial
interest outstanding) $14.08
======
Class I shares:
Net asset value and offering price per share
(net assets of $825,022 / 58,248 shares of beneficial
interest outstanding) $14.16
======
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,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------------------
Net investment income:
Income -
<S> <C>
Dividends $ 547,288
Interest 100,569
----------
Total investment income $ 647,857
----------
Expenses -
Management fee $ 210,333
Shareholder servicing agent fee 37,101
Distribution and service fee (Class A) 32,439
Distribution and service fee (Class B) 153,833
Distribution and service fee (Class C) 26,443
Registration fee 68,550
Printing 29,773
Custodian fee 24,276
Postage 8,524
Auditing fee 6,501
Legal fee 3,707
Amortization of organization expenses 434
Miscellaneous 23,746
----------
Total expenses $ 625,660
Fees paid indirectly (13,508)
Reduction of expenses by investment adviser (3,379)
----------
Net expenses $ 608,773
----------
Net investment income $ 39,084
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $2,189,288
Foreign currency transactions (1,538)
----------
Net realized gain on investments and foreign currency transactions $2,187,750
----------
Change in unrealized appreciation (depreciation) -
Investments $5,567,156
Translation of assets and liabilities in foreign currencies (32)
----------
Net unrealized gain on investments and foreign currency $5,567,124
----------
Net realized and unrealized gain on investments and foreign currency $7,754,874
----------
Increase in net assets from operations $7,793,958
==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C>
Increase in net assets:
From operations -
Net investment income $ 39,084
Net realized gain on investments and foreign currency transactions 2,187,750
Net unrealized gain on investments and foreign currency translation 5,567,124
-----------
Increase in net assets from operations $ 7,793,958
-----------
Distributions declared to shareholders -
From net investment income (Class A) $ (56,344)
From net investment income (Class B) (12,053)
From net investment income (Class C) (2,170)
From net investment income (Class I) (1,976)
From net realized gain on investments (Class A) (36,020)
-----------
Total distributions declared to shareholders $ (108,563)
-----------
Fund share (principal) transactions -
Net proceeds from sale of shares $81,508,083
Net asset value of shares issued to shareholders in reinvestment of
distributions 101,498
Cost of shares reacquired (4,892,905)
-----------
Increase in net assets from Fund share transactions $76,716,676
-----------
Total increase in net assets $84,402,071
Net assets:
At beginning of period 492,313
-----------
At end of period (including accumulated undistributed net investment
loss of $33,228 respectively) $84,894,384
===========
</TABLE>
See notes to financial statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1996*
- -----------------------------------------------------------------------------------------------------
<S> <C>
Increase in net assets:
From operations -
Net investment income $ 1,821
Net realized gain (loss) on investments and foreign currency
transactions 29,981
Net unrealized gain on investments and foreign currency translation 6,658
----------
Increase in net assets from operations $ 38,460
----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 453,853
Increase in net assets from Fund share transactions 453,853
----------
Total increase in net assets $ 492,313
Net assets:
At beginning of period --
----------
At end of period (including accumulated undistributed net investment
income of $1,769 respectively) $ 492,313
==========
</TABLE>
*For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
1997 1996*
- ----------------------------------------------------------------------------------------------------------
CLASS A
- ----------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $11.13 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.07 $ 0.05
Net realized and unrealized gain on investments and foreign
currency transactions 3.02 1.08
------ ------
Total from investment operations $ 3.09 $ 1.13
------ ------
Less distributions declared to shareholders -
From net investment income (0.06) --
From net realized gain on investments and foreign
currency transactions (0.04) --
------ ------
Total distributions declared to shareholders (0.10) --
------ ------
Net asset value - end of period $14.12 $11.13
====== ======
Total return(+) 36.22% 11.30%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.50% 1.50%+
Net investment income 0.56% 0.65%+
Portfolio turnover 106% 58%
Average commission rate $0.0423 $0.0113
Net assets at end of period (000 omitted) $33,567 $ 492
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through
August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
(S) The investment advisor voluntarily agreed to maintain the expenses of the Fund at not more than 1.50%
of the average daily net assets. To the extent actual expenses were over/under the limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.07 $(0.13)
Ratios (to average net assets):
Expenses## 1.55% 4.58%+
Net investment income (loss) 0.51% (1.86)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31,
1997**
- -------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $12.01
------
Income from investment operations# -
Net investment loss(S) $(0.02)
Net realized and unrealized gain on investments and foreign currency
transactions 2.13
------
Total from investment operations $ 2.11
------
Less distributions declared -
From net investment income (0.01)
------
Net asset value - end of period $14.11
======
Total return 17.56%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.25%+
Net investment loss (0.22)%+
Portfolio turnover 106%
Average commission rate $0.0423
Net assets at end of period (000 omitted) $43,069
*For the period from the commencement of the Fund's offering of Class B
shares, January 2, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
(S)The investment advisor voluntarily agreed to maintain the expenses of the
Fund at not more than 2.25% of the average daily net assets. To the extent
actual expenses were over/ under the limitation, the net investment loss per
share and the ratios would have been:
Net investment loss $(0.02)
Ratios (to average net assets):
Expenses## 2.30%+
Net investment loss (0.27)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31,
1997**
- -------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $ 12.00
-------
Income from investment operations# -
Net investment loss(S) $ (0.02)
Net realized and unrealized gain on investments and foreign currency
transactions 2.11
-------
Total from investment operations $ 2.09
-------
Less distributions declared -
From net investment income (0.01)
-------
Net asset value - end of period $ 14.08
=======
Total return 17.41%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.25%+
Net investment loss (0.21)%+
Portfolio turnover 106%
Average commission rate $0.0423
Net assets at end of period (000 omitted) $ 7,433
**For the period from the commencement of the Fund's offering of Class C
shares, January 2, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid
indirectly.
(S)The investment advisor voluntarily agreed to maintain the expenses of the
Fund at not more than 2.25% of the average daily net assets. To the extent
actual expenses were over/ under the limitation, the net investment loss per
share and the ratios would have been:
Net investment loss $(0.02)
Ratios (to average net assets):
Expenses## 2.30%+
Net investment loss (0.26)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED
AUGUST 31,
1997**
- -------------------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $12.01
------
Income from investment operations# -
Net investment income(S) $ 0.08
Net realized and unrealized gain on investments and foreign currency
transactions 2.11
------
Total from investment operations $ 2.19
------
Less distributions declared -
From net investment income (0.04)
------
Net asset value - end of period $14.16
======
Total return 19.01%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.18%+
Net investment income 0.87%+
Portfolio turnover 106%
Average commission rate $0.0423
Net assets at end of period (000 omitted) $ 825
** For the period from the commencement of the Fund's offering of Class I shares, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment advisor voluntarily agreed to maintain the expenses of the Fund at not
more than 1.25% of the average daily net assets. To the extent actual expenses were
over/ under the limitation, the net investment income per share and the ratios would
have been:
Net investment income $ 0.08
Ratios (to average net assets):
Expenses## 1.22%+
Net investment income 0.83%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Research Growth and Income 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 - 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 gain 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 Fund
operations.
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 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 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 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 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. On contract settlement date, the gains or losses are recorded
as realized gains or losses on foreign currency transactions.
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 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 custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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. 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, 1997, $1,538 was reclassified
from accumulated net investment income to accumulated net realized gain on
investments due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share.
(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 0.65%
of average daily net assets. The investment adviser did not impose a portion
of its fee, which is reflected as a preliminary reduction of expenses in the
Statement of Operations.
Under a temporary expense reimbursement agreement with MFS, MFS has
voluntarily agreed to pay all of the Fund's operating expenses exclusive of
management, distribution, and service fees. The Fund in turn will pay MFS an
expense reimbursement fee not greater than 0.60% of average daily net assets
of the Fund. To the extent that the expense reimbursement fee exceeds the
Fund's actual expenses, the excess will be applied to amounts paid by MFS in
prior years. At August 31, 1997, the aggregate unreimbursed expenses owed to
MFS by the Fund amounted to $15,331, including $10,800 incurred in the current
period.
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 Trustees
are currently not receiving any payments for their services to the Fund.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$61,977 for the year ended August 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's 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 $520 for the year ended August 31, 1997. Payment of the 0.10% per
annum Class A distribution fee is currently being waved on a voluntary basis
and may be imposed at the discretion of MFD. Fees incurred under the
distribution plan during the year ended August 31, 1997, were 0.25% of average
daily net assets attributable to Class A shares.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B and
Class C shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class B
and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $73 and
$19 for Class B and Class C shares, respectively, for the year ended August
31, 1997. Fees incurred under the distribution plan during the period ended
August 31, 1997, 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. MFD receives all contingent deferred sales charges.
There were no contingent deferred sales charges imposed during the year ended
August 31, 1997, on Class A shares of the Fund. Contingent deferred sales
charges imposed during the year ended August 31, 1997, were $12,565 and $1,795
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 at an effective annual rate of up
to 0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
the average daily net assets of Class A shares at an effective annual rate of
up to 0.15%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
- ------------------------------------------------------------------------------
U.S. government securities $ 1,462,070 $ 361,245
============ ===========
Investments (non-U.S. government securities) $105,914,449 $32,798,325
============ ===========
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 $79,835,431
===========
Gross unrealized appreciation $ 6,710,597
Gross unrealized depreciation (1,194,480)
-----------
Net unrealized appreciation $ 5,516,117
===========
(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, 1997 AUGUST 31, 1996*
---------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------
Shares sold 2,557,527 $32,802,879 44,240 $453,853
Shares issued to shareholders in
reinvestment of distributions 6,926 87,900 -- --
Shares reacquired (230,966) (2,975,784) -- --
--------- ----------- ------- --------
Net increase 2,333,487 $29,914,995 44,240 $453,853
========= =========== ======= ========
Class B Shares
PERIOD ENDED AUGUST 31,
1997**
----------------------
SHARES AMOUNT
- --------------------------------------------------------
Shares sold 3,163,454 $40,817,323
Shares issued to shareholders in
reinvestment of distributions 854 10,426
Shares reacquired (112,325) (1,518,396)
--------- -----------
Net increase 3,051,983 $39,309,353
========= ===========
Class C Shares
PERIOD ENDED AUGUST 31,
1997**
----------------------
SHARES AMOUNT
- --------------------------------------------------------
Shares sold 557,072 $7,186,023
Shares issued to shareholders in
reinvestment of distributions 97 1,196
Shares reacquired (29,255) (395,528)
-------- ----------
Net increase 527,914 $6,791,691
======== ==========
Class I Shares
PERIOD ENDED AUGUST 31,
1997**
-----------------------
SHARES AMOUNT
- --------------------------------------------------------
Shares sold 58,353 $701,858
Shares issued to shareholders in
reinvestment of distributions 148 1,976
Shares reacquired (253) (3,197)
------- --------
Net increase 58,248 $700,637
======= ========
* For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class B,
Class C, and Class I shares, January 2, 1997, through August 31, 1997.
(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 $400 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended August
31, 1997, was $50.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Research Growth
and Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Research Growth and Income Fund, including the schedule of portfolio
investments as of August 31, 1997, and the related statement of operations for
the year then ended, the statement of changes in net assets and the financial
highlights for the year then ended and 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 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 and financial highlights. Our procedures included
confirmation of the securities owned at August 31, 1997, by correspondence
with the custodian and brokers or by 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 audit 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
Research Growth and Income Fund at August 31, 1997, the results of its
operations for the year then ended, the changes in its net assets and the
financial highlights for the year then ended and for the period from January
2, 1996 (commencement of operaitons) to August 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) RESEARCH GROWTH AND INCOME FUND
<TABLE>
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Cambridge CUSTODIAN
Trust Company State Street Bank and Trust Company
Marshall N. Cohan - Private Investor AUDITORS
Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery,
Brigham and Women's Hospital; Professor of INVESTOR INFORMATION
Surgery, Harvard Medical School For MFS stock and bond market outlooks, call toll
free: 1-800-637-4458 anytime from a touch-tone
The Hon. Sir J. David Gibbons, KBE - Chief telephone.
Executive Officer, Edmund Gibbons Ltd.; Chairman,
Bank of N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call your
financial adviser or, for an information kit, call
Abby M. O'Neill - Private Investor; toll free: 1-800-637-2929 any business day from 9
Director, Rockefeller Financial Services, Inc. a.m. to 5 p.m. Eastern time (or leave a message
(investment advisers) anytime).
Walter E. Robb, III - President and Treasurer, INVESTOR SERVICE
Benchmark Advisors, Inc. (corporate financial MFS Service Center, Inc.
consultants); President, Benchmark Consulting P.O. Box 2281
Group, Inc. (office services); Trustee, Landmark Boston, MA 02107-9906
Funds (mutual funds)
For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from
President, Director and Secretary, Massachusetts 8 a.m. to 8 p.m. Eastern time.
Financial Services Company
For service to speech- or hearing-impaired, call
Jeffrey L. Shames* - President and Director, toll free: 1-800-637-6576 any business day from 9
Massachusetts Financial Services Company a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a
J. Dale Sherratt - President, Insight Resources, Telecommunications Device for the Deaf.)
Inc. (acquisition planning specialists)
For share prices, account balances, and exchanges,
Ward Smith - Former Chairman (until 1994), NACCO call toll free: 1-800-MFS-TALK (1-800-637-8255)
Industries; Director, Sundstrand Corporation anytime from a touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
[DALBAR For the fourth year in a row,
DISTRIBUTOR LOGO] MFS earned a #1 ranking in the
MFS Fund Distributors, Inc. DALBAR, Inc. Broker/Dealer Survey,
500 Boylston Street Main Office Operations Service Quality
Boston, MA 02116-3741 Category. The firm achieved a 3.42
overall score on a scale of 1 to 4 in
DIRECTOR OF RESEARCH the 1997 survey. A total of 111 firms
Kevin R. Parke* responded, offering input on the
quality of service they received from
TREASURER 29 mutual fund companies nationwide.
W. Thomas London* The survey contained questions about
service quality in 11 categories,
ASSISTANT TREASURERS including "knowledge of operations
Mark E. Bradley* contact," "keeping you informed,"
Ellen Moynihan* "ease of doing business" with the firm.
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) RESEARCH GROWTH BULK RATE
AND INCOME FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MRG-2 10/97 17M 091/291/391/891
<PAGE> 324
MFS STRATEGIC GROWTH FUND
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION DATED
JANUARY 1, 1998.
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1998 AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
-------
<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 ............................................................ 0.75%
Rule 12b-1 Fees ............................................................ None
Other Expenses (after expense limitation)(1)(2)(3) ......................... 0.50%
----
Total Operating Expenses (after expense limitation)(3) ..................... 1.25%
</TABLE>
(1) "Other Expenses" is based on Class A expenses incurred during the fiscal
year ended August 31, 1997.
(2) The Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Fund's expenses). Any such fee reductions are
not reflected under "Other Expenses."
(3) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed 0.50%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be 0.76%
and 1.51%, respectively. See "Other Information" below.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<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.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP.
-1-
<PAGE> 325
Financial Statements - Class I Shares
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31,1997*
- -----------------------------------------------------------------------------------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period .......................... $ 12.08
Income from investment operations ###
Net investment (loss) ....................................... $ (0.04)
Net realized and unrealized gain on investments and
foreign currency transactions .............................. 4.76
------------
Total from investment operations ......................... $ 4.72
------------
Net asset value - end of period ................................ $ 16.80
------------
Total return ................................................... 39.24%++
Ratios (to average net assets)/Supplemental data ###:
Expenses## .................................................. 0.94%+
Net investment loss ......................................... (0.40)%+
Portfolio turnover ............................................. 82%
Average commission rate ........................................ $ 0.0527
Net assets at end of period (000 omitted) ...................... $ 13,462
</TABLE>
* For the period from the inception of Class I shares, January 2, 1997,
through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### Subject to reimbursement by the Fund, the Adviser voluntarily agreed to
maintain expenses of the Fund, exclusive of management, distribution, and
service fees, at not more than 0.50% of average daily net assets reduced
from 1.50%, (based on operating expenses) effective April 14, 1997. To the
extent actual expenses were over/under this limitation, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment (loss) $ (0.06)
Ratios (to average net assets):
Expenses 1.14%+
Net investment (loss) (0.60)%+
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
-2-
<PAGE> 326
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor in
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 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 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 I shares are offered
at net asset value without an initial sales charge or CDSC and are not subject
to a distribution or service fee. Class C shares and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12-b-1
fees, taxes, extraordinary expenses, brokerage and transactions costs and class
specific expenses, do not exceed 0.50% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or April 10, 2000.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
-3-
<PAGE> 327
<TABLE>
<S> <C>
PROSPECTUS
MFS(R) STRATEGIC JANUARY 1, 1998
GROWTH FUND CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- ------------------------------------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
</TABLE>
This Prospectus pertains to MFS Strategic Growth Fund (the "Fund"), a
diversified series of MFS Series Trust I (the "Trust"). The investment objective
of the 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 growth (emerging growth companies). The
minimum initial investment generally is $1,000 per account (see "Information
Concerning Shares of the Fund -- 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.
(continued on next page)
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.
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> 328
(continued from previous page)
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, 1998, 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 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). The SEC maintains an Internet World Wide Web site at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Expense Summary................................................. 3
2. Condensed Financial Information................................. 5
3. The Fund........................................................ 7
4. Investment Objective and Policies............................... 7
5. Certain Securities and Investment Techniques.................... 8
6. Additional Risk Factors......................................... 14
7. Management of the Fund.......................................... 17
8. Information Concerning Shares of the Fund....................... 18
Purchases.................................................... 18
Exchanges.................................................... 25
Redemptions and Repurchases.................................. 26
Distribution Plan............................................ 29
Distributions................................................ 31
Tax Status................................................... 32
Net Asset Value.............................................. 33
Expenses..................................................... 33
Description of Shares, Voting Rights and Liabilities......... 34
Performance Information...................................... 34
9. Shareholder Services............................................ 35
Appendix A -- Waivers of Sales Charges.......................... A-1
</TABLE>
2
<PAGE> 329
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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.................. 0.75% 0.75% 0.75%
Rule 12b-1 Fees (after expense
limitation)..................... 0.25%(2) 1.00%(3) 1.00%(3)
Other Expenses (after expense
limitation)(4)(5)............... 0.50% 0.50% 0.50%
---- ---- ----
Total Operating Expenses (after
expense limitation)(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 "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)
0.35% per annum of the average daily net assets attributable to Class A
shares. The Class A distribution fee of 0.10% is currently being waived on a
voluntary basis and may be imposed at the discretion of MFD. Distribution
expenses paid under this Plan, together with the initial sales charge, may
cause long-term shareholders to pay more than the maximum sales charge that
would have been permissible if imposed entirely as an initial sales charge.
(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,
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 "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) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed 0.50% per annum of the
Fund's average daily net
3
<PAGE> 330
assets during the current fiscal year. Otherwise, "Other Expenses" for Class
A, Class B and Class C shares would be 0.76% per annum, respectively.
(6) Absent any fee reductions, "Total Operating Expenses" for Class A, Class B
and Class C shares would be 1.76%, 2.51% and 2.51%, respectively. (see
"Information Concerning Shares of the Fund -- Expenses" below).
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) (1)
1 year........... $ 72 $ 63 $ 23 $ 33 $ 23
3 years.......... 102 100 70 70 70
5 years.......... 135 140 120 120 120
10 years.......... 226 239(2) 239(2) 258 258
</TABLE>
- ---------------
(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.
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.
4
<PAGE> 331
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited since inception of the Fund and
should be read in conjunction with the financial statements included in the
Fund's Annual Report to shareholders which are incorporated by reference into
the SAI in reliance upon the report of the Fund's independent auditors, given
upon their authority as experts in accounting and auditing. The Fund's
independent auditors are Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
--------------- ----------------
CLASS A CLASS A
--------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout the
period):
Net asset value -- beginning of period................ $ 12.26 $ 10.00
------- -------
Income from investment operations# --
Net investment income (loss)sec................... $ (0.11) $ 0.02
Net realized and unrealized gain on investments
and foreign currency transactions............... 6.67 2.24
------- -------
Total from investment operations...................... $ 6.56 $ 2.26
------- -------
Less distributions declared to shareholders --
From net realized gain on investments and foreign
currency transactions........................... (2.03) --
------- -------
Net asset value -- end of period...................... $ 16.79 $ 12.26
======= =======
Total return++........................................ 59.54% 22.60%++
Ratios (to average net assets)/Supplemental datasec.:
Expenses##........................................ 1.29% 0.44%+
Net investment income (loss)...................... (0.82)% 0.23%+
Portfolio turnover.................................... 82% 104%
Average commission rate............................... $0.0527 $ 0.0555
Net assets at end of period (000 omitted)............. $21,699 $ 10,145
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares on January 2, 1996, through
August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge. If
the charge had been included, the results would have been lower.
sec. Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain
expenses of the Fund, exclusive of management, distribution, and service fees, at
not more than 0.50% of average daily net assets reduced from 1.50% (based on
operating expenses), effective April 14, 1997. To the extent actual expenses were
over/under this limitation, the net investment income per share and the ratios
would have been:
Net investment loss.................................. $(0.15) $(0.05)
Ratios (to average net assets):
Expenses##........................................ 1.59% 1.84%+
Net investment loss............................... (1.12)% (0.66)%+
</TABLE>
5
<PAGE> 332
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
AUGUST 31, 1997* AUGUST 31, 1997*
---------------- ----------------
CLASS B CLASS C
---------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout
the period):
Net asset value -- beginning of period............... $ 12.53 $ 12.53
------- -------
Income from investment operations# --
Net investment losssec........................... $ (0.09) $ (0.09)
Net realized and unrealized gain on investments
and foreign currency transactions.............. $ 4.31 $ 4.33
------- -------
Total from investment operations..................... $ 4.22 $ 4.24
------- -------
Net asset value -- end of period..................... $ 16.75 $ 16.77
======= =======
Total return......................................... 33.76%++ 33.92%++
------- -------
Ratios (to average net assets)/Supplemental datasec.:
Expenses##....................................... 2.02%+ 2.04%+
------- -------
Net investment loss.............................. (1.46)%+ (1.48)%+
------- -------
Portfolio turnover................................... 82% 82%
Average commission rate.............................. $ 0.0527 $ 0.0527
Net assets at end of period (000 omitted)............ $ 15,735 $ 6,048
------- -------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class B and Class C shares on April 11,
1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
sec. Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain
expenses of the Fund, exclusive of management, distribution, and service fees, at
not more than 0.50% of average daily net assets reduced from 1.50%, (based on
operating expenses) effective April 14, 1997. To the extent actual expenses were
over/under this limitation, the net investment income per share and the ratios
would have been:
Net investment loss................................... $(0.12) $ (0.13)
Ratios (to average net assets):
Expenses##.......................................... 2.51%+ 2.56%+
Net investment loss................................. (1.95)%+ (1.99)%+
</TABLE>
6
<PAGE> 333
3. 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.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. 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 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.
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 "Certain Securities and Investment Techniques --
Equity Securities" below). In pursuit of its investment objective, the Fund may
invest in companies of any size including smaller, lesser
7
<PAGE> 334
known companies in the developing stages of their life cycle that offer the
potential for accelerated earnings or revenue growth (emerging growth
companies). Such companies generally would be expected to show earnings growth
over time that is well above the growth rate of the overall economy and the rate
of inflation, and would have the products, management and market opportunities
which are usually necessary to become more widely recognized as growth
companies.
The Adviser will consider many factors when choosing the Fund's investments,
such as economic and financial trends or the prospective acquisition or
reorganization of a company. Some of the Fund's investments may not respond to
market rallies or downturns. While the Fund may buy securities that provide
income, it does not place any emphasis on income, except when the Adviser
believes this income will have a favorable influence on the security's market
value.
Consistent with its investment objective and policies described above, the Fund
may also 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 a U.S.
exchange.
The Fund may engage in certain securities transactions and investment techniques
as described under the caption "Certain Securities and Investment Techniques"
below and "Certain Securities and Investment Techniques" 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
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"). A determination is
made, 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, retains sufficient oversight, focusing on
factors such as valuation, liquidity and availability of information. Investing
in Rule 144A securities could have the effect of decreasing the level of
liquidity in 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
8
<PAGE> 335
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 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. Government 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.
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). 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 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. In general, the 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, the Fund will segregate liquid assets
sufficient to cover its commitments. Although the fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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.
9
<PAGE> 336
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.
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 may be of any size, 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.
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 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 the location of its assets. The issuer's
principal activities generally are deemed to be located in a particular country
if: (a) the security is issued or guaranteed by the government of that country
or any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively
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indexed (i.e., their principal value or interest rates may increase or decrease
if the underlying instrument appreciates), and may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be more volatile
than the underlying instrument itself and could involve the loss of all or a
portion of the principal amount or interest on the investment.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
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, or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions. Swaps, caps, floors and collars are
highly specialized activities which involve certain risks.
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. However, the writing of
an option constitutes only a partial hedge, up to
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<PAGE> 338
the amount of the premium, less any transaction costs. In contrast, 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
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
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<PAGE> 339
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 under "Additional Risk Factors" below 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."
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
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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 which require 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.
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 "Certain Securities and Investment Techniques" in the SAI.
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 Fund will involve a higher degree of risk
than would established growth stocks.
OPTIONS, FUTURES CONTRACTS AND FORWARD CONTRACTS: Although the Fund may enter
into transactions in options, Futures Contracts, Options on Futures Contracts,
Forward Contracts and
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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 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
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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 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. For a description of the strategies
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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 Conduct Rules
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). Except
with respect to the Fund's policies on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated January 2, 1996. The Fund's portfolio manager is
Christian A. Felipe, a Senior Vice President of the Adviser. Mr. Felipe has been
the portfolio manager of the Fund since the Fund's inception and has been
employed as a portfolio manager by the Adviser since 1986. Under the Advisory
Agreement, the Adviser provides the Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for the Fund. For its services and facilities, the
Adviser is entitled to receive a management fee, computed and paid monthly, in
an amount equal to the sum of 0.75% of the Fund's average daily net assets. For
the fiscal year ended August 31, 1997, the Adviser received fees under the
Advisory Agreement of $146,570. Prior to April 10, 1997, 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(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 Institutional Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust and seven variable accounts, each of which is a
registered investment company established by Sun Life Assurance Company of
Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection with the sale of
various fixed/variable annuity contracts. MFS and its wholly owned subsidiary,
MFS Institutional Advisors, Inc., provide investment advice to substantial
private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the
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U.S., Massachusetts Investors Trust. Net assets under the management of the MFS
organization were approximately $69.4 billion on behalf of approximately 2.7
million investor accounts as of November 30, 1997. As of such date, the MFS
organization managed approximately $20.1 billion of assets invested in fixed
income funds and fixed income portfolios, approximately $4.1 billion of assets
invested in foreign securities, and approximately $44.2 billion of assets
invested in equity securities. MFS is a subsidiary of Sun Life of Canada (U.S.),
a subsidiary of Sun Life of Canada (U.S.) Holdings, Inc., which in turn is a
wholly owned subsidiary of Sun Life Assurance Company of Canada ("Sun Life").
The Directors of MFS are A. Keith Brodkin, Jeffrey L. Shames, 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, James R. Bordewick, Jr., Ellen Moynihan and Mark E. Bradley, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
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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
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i) the
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of the 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;
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<PAGE> 346
(iii) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent (the
"MFS Participant Recordkeeping System"); (b) the plan establishes an account
with the Shareholder Servicing Agent on or after July 1, 1996; and (c) the
aggregate purchases by the retirement plan of Class A shares of the MFS
Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE 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; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- --------------------------------- -------------------------------------
<C> <S>
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" below 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
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<PAGE> 347
403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and
subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization demonstrates to
the satisfaction of, and certifies to, the Shareholder Servicing Agent that
the retirement plan has, at the time of certification or will have pursuant
to a purchase order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of the MFS Funds
and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 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" below 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).
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<PAGE> 348
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 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
22
<PAGE> 349
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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m.,
23
<PAGE> 350
Eastern time), the purchase will occur at the closing net asset value of the
shares purchased on that day. The Shareholder Servicing Agent may be liable for
any losses resulting from unauthorized telephone transactions if it does not
follow reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase or exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Funds
may have different and/or more restrictive policies with respect to market
timers than the Fund. These policies are disclosed in the prospectuses of these
other MFS Funds.
DEALER CONCESSIONS. Dealers may receive different compensation with respect to
sales of Class A, 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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees in group meetings or to help pay the
expenses of sales contests.
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<PAGE> 351
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.
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
25
<PAGE> 352
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
26
<PAGE> 353
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
27
<PAGE> 354
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 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 during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
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<PAGE> 355
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 or exchanges, except in the case
of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases -- General -- Minimum Investment." Shareholders will be notified that
the value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares 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
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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 Fund -- Distributor" in the SAI. The amount of the
distribution fee paid by the Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, 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 0.10% 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 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
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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. The Class A distribution fee of 0.10%
is currently being waived on a voluntary basis and may be imposed at the
discretion of MFD. Prior to April 10, 1997, MFD waived its right to receive
distribution and service fees for Class A shares.
DISTRIBUTIONS
The 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, 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
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distributions during the calendar year to its shareholders from short-term
capital gains. Shareholders may elect to receive dividends and capital gain
distributions in either cash or additional shares of the same class with respect
to which a distribution is made. See "Tax Status" and "Shareholder
Services -- Distribution Options" below. Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with respect
to Class B and Class C shares because expenses attributable to Class B and Class
C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. 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 (as well as the rate category or categories under which such gain is
taxable), 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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.
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NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received 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, 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 sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.50% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or April 10, 2000.
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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.
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the risk of a shareholder incurring financial loss on account of
shareholder liability would be limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
PERFORMANCE INFORMATION
From time to time, the Fund 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 Securities Corporation 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.
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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, and purchased by, the public on different dates (the class
"inception date"). The calculation of total rate of return for a class of shares
which has a later class inception date than another class of shares of the Fund
is based both on (i) the performance of the Fund's newer class from its
inception date and (ii) the performance of the Fund's oldest class from its
inception date up to the class inception date of the newer class. See the SAI
for further information on the calculation of total rate of return for share
classes with different class inception 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, 1997, 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").
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DISTRIBUTION OPTIONS -- The following options are available to all accounts
(except Systematic Withdrawal Plan accounts described below) and may be changed
as often as desired by notifying the Shareholder Servicing Agent:
-- Dividends and capital gain distributions reinvested in additional
shares; this option will be assigned if no other option is specified;
-- Dividends (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.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of
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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).
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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
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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, 1998, 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.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B 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;
- 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.
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4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan;
- 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.
A-2
<PAGE> 367
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed;
and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund "supermarket" account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
A-3
<PAGE> 368
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed
payment of commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds subject to
such requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases subject to a
CDSC" in the Prospectus). The Eligible Funds are all funds included in the
MFS Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
A-4
<PAGE> 369
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-5
<PAGE> 370
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK WORLD
- ---------------------------------------------------- ---------------------------------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging
Markets Equity Fund
Massachusetts Investors Growth Stock Fund
MFS(R) International Growth Fund(3)
MFS(R) Mark Emerging Growth Fund
MFS(R) International Growth and
MFS(R) Equity Income Fund Income Fund(4)
MFS(R) Growth Opportunities Fund MFS(R) World Asset Allocation Fund sm
MFS(R) Large Cap Growth Fund(1) MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
MFS(R) Mid Cap Growth Fund(2) MFS(R) World Growth Fund
MFS(R) New Discovery Fund MFS(R) World Total Return Fund
MFS(R) Research Fund
NATIONAL TAX-FREE BOND
MFS(R) Research Growth and Income Fund ---------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Strategic Growth Fund
MFS(R) Municipal High Income Fund
MFS(R) Union StandardRegistration Mark Equity Fund
MFS(R) Municipal Income Fund
MFS(R) Value Fund
STATE TAX-FREE BOND
STOCK AND BOND ---------------------------------------------------------
- ---------------------------------------------------- Alabama, Arkansas, California, Florida,
MFS(R) Total Return Fund Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
MFS(R) Utilities Fund Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
BOND
- ---------------------------------------------------- MONEY MARKET
MFS(R) Bond Fund ---------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Money Market Fund
MFS(R) Government Securities Fund
MFS(R) Money Market Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- ---------------------------------------------------- (1) Formerly MFSRegistration Mark Capital Growth Fund.
MFS(R) Government Limited Maturity Fund (2) Formerly MFSRegistration Mark OTC Fund.
(3) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Limited Maturity Fund International Growth Fund.
(4) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Municipal Limited Maturity Fund International Growth and Income Fund.
</TABLE>
<PAGE> 371
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
<PAGE> 372
----------------
[MFS LOGO] Bulk Rate
INVESTMENT MANAGEMENT U.S. Postage
We invented the mutual fund(TM) Paid
MFS
----------------
MFS(R) STRATEGIC GROWTH FUND
500 Boylston Street, Boston,MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial records
because it provides important facts
about your investment.
MSG-1-1/98/139M
<PAGE> 373
[MFS LOGO]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(TM)
MFS(R) STRATEGIC GROWTH STATEMENT OF
FUND ADDITIONAL INFORMATION
<TABLE>
(A member of the MFS Family of Funds(R)) January 1, 1998
- --------------------------------------------------------------------------------------------------
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
Certain Securities and Investment Techniques....................................... 2
3. Management of the Fund................................................................ 14
Trustees........................................................................... 14
Officers........................................................................... 15
Trustee Compensation Table......................................................... 15
Investment Adviser................................................................. 16
Administrator...................................................................... 16
Custodian.......................................................................... 16
Shareholder Servicing Agent........................................................ 17
Distributor........................................................................ 17
4. Portfolio Transactions and Brokerage Commissions...................................... 18
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs................................................. 19
Exchange Privilege................................................................. 21
Tax-Deferred Retirement Plans...................................................... 22
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.................................. 27
10. Independent Auditors and Financial Statements......................................... 28
Appendix A -- Performance Quotations.................................................. A-1
</TABLE>
MFS(R) STRATEGIC GROWTH FUND
A series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
January 1, 1998. 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> 374
1. DEFINITIONS
"Fund" -- MFS Strategic Growth 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, 1998, as
amended or supplemented
from time to time.
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," "Certain Securities and Investment Techniques" and "Additional Risk
Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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. Government 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 liquid assets sufficient to cover any commitments or
to limit any potential risk. Although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
2
<PAGE> 375
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. Indexed securities may be more volatile than the underlying
instrument itself and could involve the loss of all or a portion of the
principal amount of the investment.
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
3
<PAGE> 376
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 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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded, and applicable
laws and regulations. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
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 liquid assets. 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 written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the
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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 liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets 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 liquid assets in a segregated account
with its custodian. Put and call options on stock indices may also be covered in
such other manner as may be in accordance with the rules of 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.
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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 liquid assets 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 purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures
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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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets in an amount
equal to the value of its commitments under Forward Contracts.
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 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
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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 liquid assets in a segregated account with its custodian. The Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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 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
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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, 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
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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 liquid assets 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 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
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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 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.
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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, 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 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
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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) and non-fundamental policy
(1), these investment restrictions and policies are adhered to at the time of
purchase or utilization of assets; a subsequent change in circumstances will not
be considered to result in a violation of policy.
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 15% 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 10% 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; currently, the 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 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;
(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; or
(10) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of 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.)
TRUSTEES
A. KEITH BRODKIN,* Chairman and President (born 8/4/35)
Massachusetts Financial Services Company, Chairman
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RICHARD B. BAILEY* (born 9/14/26)
Private Investor; Massachusetts Financial Services Company, former Chairman and
Director (prior to September 30, 1991); Cambridge Bancorp, Director; Cambridge
Trust Company, Director
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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November 1997)
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 8/18/26)
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
Address: 36080 Shaker Blvd., Hunting Valley, 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
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touch LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young LLP, Senior Tax Manager (prior to September 1994)
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.
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 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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
RETIREMENT TOTAL
TRUSTEE BENEFIT ESTIMATED TRUSTEE FEES
FEES ACCRUED CREDITED FROM FUND AND
FROM AS PART OF YEARS OF FUND
TRUSTEE FUND(1) FUND EXPENSE(1) SERVICE(2) COMPLEX(3)
<S> <C> <C> <C> <C>
Walter E. Robb, III... $ 0 $0 6 $149,258
Marshall N. Cohan..... 0 0 6 149,258
Sir David Gibbons..... 0 0 6 136,508
Richard B. Bailey..... 0 0 6 247,168
Ward Smith............ 0 0 10 149,258
Abby M. O'Neill....... 0 0 7 123,758
Dr. Lawrence Cohn..... 0 0 16 136,508
J. Dale Sherratt...... 0 0 18 149,258
</TABLE>
- ---------------
(1) For the fiscal year ending August 31, 1997.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1996. All Trustees served
as Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS complex (having
aggregate net assets at December, 1996 of approximately $38.5 billion).
15
<PAGE> 388
For the period from the commencement of investment operations on January 2, 1996
to the Fund's fiscal year ended August 31, 1997, the Trustees waived their right
to receive such fees.
As of November 29, 1997, the Trustees and officers as a group owned less than 1%
of the Fund's shares, not including 825,361.53 Class I shares of the Fund (which
represent approximately 13% 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 29, 1997, 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 99.88% of the outstanding
Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to 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 an
indirect 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").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading "Management
of the Funds."
For the Fund's fiscal year ended August 31, 1997, MFS received $146,570 under
the Advisory Agreement.
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.
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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period March 1, 1997 through
August 31, 1997, MFS received $1,974 under the 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
16
<PAGE> 389
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 September 10, 1986,
as amended (the "Agency Agreement") with the Trust. The Shareholder Servicing
Agent's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the Fund.
For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 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
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. 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.
During the Fund's fiscal year ended August 31, 1997, MFD received sales charges
of $46,851 and dealers received sales charges of $275,362 (as their concession
on gross sales charges of $322,213) for selling Class A shares of the Fund; the
Fund received $11,813,437 representing the aggregate net asset value of such
shares.
For the period from the inception date of Class A shares 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.
For the period ended August 31, 1996, the contingent deferred sales charge
("CDSC") imposed on the redemption of Class A, Class B and Class C shares was
$0. For the fiscal year ended August 31, 1997, the CDSC imposed on the
redemption of Class A, Class B and C shares was $12, $403 and $437 respectively.
The Distribution 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 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
17
<PAGE> 390
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 Conduct Rules 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 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
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $50,980 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $52,060 on total transactions of $40,134,477.
18
<PAGE> 391
For the period ended August 31, 1996, the Fund paid total brokerage commissions
of $19,205 on total transactions of $13,710,580.
During the fiscal year ended August 31, 1997, the Fund acquired securities
issued by Morgan Stanley & Co. and Merrill Lynch, Pierce, Fenner & Smith Inc.,
regular broker-dealers of the Fund, which securities had a value of $197,986 and
$239,481, respectively, as of August 31, 1997.
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 shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The
19
<PAGE> 392
minimum purchase amount is $50 and the maximum purchase amount is $100,000.
Shareholders wishing to avail themselves of this telephone purchase privilege
must so elect on their Account Application and designate thereon a bank and
account number from which purchases will be made. If a telephone purchase
request is received by the Shareholder Servicing Agent on any business day prior
to the close of regular trading on the Exchange (generally, 4:00 p.m., Eastern
time), the purchase will occur at the closing net asset value of the shares
purchased on that day. The Shareholder Servicing Agent may be liable for any
losses resulting from unauthorized telephone transactions if it does not follow
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing Agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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 shareholder may deposit into the account
additional shares of the Fund, change the payee or change the dollar amount of
each payment. The Shareholder Servicing Agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if 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
20
<PAGE> 393
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 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.
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<PAGE> 394
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.
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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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 shareholders have held their shares. Such capital gains may be taxable
to shareholders that are individuals, estates, or trusts at maximum rates of
20%, 25%, or 28%, depending upon the source of the gains. Any Fund dividend that
is declared in October, November or December of any
22
<PAGE> 395
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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 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 certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss with
respect to other positions in its portfolio may constitute "straddles," and may
be subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles 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. The Fund may
elect to mark-to-market any investments in "passive foreign investment
companies" on the last day of each year. This election may cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
investments; in order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold. Investment income received by the Fund from foreign
securities may be subject to foreign income taxes withheld at the source; the
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 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% (or any lower rate permitted
under an applicable treaty) on taxable dividends and other payments to Non-U.S.
Persons that are subject to such withholding. 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
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<PAGE> 396
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 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.
DISTRIBUTION AND SERVICE FEES PAID DURING THE FUND'S LAST FISCAL YEAR: During
the fiscal year ended August 31, 1997, the Fund paid the following Distribution
Plan expenses:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES PAID FEES RETAINED FEES RECEIVED
CLASS OF SHARES BY FUND BY MFD BY DEALERS
--------------- ------------ ------------- -------------
<S> <C> <C> <C>
Class A Shares $11,200 $ 2,320 $ 8,880
Class B Shares $20,634 $15,608 $20,502
Class C Shares $ 8,868 $ 0 $ 8,868
</TABLE>
GENERAL: The of the Distribution Plan will remain in effect until August 1,
1998, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by vote of both the Trustees and a
majority of the Trustees who are not "interested persons" or financially
interested parties 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;
Martin Luther King Day; Presidents' Day; Good Friday; Memorial Day; Independence
Day; Labor Day; Thanksgiving Day and Christmas Day.) This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value
24
<PAGE> 397
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 stock market 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 stock market 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 stock market 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)
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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
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).
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<PAGE> 398
Total rate of return quotations for each class are presented in Appendix A
attached hereto under the heading "Performance Quotations."
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.
Yield quotations for each class are presented in Appendix A attached hereto
under the heading "Performance Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to the 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.
Current distribution rate quotations for each class of shares are presented in
Appendix A attached hereto under the heading "Performance Quotations."
GENERAL: From time to time the Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Securities Corporation, CDA Wiesenberger,
Shearson Lehman and Salomon Bros. Indices, Ibbotson, Business Week, Lowry
Associates, Media General, Investment Company Data, The New York Times, Your
Money, Strangers Investment Advisor, Financial Planning on Wall Street, Standard
and Poor's, Individual Investor, The 100 Best Mutual Funds You Can Buy, by
Gordon K. Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. The Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. 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(sm) program, an intergenerational financial
planning assistance program; issues with respect to insurance (e.g., disability
and life insurance and Medicare supplemental insurance); is-
26
<PAGE> 399
sues regarding financial and health care management for elderly family members;
and other similar or related matters.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are low. While such a strategy does not
assure a profit or guard against a loss in a declining market, the investor's
average cost per share can be lower than if fixed numbers of shares are
purchased at the same intervals.
MFS FIRSTS: MFS has a long history of innovations.
-- 1924 -- Massachusetts Investors Trust is established as the first open-end
mutual fund in America.
-- 1924 -- Massachusetts Investors Trust is the first mutual fund to make full
public disclosure of its operations in shareholder reports.
-- 1932 -- One of the first internal research departments is established to
provide in-house analytical capability for an investment management firm.
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and twelve 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). Of the twelve other series of the Trust, all offer Class A and Class B
shares, eleven offer Class C shares and eleven offer Class I shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders. The
Trust reserves the right to create and issue a number of series and additional
classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
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
27
<PAGE> 400
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, 1997, the Statement of Operations for the year ended August 31, 1997,
the Statement of Changes in Net Assets for the year ended August 31, 1997 and
the period ended 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.
28
<PAGE> 401
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTION DIVIDENDS VALUE
---------- --------------- ------------ ---------- -------
<S> <C> <C> <C> <C>
December 31, 1996* $11,619 $0 $1,908 $13,527
------- -- ------ -------
</TABLE>
* For the period from the class inception date on January 2, 1996, to December
31, 1996.
Explanatory Notes: The results assume that income, dividends and capital gains
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 as of August 31, 1997.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL YIELD YIELD
TOTAL RETURNS* (INCLUDING (WITHOUT CURRENT
-------------------------- ANY ANY DISTRIBUTION
1 YEAR LIFE OF FUND WAIVERS) WAIVERS) RATE
------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Class A Shares with sales charge........... 51.98% 45.37%(1) -0.37% -1.27% 0.00%
Class A Shares without sales charge........ 59.54% 49.69%(1) N/A N/A N/A
Class B Shares with CDSC................... 55.16% (2) 47.63%(2) N/A N/A N/A
Class B Shares without CDSC................ 59.16% (2) 49.48%(2) -1.12% -2.00% 0.00%
Class C Shares with CDSC................... 58.35% (3) 49.59%(3) N/A N/A N/A
Class C Shares without CDSC................ 59.35% (3) 49.59%(3) -1.13% -1.90% 0.00%
Class I Shares............................. 59.73% (4) 49.80%(4) -0.14% -0.93% N/A
</TABLE>
(1) From the class inception date on January 2, 1996.
(2) Class B share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class B shares on April 11,
1997. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class B shares differ. Class B share performance has been
adjusted to reflect that Class B shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an Initial sales charge. Class B
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(3) Class C share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class C shares on April 11,
1997. Sales charges, expenses and expense ratios, and therefore performance,
for Class A and Class C shares differ. Class C share performance has been
adjusted to reflect that Class C shares generally are subject to a CDSC
(unless the performance quotation does not give effect to the CDSC) whereas
Class A shares generally are subject to an Initial sales charge. Class C
share performance has not, however, been adjusted to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are lower for
Class A shares.
(4) Class I share performance includes the performance of the Fund's Class A
shares for periods prior to the inception of Class I shares on January 2,
1997. Sales charges, expenses and expense ratios, and therefore performance
for Class I and A shares differ. Class I share performance has been adjusted
to reflect that Class I shares are not subject to an initial sales charge,
whereas Class A shares generally are subject to an initial sales charge.
Class I share performance has not, however, been adjusted to reflect
differences in operating expenses (e.g., Rule 12b-1 fees), which generally
are lower for Class I shares.
* Total rate of return figures would have been lower if an expense limitation
was not in place.
A-1
<PAGE> 402
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) STRATEGIC GROWTH FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
MSG-13-4/97/500
<PAGE> 403
<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT August 31, 1997
MFS(R) STRATEGIC GROWTH FUND
[GRAPHIC OMITTED]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 2
Portfolio Manager's Profile ............................................... 4
Fund Facts ................................................................ 5
Performance Summary ....................................................... 5
Tax Form Summary .......................................................... 7
Portfolio Concentration ................................................... 8
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 27
The MFS Family of Funds(R) ................................................ 28
Trustees and Officers ..................................................... 29
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED AUGUST 31, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 59.54%, CLASS B SHARES
59.16%, CLASS C SHARES 59.35%, AND CLASS I SHARES 59.73%. (SEE
PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE FUND HAS BEEN WELL POSITIONED IN THREE MAJOR SECTORS THAT HAVE DRIVEN
ITS PERFORMANCE: TECHNOLOGY, FINANCIAL SERVICES, AND MEDIA.
o TECHNOLOGY HAS BENEFITED FROM A SWEEPING MOVEMENT BY AMERICAN
CORPORATIONS TO INCREASE PRODUCTIVITY, WHILE FINANCIAL SERVICES AND MEDIA
COMPANIES HAVE BEEN GOING THROUGH A RAPID AND MUCH-NEEDED CONSOLIDATION
PROCESS.
o THE FUND HAS A SMALL ALLOCATION IN STOCKS OF JAPANESE TECHNOLOGY
COMPANIES THAT FEATURE DIGITAL (AS OPPOSED TO ANALOG) TECHNOLOGY IN
PRODUCTS SUCH AS CAMCORDERS AND TELEVISIONS.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. The rapid
pace of growth seen in the first quarter slowed slightly in the second quarter,
to an annual rate of 3.3%. While real (inflation-adjusted) growth could moderate
further in the third quarter, we believe economic momentum will carry well into
the first quarter of 1998. The money supply is increasing at a rapid rate, the
housing and automobile markets are strengthening, and it now appears that
Christmas sales could be quite good. Because economic growth continues to be
impressive, markets are likely to begin focusing on the Federal Reserve Board's
willingness to raise interest rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
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 15, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of Christian Felipe]
Christian Felipe
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 59.54%, Class B shares 59.16%, Class C shares 59.35%, and
Class I shares 59.73%. These returns, which include the reinvestment of
distributions but exclude the effects of any sales charges, compare to a
40.78% return for the Standard & Poor's 500 Composite Index, a popular,
unmanaged index of common stock total return performance.
Q. WHY DO YOU THINK THE FUND HAS PERFORMED SO WELL OVER THE PAST 12 MONTHS?
A. The Fund has been well positioned in three major sectors that have driven
its performance: technology, financial services, and media. Technology has
benefited from a sweeping movement by American corporations to increase
productivity, while financial services and media companies have been going
through a rapid and much-needed consolidation process.
Q. LET'S LOOK AT EACH OF THESE SECTORS, STARTING WITH TECHNOLOGY.
WHAT'S GOING ON THERE?
A. Besides helping companies' productivity, the technology sector has
benefited from the rapid proliferation of personal computers and the
dramatic growth of the Internet. This has led to fast top-line growth for
many of the companies that are well positioned in these markets, such as
Microsoft, Intel, Sun Microsystems, and Oracle Systems. This, in turn, has
led to rapid earnings growth, which the market has begun to recognize. We
put a small part of the Fund, about 4%, in stocks of Japanese technology
companies that now feature digital (as opposed to analog) technology in
products like camcorders, televisions, and cameras. For example, a consumer
can take a camcorder, record with it, download the information onto a PC,
edit it onto a video, and send it over the Internet so the grandparents can
see their grandchildren taking their first steps. Companies like Sony and
Canon have been at the leading edge of this area, and those stocks have
done great. Looking ahead, I think the overall prospects for technology
companies are still very strong and that valuations are reasonable, and we
are continuing to search for the best names.
Q. NOW, WHAT ABOUT FINANCIAL SERVICES?
A. These companies have benefited from stable interest rates and the low
inflation rate, which have led to a boom in companies that cater to the
retirement, investment, and savings communities. Companies like Franklin
Resources and Morgan Stanley, Dean Witter, Discover have been great stocks
for the portfolio. We were also fortunate that one of our stocks in this
area, Equitable of Iowa, was bought out by ING Barings, a foreign bank and
investment firm. We've seen a lot of consolidation in this area, too, as
banks and other financial services companies have merged, creating greater
efficiencies of scale and improved valuations.
Q. AND MEDIA?
A. There's been consolidation here, too, thanks to the Telecommunications Act
of 1996, as many television and radio companies, such as LIN Television,
American Radio, and SFX Broadcasting, have merged or been bought out.
Consolidation has also helped strengthen some of the other companies in the
portfolio.
Q. GETTING BACK TO TECHNOLOGY, WHEN YOU USE THIS TERM, WHAT KINDS OF COMPANIES
ARE YOU REFERRING TO, AT LEAST AS THEY RELATE TO THE FUND?
A. Our definition of a technology company excludes what we call "commodity
plays." On the surface, they look like technology companies; they make
personal computers or disk drives, or they are distributors, or re-sellers.
We see them as commodity companies, as opposed to companies like Microsoft
and Intel, which we view as the guts and brains of the industry. We're not
suggesting that the commodity companies, the ones that make and sell PCs in
stores or sell them over the phone or the Internet, can't be good
investments. But we don't believe they control their own destinies, and
they're subject to major competitive inroads, from foreign manufacturers,
for example. There is no microprocessor company that can compete with
Intel, nor is there an operating system of any significance that can
compete with Microsoft Windows. Anyone can make a PC. What matters is the
sustainability of the business franchise.
Q. IN YOUR LAST REPORT, YOU SAID STOCKS OF HEALTH MAINTENANCE ORGANIZATIONS
(HMOS) HAD UNDERPERFORMED DUE TO POOR PRICING BY THE INDUSTRY. HOW DOES
THAT SITUATION STAND NOW?
A. HMOs continue to be a very difficult area. We've refocused the health care
part of the portfolio away from the service companies toward the products
and pharmaceutical companies like Bristol-Myers Squibb and Schering Plough.
Q. HAVE THERE BEEN ANY SIGNIFICANT CHANGES IN OTHER FUND HOLDINGS?
A. Not really, except that we've had three or four major stocks get bought
out, in sectors like financial services and media, which I mentioned. Other
than that, there haven't been any major changes to the portfolio. Microsoft
and Franklin Resources are still the two largest positions.
Q. COULD YOU TALK ABOUT ANY SPECIFIC STOCKS THAT PERFORMED MUCH BETTER THAN
YOU EXPECTED, AND WHY YOU THINK THEY DID WELL?
A. Tyco International was one stock that really surprised us. It made some
acquisitions, of ADT, for example, that turned out to add a lot more to
earnings than we had anticipated.
Q. IN GENERAL, HOW WOULD YOU CHARACTERIZE THE BUSINESS AND ECONOMIC
ENVIRONMENT OF THE PAST YEAR, PARTICULARLY AS IT RELATES TO THE FUND?
A. Nearly perfect - steady growth, nominal inflation, stable interest rates.
We think that will continue. However, there is some cause for concern in
the international markets, like Asia's, where the currency crisis has put
pressure on companies that do business there. Europe continues to be
lackluster in its economic performance. However, while this might cause
some minor changes in the Fund, our emphasis has been on U.S. companies, so
we do not believe it's going to make a major difference. At the same time,
the yen has continued to depreciate dramatically; that has favored the
Japanese multinationals, and we've continued to put our money in those
companies.
/s/ Christian Felipe
Christian Felipe
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
CHRISTIAN FELIPE JOINED MFS IN 1986. A GRADUATE OF THE UNIVERSITY OF
CALIFORNIA, LOS ANGELES, AND THE UNIVERSITY OF PENNSYLVANIA 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. MR. FELIPE HAS
MANAGED MFS(R) STRATEGIC GROWTH FUND SINCE ITS INCEPTION IN 1996.
FUND FACTS
OBJECTIVE: 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 THAT HAVE ABOVE-AVERAGE GROWTH POTENTIAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A SHARES: JANUARY 2, 1996
CLASS B SHARES: APRIL 11, 1997
CLASS C SHARES: APRIL 11, 1997
CLASS I SHARES: JANUARY 2, 1997
SIZE: $56.9 MILLION NET ASSETS AS OF AUGUST 31, 1997
PERFORMANCE SUMMARY
The information below and on the following pages illustrates the historical
performance of MFS Strategic Growth Fund - Class A shares in comparison to
various market indicators. Class A share performance results reflect the
deduction of the 5.75% maximum sales charge; benchmark comparisons are
unmanaged and do not reflect any fees or expenses. The performance of other
share classes will be greater than or less than the line shown, based on the
differences in charges and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Strategic Growth S&P 500 Composite Consumer Price
Fund -- Class A Index Index -- U.S.
January 1996 $10,000 $10,000 $10,000
April 1996 $12,600 $10,700 $10,200
September 1996 $13,700 $11,300 $10,300
December 1996 $14,200 $12,200 $10,300
April 1997 $15,900 $13,400 $10,400
August 1997 $19,559 $15,112 $10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MFS Strategic Growth Fund (Class A) including 5.75% sales charge (SEC
results) +51.98% +45.37%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class A) at net asset value +59.54% +49.69%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class B) with CDSC (SEC results) +55.16% +47.63%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class B) at net asset value +59.16% +49.48%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class C) with CDSC (SEC results) +58.35% +49.59%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class C) at net asset value +59.35% +49.59%
- -----------------------------------------------------------------------------------------------------------------------------
MFS Strategic Growth Fund (Class I) at net asset value +59.73% +49.80%
- -----------------------------------------------------------------------------------------------------------------------------
Average growth fund+ +33.52% +26.77%
- -----------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index++ +40.78% +28.29%
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Price Index**++ + 2.19% + 2.85%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
+Source: Lipper Analytical Services, Inc.
++Source: CDA/Wiesenberger.
**The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results.
Class A share SEC results include the maximum 5.75% sales charge. Class B
share SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
Class C shares have no initial sales charge but, along with Class B shares,
have higher annual fees and expenses than Class A shares. Class C share
purchases are subject to a 1% CDSC if redeemed within 12 months of purchase.
Class I shares, which became available on January 2, 1997, have no initial
sales charge or Rule 12b-1 fees and are only available to certain
institutional investors.
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods
prior to the commencement of offering of Class B and Class C shares. Because
operating expenses attributable to Class B and Class C shares are higher than
those of Class A shares, Class B and Class C share performance generally would
have been lower than Class A share performance. The Class A share performance
included within the Class B and Class C share SEC performance has been
adjusted to reflect the CDSC generally applicable to Class B and Class C
shares rather than the initial sales charge generally applicable to Class A
shares.
Class I share results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class
I share performance generally would have been higher than Class A share
performance. The Class A share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies
and waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
THE MFS STRATEGIC GROWTH FUND HAS DESIGNATED $128 AS A LONG-TERM CAPITAL
GAIN.
DIVIDENDS RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR
CORPORATIONS, CAME TO 4.4%.
<PAGE>
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1997
TOP 10 EQUITY HOLDINGS
FRANKLIN RESOURCES, INC. CVS CORP.
Mutual fund and financial services U.S. drugstore chain
company
CLEAR CHANNEL COMMUNICATIONS, INC.
MICROSOFT CORP. Radio and television company
Computer software and systems
company MCI COMMUNICATIONS CORP.
Telecommunications company
COMPUTER ASSOCIATES INTERNATIONAL,
INC. RITE AID CORP.
Computer software company U.S. drugstore chain
ORACLE SYSTEMS CORP. LIN TELEVISION CORP.
Developer and manufacturer of Broadcasting and cellular
database software communications company
TYCO INTERNATIONAL LTD.
Manufacturer of fire protection,
packaging, and electronic equipment
LARGEST SECTORS
[GRAPHIC OMITTED]
Leisure 18.5%
Technology 34.5%
Financial Services 14.3%
Miscellaneous
(conglomerates, special
products/services) 13.2%
Retailing 12.8%
Health Care 6.7%
For a more complete breakdown, refer to the Portfolio of Investments.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
<TABLE>
<CAPTION>
Stocks - 89.9%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------------------
U.S. Stocks - 84.7%
Aerospace - 0.3%
<S> <C> <C>
Gulfstream Aerospace Corp.* 6,500 $ 192,562
- -------------------------------------------------------------------------------------------------
Banks and Credit Companies - 2.0%
Citicorp 2,377 $ 303,365
Norwest Corp. 9,449 542,727
State Street Corp. 1,000 49,875
Wells Fargo & Co. 989 251,453
-----------
$ 1,147,420
- -------------------------------------------------------------------------------------------------
Broadcasting - 1.0%
Argyle Television, Inc.* 5,000 $ 140,000
SFX Broadcasting, Inc.* 1,345 98,689
Young Broadcasting, Inc., "A"* 8,899 321,477
-----------
$ 560,166
- -------------------------------------------------------------------------------------------------
Building - 0.1%
Newport News Shipbuilding, Inc. 2,000 $ 38,750
- -------------------------------------------------------------------------------------------------
Business Machines - 2.4%
Affiliated Computer Services, Inc., "A"* 11,124 $ 292,005
Sun Microsystems, Inc.* 22,000 1,056,000
-----------
$ 1,348,005
- -------------------------------------------------------------------------------------------------
Business Services - 1.9%
AccuStaff, Inc.* 4,600 $ 122,188
At Home Corp.* 100 1,913
Computer Sciences Corp.* 3,540 263,287
CUC International, Inc.* 11,905 279,767
DST Systems, Inc.* 2,800 101,325
First Data Corp. 6,432 264,114
Galileo International, Inc.* 500 13,219
Sabre Group Holding, Inc., "A"* 1,500 46,125
-----------
$ 1,091,938
- -------------------------------------------------------------------------------------------------
Cellular Telephones - 0.7%
AirTouch Communications, Inc.* 6,719 $ 227,186
Telephone & Data Systems, Inc. 4,380 173,010
-----------
$ 400,196
- -------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 4.3%
Microsoft Corp.* 18,409 $ 2,433,440
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 13.3%
BMC Software, Inc.* 14,644 $ 917,080
Cadence Design Systems, Inc.* 23,965 1,139,835
Computer Associates International, Inc. 35,888 2,400,010
Compuware Corp.* 10,430 644,053
Oracle Systems Corp.* 61,050 2,327,531
Synopsys, Inc.* 3,500 121,188
USCS International, Inc.* 3,000 53,625
-----------
$ 7,603,322
- -------------------------------------------------------------------------------------------------
Consumer Goods and Services - 3.4%
Meyer Fred, Inc.* 2,500 $ 130,000
Service Corp. International 1,000 32,000
Tyco International Ltd.* 22,623 1,774,492
-----------
$ 1,936,492
- -------------------------------------------------------------------------------------------------
Containers - 0.3%
Corning, Inc. 3,110 $ 164,441
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 0.3%
Westinghouse Electric Corp. 6,190 $ 159,392
- -------------------------------------------------------------------------------------------------
Electronics - 1.8%
Sony Corp. 11,643 $ 1,026,039
- -------------------------------------------------------------------------------------------------
Entertainment - 10.3%
American Radio Systems Corp., "A" * 4,284 $ 210,987
Clear Channel Communications, Inc.* 24,100 1,637,294
Cox Radio, Inc.* 6,100 163,175
Disney (Walt) Co. 1,500 115,219
Harrah's Entertainment, Inc.* 40,796 915,360
Jacor Communications, Inc., "A"* 8,210 361,240
LIN Television Corp.* 24,414 1,158,139
Mirage Resorts, Inc.* 6,590 176,694
Time Warner, Inc. 7,798 401,597
Univision Communications, Inc., "A"* 14,554 745,893
-----------
$ 5,885,598
- -------------------------------------------------------------------------------------------------
Financial Institutions - 9.4%
American Express Co. 12,838 $ 998,154
Associates First Capital Corp., "A" 13,704 795,689
Federal National Mortgage Assn. 14,738 648,472
Franklin Resources, Inc. 32,286 2,498,129
Merrill Lynch & Co., Inc. 3,894 239,481
Morgan Stanley, Dean Witter, Discover and Co. 4,114 197,986
-----------
$ 5,377,911
- -------------------------------------------------------------------------------------------------
Financial Services - 0.1%
Liberty Financial Cos., Inc. 1,000 $ 49,563
- -------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.4%
PepsiCo, Inc. 5,929 $ 213,444
- -------------------------------------------------------------------------------------------------
Insurance - 1.5%
Equitable of Iowa Cos. 10,199 $ 664,210
Lincoln National Corp. 2,800 187,425
-----------
$ 851,635
- -------------------------------------------------------------------------------------------------
Medical and Health Products - 2.9%
Bristol-Myers Squibb Co. 11,327 $ 860,852
Johnson & Johnson 3,000 170,062
Mckesson Corp.## 1,100 103,056
Pfizer, Inc. 1,500 83,063
Schering Plough Corp. 9,317 447,216
-----------
$ 1,664,249
- -------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Cardinal Health, Inc. 1,000 $ 66,250
Columbia/HCA Healthcare Corp. 9,179 289,712
Genesis Health Ventures, Inc.* 3,500 122,062
Health Management Associates, Inc., "A"* 700 20,694
HEALTHSOUTH Corp.* 10,657 265,759
Medtronic, Inc. 600 54,225
Pacificare Health Systems, Inc., "B"* 1,000 68,375
St. Jude Medical, Inc.* 6,256 238,119
United Healthcare Corp. 11,481 558,264
-----------
$ 1,683,460
- -------------------------------------------------------------------------------------------------
Office Equipment - 1.5%
Office Depot, Inc.* 46,109 $ 850,135
- -------------------------------------------------------------------------------------------------
Pollution Control - 0.7%
USA Waste Services, Inc.* 2,300 $ 96,600
Waste Management, Inc. 9,391 300,512
-----------
$ 397,112
- -------------------------------------------------------------------------------------------------
Printing and Publishing - 1.2%
Gannett Co., Inc. 4,790 $ 466,726
Tribune Co. 4,611 227,956
-----------
$ 694,682
- -------------------------------------------------------------------------------------------------
Restaurants and Lodging - 4.1%
HFS, Inc.* 14,577 $ 811,756
Hilton Hotels Corp. 29,018 890,490
Marriot International, Inc. 3,923 261,125
Promus Hotel Corp.* 9,860 382,691
-----------
$ 2,346,062
- -------------------------------------------------------------------------------------------------
Stores - 9.2%
AutoZone, Inc.,* 6,120 $ 172,890
CVS Corp. 31,372 1,768,597
General Nutrition Cos., Inc.* 7,040 195,360
Gymboree Corp.* 3,200 78,400
Home Depot, Inc. 14,225 671,242
Liz Claiborne, Inc. 3,250 144,828
Micro Warehouse, Inc.* 5,100 133,238
Penney (J.C.), Inc. 2,690 161,400
PETsMART, Inc.* 2,000 17,125
Rite Aid Corp. 29,223 1,462,976
Wal-Mart Stores, Inc. 12,406 440,413
-----------
$ 5,246,469
- -------------------------------------------------------------------------------------------------
Supermarkets - 0.7%
Safeway, Inc.* 7,420 $ 377,956
- -------------------------------------------------------------------------------------------------
Telecommunications - 4.6%
Aspect Telecommunications Corp.* 17,938 $ 394,636
Cabletron Systems, Inc.* 5,130 155,182
Cellular Communications International* 3,800 136,800
Cisco Systems, Inc.* 11,962 901,636
Lucent Technologies, Inc. 13,082 1,018,761
-----------
$ 2,607,015
- -------------------------------------------------------------------------------------------------
Utilities - Telephone - 3.3%
MCI Communications Corp. 54,440 $ 1,551,540
Sprint Corp. 7,513 353,111
-----------
$ 1,904,651
- -------------------------------------------------------------------------------------------------
Total U.S. Stocks $48,252,105
- -------------------------------------------------------------------------------------------------
Foreign Stocks - 5.2%
Germany - 0.6%
SAP AG, ADR (Computer Software - Systems) 200 $ 43,983
SAP AG, Preferred (Computer Software - Systems) 1,017 232,081
SAP Aktiengesellschaft, ADR (Computer Software - Systems)## 600 45,300
-----------
$ 321,364
- -------------------------------------------------------------------------------------------------
Japan - 4.1%
Canon, Inc. (Special Products and Services) 22,000 $ 607,463
Canon, Inc., ADR (Special Products and Services) 7,510 1,044,829
Sony Corp. (Electronics) 7,600 661,691
-----------
$ 2,313,983
- -------------------------------------------------------------------------------------------------
Switzerland - 0.2%
Novartis AG (Pharmaceuticals) 100 $ 141,221
- -------------------------------------------------------------------------------------------------
United Kingdom - 0.3%
Danka Business Systems, ADR (Business Services) 3,240 $ 151,470
- -------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 2,928,038
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $44,792,121) $51,180,143
- -------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.1%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------------------
Entertainment - 0.1%
American Radio Systems Corp., 7s ##*
(Identified Cost, $48,600) 1,000 $ 65,250
- -------------------------------------------------------------------------------------------------
Warrants - 0.9%
- -------------------------------------------------------------------------------------------------
Intel Corp.* (Identified Cost, $217,698) 7,243 $ 518,780
- -------------------------------------------------------------------------------------------------
Short-Term Obligations - 4.9%
- -------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97 $1,100 $ 1,099,839
Federal National Mortgage Assn., due 10/03/97 - 10/23/97 1,710 1,699,144
- -------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 2,798,983
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $47,857,402) $54,563,156
Other Assets, Less Liabilities - 4.2% 2,380,418
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $56,943,574
- -------------------------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
AUGUST 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $47,857,402) $54,563,156
Cash 72,569
Receivable for Fund shares sold 1,906,665
Receivable for investments sold 459,831
Dividends and interest receivable 11,193
Deferred organization expenses 2,277
Other assets 734
-----------
Total assets $57,016,425
-----------
Liabilities:
Payable for investments purchased $ 46,976
Payable for Fund shares reacquired 562
Payable to affiliates -
Management fee 3,438
Distribution and service fee 19,585
Accrued expenses and other liabilities 2,290
-----------
Total liabilities $ 72,851
-----------
Net assets $56,943,574
===========
Net assets consist of:
Paid-in capital $49,029,398
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 6,705,524
Accumulated undistributed net realized gain on investments
and foreign currency transactions 1,208,652
-----------
Total $56,943,574
===========
Shares of beneficial interest outstanding: 3,393,373
=========
Class A shares:
Net asset value per share
(net assets of $21,698,530 / 1,292,286 shares of
beneficial interest outstanding) $16.79
======
Offering price per share (100 / 94.25) $17.81
======
Class B shares:
Net asset value and offering price per share
(net assets of $15,734,762 / 939,339 shares of
beneficial interest outstanding) $16.75
======
Class C shares:
Net asset value and offering price per share
(net assets of $6,047,843 / 360,580 shares of beneficial
interest outstanding) $16.77
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $13,462,439 / 801,168 shares of
beneficial interest outstanding) $16.80
======
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,
Class B, and Class C shares.
See notes to financial statements
<PAGE>
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 1997
- --------------------------------------------------------------------------------
Net investment income:
Income -
Dividends $ 71,128
Interest 27,789
----------
Total investment income $ 98,917
----------
Expenses -
Management fee $ 146,570
Shareholder servicing agent fee 19,628
Shareholder servicing agent fee (Class A) 4,700
Distribution and service fee (Class A) 11,200
Distribution and service fee (Class B) 20,634
Distribution and service fee (Class C) 8,868
Administrative fee 1,974
Registration fee 51,496
Custodian fee 10,671
Printing 10,406
Auditing fee 8,515
Postage 2,762
Legal fee 2,087
Amortization of organization expenses 434
Miscellaneous 4,711
----------
Total expenses $ 304,656
Fees paid indirectly (143)
Reduction of expenses by investment adviser (56,663)
----------
Net expenses $ 247,850
----------
Net investment loss $ (148,933)
----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $1,913,771
Foreign currency transactions 776
----------
Net realized gain on investments and foreign currency $1,914,547
----------
Change in unrealized appreciation (depreciation) -
Investments $6,419,234
Translation of assets and liabilities in
foreign currencies (230)
----------
Net unrealized gain on investments and foreign
currency translations $6,419,004
----------
Net realized and unrealized gain on investments
and foreign currency $8,333,551
----------
Increase in net assets from operations $8,184,618
==========
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income (loss) $ (148,933) $ 13,249
Net realized gain on investments and foreign currency
transactions 1,914,547 1,148,632
Net unrealized gain on investments and foreign currency
translation 6,419,004 286,520
------------ ------------
Increase in net assets from operations $ 8,184,618 $ 1,448,401
------------ ------------
Distributions declared to shareholders -
From net realized gain on investments (Class A) (1,718,843) --
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 42,785,722 $ 9,192,182
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,718,872 --
Cost of shares reacquired (4,171,478) (495,900)
------------ ------------
Increase in net assets from Fund share transactions $ 40,333,116 $ 8,696,282
------------ ------------
Total increase in net assets $ 46,798,891 $ 10,144,683
Net assets:
At beginning of period 10,144,683 --
------------ ------------
At end of period (including accumulated undistributed net
investment income of $0 and $13,184, respectively) $ 56,943,574 $ 10,144,683
============ ============
</TABLE>
*For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 12.26 $ 10.00
------------ ------------
Income from investment operations# -
Net investment income (loss)(S) $ (0.11) $ 0.02
Net realized and unrealized gain on investments and foreign
currency transactions 6.67 2.24
------------ ------------
Total from investment operations $ 6.56 $ 2.26
------------ ------------
Less distributions declared to shareholders -
From net realized gain on investments and foreign currency
transactions (2.03) --
------------ ------------
Net asset value - end of period $ 16.79 $ 12.26
============ ============
Total return(+) 59.54% 22.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.29% 0.44%+
Net investment income (loss) (0.82)% 0.23%+
Portfolio turnover 82% 104%
Average commission rate $ 0.0527 $ 0.0555
Net assets at end of period (000 omitted) $ 21,699 $ 10,145
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through
August 31, 1996.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
(S)Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain expenses of the Fund,
exclusive of management, distribution, and service fees, at not more than 0.50% of average daily net
assets reduced from 1.50%, (based on operating expenses) effective April 14, 1997. To the extent
actual expenses were over/under this limitation, the net investment income per share and the ratios
would have been:
Net investment loss $ (0.15) $ (0.05)
Ratios (to average net assets):
Expenses## 1.59% 1.84%+
Net investment loss (1.12)% (0.66)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31, 1997**
- --------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $12.53
------
Income from investment operations# -
Net investment loss(S) $(0.09)
Net realized and unrealized gain on investments and foreign currency
transactions 4.31
-----
Total from investment operations $ 4.22
------
Net asset value - end of period $16.75
======
Total return 33.76%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.02%+
Net investment loss (1.46)%+
Portfolio turnover 82%
Average commission rate $0.0527
Net assets at end of period (000 omitted) $15,735
**For the period from the commencement of offering of the Fund's Class B shares April 11,
1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain expenses
of the Fund, exclusive of management, distribution, and service fees, at not more than
0.50% of average daily net assets reduced from 1.50%, (based on operating expenses)
effective April 14, 1997. To the extent actual expenses were over/under this limitation,
the net investment income per share and the ratios would have been:
Net investment loss $ (0.12)
Ratios (to average net assets):
Expenses## 2.51%+
Net investment loss (1.95)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31,1997***
- --------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $12.53
------
Income from investment operations# -
Net investment loss(S) $(0.09)
Net realized and unrealized gain on investments and foreign currency
transactions 4.33
------
Total from investment operations $ 4.24
------
Net asset value - end of period $16.77
======
Total return 33.92%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.04%+
Net investment loss (1.48)%+
Portfolio turnover 82%
Average commission rate $0.0527
Net assets at end of period (000 omitted) $ 6,048
***For the period from the commencement of the Fund's offering of Class C shares, April 11,
1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain expenses
of the Fund, exclusive of management, distribution, and service fees, at not more than
0.50% of average daily net assets reduced from 1.50%, (based on operating expenses)
effective April 14, 1997. To the extent actual expenses were over/under this limitation,
the net investment income per share and the ratios would have been:
Net investment loss $(0.13)
Ratios (to average net assets):
Expenses## 2.56%+
Net investment loss (1.99)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997****
- --------------------------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $ 12.08
-------
Income from investment operations# -
Net investment (loss)(S) $ (0.04)
Net realized and unrealized gain on investments and foreign currency
transactions 4.76
-------
Total from investment operations $ 4.72
-------
Net asset value - end of period $ 16.80
=======
Total return 39.24%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.94%+
Net investment loss (0.40)%+
Portfolio turnover 82%
Average commission rate $0.0527
Net assets at end of period (000 omitted) $13,462
****For the period from the commencement of the Fund's offering of Class I shares, January
2, 1997, through August 31, 1997.
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)Subject to reimbursement by the Fund, the Adviser voluntarily agreed to maintain
expenses of the Fund, exclusive of management, distribution, and service fees, at not
more than 0.50% of average daily net assets reduced from 1.50%, (based on operating
expenses) effective April 14, 1997. To the extent actual expenses were over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income (loss) $ (0.06)
Ratios (to average net assets):
Expenses 1.14%+
Net investment loss (0.60)%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Growth 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 - Equity securities listed on securities exchanges or
reported through the NASDAQ system are reported at market value using last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are reported at market value using last
quoted bid prices. Debt securities (other than short-term obligations which
mature in 60 days of 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 result 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 Fund
operations.
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 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 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. The Fund 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 as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
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.
Dividends received in cash are recorded on the ex-dividend date. 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 custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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. 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 1997, $135,749 was reclassified from
accumulated undistributed net investment income to accumulated net realized
gain on investments due to differences between book and tax accounting for
currency transactions. This change had no effect on the net assets or net
asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective
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 has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of the Fund's operating expenses, exclusive of
management, distribution, and service fees. The Fund in turn will pay MFS an
expense reimbursement fee not greater than 0.50% of average daily net assets
reduced from 1.50%, (based on total operating expenses) effective April 14,
1997. To the extent that the expense reimbursement fee exceeds the Fund's
actual expenses, the excess will be applied to amounts paid by MFS in prior
years. At August 31, 1997, the aggregate unreimbursed expenses owed to MFS by
the Fund amounted to $50,270.
Administrator - Effective March 1, 1997, the Fund has an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
and other administrative services. As a partial reimbursement for the cost of
providing these services, the Fund pays MFS an administrative fee up to 0.015%
per annum of the Fund's average daily net assets, provided that the
administrative fee is not assessed on Fund assets that exceed $3 billion.
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 Trustees did not receive
any payments for their services to the Fund.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$46,851 for the year ended August 31, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class
C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's 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 $2,320 for the year ended August 31, 1997. Fees incurred under the
distribution plan during the year ended August 31, 1997, were 0.12% of average
daily net assets attributable to Class A shares on an annualized basis. The
distribution fee under the Class A distribution plan is currently being
waived.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average 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 $132 and $0 for Class B and Class C
shares, respectively, for the year ended August 31, 1997. Fees incurred under
the distribution plan during the year ended August 31, 1997, were 1.00% and
1.00% of average net assets attributable to Class B and Class C shares on an
annualized basis respectively.
Purchases over $1 million of Class A shares and certain purchases by
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
twelve months of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended August 31,
1997, were $12, $403, and $437 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 at an effective annual rate of up
to 0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of
the average daily net assets of each class of shares 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. MFSC did not impose a portion of
its fee, which is reflected as a reduction of expenses in the Statement of
Operations.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, aggregated $49,575,360 and $16,236,891,
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 $47,872,576
===========
Gross unrealized appreciation $ 7,225,010
Gross unrealized depreciation (534,430)
-----------
Net unrealized appreciation $ 6,690,580
===========
(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
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
------------------------------ ---------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,208,172 $18,761,089 868,195 $9,192,182
Shares issued to
shareholders in
reinvestment of
distributions 139,292 1,718,872 -- --
Shares transferred to Class I (706,677) (8,960,664) -- --
Shares reacquired (176,243) (2,019,399) (40,453) (495,900)
-------- ------------ ------- ----------
Net increase 464,544 $ 9,499,898 827,742 $8,696,282
======== ============ ======= ==========
</TABLE>
* For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
Class B Shares
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997**
-------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 962,839 $15,559,691
Shares reacquired (23,500) (387,233)
------- -----------
Net increase 939,339 $15,172,458
======= ===========
Class C Shares
PERIOD ENDED
AUGUST 31, 1997***
-------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
Shares sold 375,407 $6,018,343
Shares reacquired (14,827) (249,686)
-------- ----------
Net increase 360,580 $5,768,657
======== ==========
Class I Shares
PERIOD ENDED
AUGUST 31, 1997****
-------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
Shares sold 216,474 $2,446,599
Shares transferred from Class A 706,677 8,960,664
Shares reacquired (121,983) (1,515,160)
-------- ----------
Net increase 801,168 $9,892,103
======== ==========
</TABLE>
** For the period from the commencement of the Fund's offering of Class B
shares, April 11, 1997, through August 31, 1997.
*** For the peirod from the commencement of the Fund's offering of Class C
shares, April 11, 1997, through August 31, 1997.
**** For the period from the commencement of the Fund's offering of Class I
shares, January 2, 1997, through August 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1997, was $11.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Strategic Growth
Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Growth Fund, including the schedule of portfolio investments as of
August 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets and the financial highlights for
the year then ended and 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 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 and financial highlights. Our procedures included
confirmation of securities owned as of August 31, 1997, by correspondence with
the custodian and brokers or by 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
Strategic Growth Fund at August 31, 1997, the results its operations for the
year then ended, the changes in its net assets and the financial highlights
for the year then ended and 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 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) STRATEGIC GROWTH FUND
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, CUSTODIAN
Cambridge Trust Company State Street Bank and Trust Company
Marshall N. Cohan - Private Investor AUDITORS
Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; INVESTOR INFORMATION
Professor of Surgery, Harvard Medical School For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime
The Hon. Sir J. David Gibbons, KBE - Chief from a touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call
your financial adviser or, for an
Abby M. O'Neill - Private Investor; information kit, call toll free:
Director, Rockefeller Financial Services, 1-800-637-2929 any business day from 9
Inc. (investment advisers) a.m. to 5 p.m. Eastern time (or leave a
message anytime).
Walter E. Robb, III - President and
Treasurer, Benchmark Advisors, Inc. INVESTOR SERVICE
(corporate financial consultants); MFS Service Center, Inc.
President, Benchmark Consulting Group, P.O. Box 2281
Inc. (office services); Trustee, Landmark Boston, MA 02107-9906
Funds (mutual funds)
For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from 8
President, Director and Secretary, a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company
For service to speech- or
Jeffrey L. Shames* - President and hearing-impaired, call toll free:
Director, Massachusetts Financial Services Company 1-800-637-6576 any business day from 9
a.m. to 5 p.m. Eastern time. (To use this
J. Dale Sherratt - President, Insight service, your phone must be equipped with
Resources, Inc. (acquisition planning specialists) a Telecommunications Device for the Deaf.)
Ward Smith - Former Chairman (until 1994), For share prices, account balances, and
NACCO Industries; Director, Sundstrand exchanges, call toll free: 1-800-MFS-TALK
Corporation (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR [DALBAR For the fourth year in a row,
MFS Fund Distributors, Inc. LOGO] MFS earned a #1 ranking in the
500 Boylston Street DALBAR, Inc. Broker/Dealer Survey,
Boston, MA 02116-3741 Main Office Operations Service Quality
Category. The firm achieved a 3.42
PORTFOLIO MANAGER overall score on a scale of 1 to 4 in
Christian Felipe* the 1997 survey. A total of 111 firms
responded, offering input on the
TREASURER quality of service they received from
W. Thomas London* 29 mutual fund companies nationwide.
The survey contained questions about
ASSISTANT TREASURERS service quality in 11 categories,
Mark E. Bradley* including "knowledge of operations
Ellen Moynihan* contact," "keeping you informed,"
James O. Yost* "ease of doing business" with the firm.
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) STRATEGIC BULK RATE
GROWTH FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(c)1997 MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116-3741
MSG-2 10/97 12M 090/290/390/890
<PAGE> 404
MFS EQUITY INCOME FUND
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION DATED
JANUARY 1, 1998.
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
-------
<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 ............................................................ 0.75%
Rule 12b-1 Fees ............................................................ None
Other Expenses (after expense limitation)(1)(2) ............................ 0.40%
----
Total Operating Expenses (after expense limitation)(2) ..................... 1.15%
</TABLE>
(1) 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."
(2) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed 0.40%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be 2.15%
and 2.90%, respectively. See "Other Information" below.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $ 12
3 years......................... 37
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
-1-
<PAGE> 405
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
- -----------------------------------------------------------------------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 12.20
---------
Income from investment operations# -
Net investment income ### $ 0.15
Net realized and unrealized gain on investments
and foreign currency transactions 2.46
---------
Total from investment operations $ 2.61
---------
Net asset value - end of period $ 14.81
---------
Total return 21.39%++
Ratios (to average net assets)/Supplemental data ###:
Expenses 1.50%+
Net investment income 1.51%+
Portfolio turnover 118%
Average commission rate $ 0.0393
Net assets at end of period (000 omitted) $ 964
</TABLE>
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997,
through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the periods indicated. If these fees had not been waived by
the Fund and/or if actual expenses had been over/under this limitation,
the net investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income (loss) $0.03
Ratios (to average net assets):
Expenses## 2.67%+
Net investment income (loss) 0.35%+
</TABLE>
-2-
<PAGE> 406
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor in
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 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 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 I shares are offered
at net asset value without an initial sales charge or CDSC and are not subject
to a distribution or service fee. Class C shares and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
paid with respect to Class A shares, Class B shares and Class C shares because
expenses attributable to Class A shares, Class B shares and Class C shares
generally will be higher.
-3-
<PAGE> 407
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12-b-1
fees, taxes, extraordinary expenses, brokerage and transactions costs and class
specific expenses, do not exceed 0.40% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
<PAGE> 408
PROSPECTUS
JANUARY 1, 1998
MFS(R) EQUITY CLASS A SHARES OF BENEFICIAL INTEREST
INCOME FUND CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Equity Income Fund (the "Fund"), a diversified
series of MFS Series Trust I (the "Trust"). 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. The minimum initial
investment generally is $1,000 per account (see "Information Concerning Shares
of the Fund -- 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.
(continued on next page)
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.
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> 409
(continued from previous page)
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, 1998, 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 41 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 at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................... 3
2. Condensed Financial Information............................... 5
3. The Fund...................................................... 6
4. Investment Objectives and Policies............................ 6
5. Certain Securities and Investment Techniques.................. 7
6. Additional Risk Factors....................................... 16
7. Management of the Fund........................................ 20
8. Information Concerning Shares of the Fund..................... 22
Purchases................................................... 22
Exchanges................................................... 28
Redemptions and Repurchases................................. 29
Distribution Plan........................................... 32
Distributions............................................... 34
Tax Status.................................................. 35
Net Asset Value............................................. 36
Expenses.................................................... 36
Description of Shares, Voting Rights and Liabilities........ 37
Performance Information..................................... 37
9. Shareholder Services.......................................... 38
Appendix A -- Waivers of Sales Charges........................ A-1
</TABLE>
2
<PAGE> 410
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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................... 0.75% 0.75% 0.75%
Rule 12b-1 Fees................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses (after expense
limitation)(4)(5)............... 0.40% 0.40% 0.40%
---- ---- ----
Total Operating Expenses (after
expense limitation)(5).......... 1.50% 2.15% 2.15%
</TABLE>
- ---------------
(1) Purchases of $1 million or more and certain purchases by retirement plans
are not subject to an initial sales charge; however, a contingent deferred
sales charge ("CDSC") of 1% will be imposed on such purchases in the event
of certain redemption transactions within 12 months following such purchases
(see "Purchases" below).
(2) The Fund has adopted a distribution plan for its shares in accordance with
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") (the "Distribution Plan"), which provides that it will pay
distribution/service fees aggregating up to (but not necessarily all of)
0.35% per annum of the average daily net assets attributable to 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 (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. 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) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed 0.40% per annum of the
Fund's average daily net assets during the current fiscal year. Otherwise,
"Other Expenses" for Class A, Class B and Class C shares would be 2.15% per
annum, respectively and "Total Operating Expenses" for
3
<PAGE> 411
Class A, Class B and Class C shares would be 3.25%, 3.90% and 3.90%,
respectively. See "Information Concerning Shares of the Fund -- Expenses"
below.
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) (1)
1 year.............................. $ 72 $ 62 $ 22 $ 32 $ 22
3 years............................. 102 97 67 67 67
5 years............................. 135 135 115 115 115
10 years............................. 226 232 232 248 248
</TABLE>
- ---------------
(1) Assumes no redemption.
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.
4
<PAGE> 412
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP. During the period from the inception of Class A shares on January 2,
1996 to August 31, 1997, Class B and Class C shares of the Fund were not
available for sale.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS A
--------------- ----------------
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
--------------- ----------------
<S> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period............ $ 11.07 $ 10.00
Income from investment operations# --
Net investment incomesec...................... $ 0.22 $ 0.13
Net realized and unrealized gain on
investments and foreign currency
transactions................................ 3.91 0.94
------- -------
Total from investment operations.................. $ 4.13 $ 1.07
------- -------
Less distributions declared to shareholders --
From net investment income.................... $ (0.16) $ --
From net realized gain on investments......... (0.22) --
Total distributions declared to shareholders...... $ (0.38) $ --
Net asset value -- end of period.................. $ 14.82 $ 11.07
------- -------
Total return...................................... 38.05% 10.70%++
Ratios (to average net assets)/Supplemental
datasec.:
Expenses...................................... 1.50% 1.50%+
Net investment income......................... 1.75% 1.83%+
Portfolio turnover................................ 118% 56%
Average commission rate........................... $0.0393 $0.0331
Net assets at end of period (000 omitted)......... $ 510 $ 477
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A shares on January 2, 1996, through
August 31, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
sec. The Adviser voluntarily agreed to maintain the expenses of the Fund at not more
than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived by the investment
adviser, distributor, and shareholder servicing agent and/or if actual expenses
were over/under this limitation, the net investment income (loss) per share and
the ratios would have been:
Net investment income (loss)................ $ 0.02 $ (0.06)
Ratios (to average net assets):
Expenses##................................. 3.40% 4.67%+
Net investment income (loss)............... (0.15)% (0.78)%+
</TABLE>
5
<PAGE> 413
3. 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 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 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.
4. INVESTMENT OBJECTIVES AND POLICIES
The 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 "Certain Securities and
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"), Fitch Investors Service, Inc. ("Fitch"), or Duff & Phelps
Credit Rating Co. ("Duff & Phelps") or Ba or lower by Moody's Investors Service,
Inc. ("Moody's"), or if unrated, determined to be of equivalent quality by the
Advisor (commonly referred to as "junk bonds").
6
<PAGE> 414
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 a U.S. exchange (not including American Depositary Receipts).
The Fund may engage in certain securities transactions and investment techniques
as described under the caption "Certain Securities and Investment Techniques"
below and "Certain Securities and Investment Techniques" 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
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.
FIXED INCOME SECURITIES: Fixed income securities in which the 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: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made, based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is 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, retains sufficient oversight, focusing on
factors such as valuation, liquidity and availability of information. Investing
in Rule 144A securities could have the effect of decreasing the level of
liquidity in 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.
7
<PAGE> 415
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 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. Government 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.
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). 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 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. In general, the 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, the Fund will segregate liquid assets
sufficient to cover its commitments. Although the fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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
8
<PAGE> 416
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.
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 may be of any size, 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.
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 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 the location of its assets. The issuer's
principal activities generally are deemed to be located in a particular country
if: (a) the security is issued or guaranteed by the government of that country
or any of its agencies, authorities or instrumentalities; (b) the issuer is
organized under the laws of, and maintains a principal office in, that country;
(c) the issuer has its principal securities trading market in that country; (d)
the issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
BRADY BONDS: The Fund may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela.
Brady Bonds have been issued only recently, and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (but primarily the U.S. dollar)
9
<PAGE> 417
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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The 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.
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 Government National Mortgage Association ("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
10
<PAGE> 418
invests, the investment may be subject to a greater or lesser risk of
prepayments 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.
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.
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).
STRIPPED MORTGAGE-BACKED SECURITIES: The 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.
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. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, may 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
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(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 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.
LOANS AND OTHER DIRECT INDEBTEDNESS: The Fund may 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.
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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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself, and could involve the loss of
all or a portion of the principal amount or interest on the investment.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
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 or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions. Swaps, caps, floors and collars are
highly specialized activities which involve certain risks.
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
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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. However, the writing of options constitutes
only a partial hedge, up to the amount of the premium, less any transaction
costs. In contrast, 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
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
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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 under "Additional
Risk Factors" below 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."
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
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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, which require 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.
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 "Certain Securities and Investment Techniques" in the SAI.
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
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companies or the market averages in general. Similarly, many of the securities
offering the capital appreciation sought by the Fund will involve a higher
degree of risk than would established growth stocks.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund is 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 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
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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 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
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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.
LOWER RATED BONDS: The Fund may invest in fixed income securities, and may
invest in convertible securities, rated Baa by Moody's or BBB by S&P, Fitch or
Duff & Phelps 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.
The Funds may also invest up to 20% of its net assets in securities rated 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") to the extent described
above. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates, the market's
perception of their credit quality, and the outlook for economic growth). In the
past, economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on a Fund's lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, a Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to a Fund but will be reflected
in the net asset value of shares of the Fund.
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.
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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. 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 Conduct Rules
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). For the fiscal year ended August 31, 1997, the Fund had a
portfolio turnover rate of over 100%. Transaction costs incurred by the Fund and
the realized capital gains and losses of the Fund may be greater than a fund
with a lesser portfolio turnover rate. For a description of strategies which may
be used by the Fund in trading portfolio securities, see "Portfolio Transactions
and Brokerage Commissions" in the SAI.
------------------------
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). Except
with respect to the fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated January 2, 1996. The Fund's portfolio manager is Lisa
B. Nurme, a Vice President of the Adviser. Ms. Nurme has been the portfolio
manager of the Fund since the Fund's inception and has been employed as a
portfolio manager by the Adviser since 1987. Under the Advisory Agreement, the
Adviser provides the Fund with overall investment advisory services. Subject to
such policies as the Trustees may determine, the Adviser makes investment
decisions for the Fund. For its services and facilities, the Adviser is entitled
to receive 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. Prior to November 1, 1997, 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(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
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Standard Trust, MFS Institutional Trust, MFS Variable Insurance Trust, MFS/Sun
Life Series Trust and seven variable accounts, each of which is a registered
investment company established by Sun Life Assurance Company of Canada (U.S.)
("Sun Life of Canada (U.S.)") in connection with the sale of various
fixed/variable annuity contracts. MFS and its wholly owned subsidiary, MFS
Institutional Advisors, Inc., provide investment advice to substantial private
clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $69.4
billion on behalf of approximately 2.7 million investor accounts as of November
30, 1997. As of such date, the MFS organization managed approximately $20.1
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $44.2 billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, 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
R. Bordewick, Jr., James O. Yost, Ellen Moynihan and Mark E. Bradley, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
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.
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<PAGE> 429
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
This Prospectus offers 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
PERCENTAGE OF: DEALER
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
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares
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<PAGE> 430
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;
(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; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
--------------------------------- ------------------------------------
<C> <S>
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>
23
<PAGE> 431
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" below 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 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.
24
<PAGE> 432
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" below 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 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
25
<PAGE> 433
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
26
<PAGE> 434
time at the discretion of MFD. The Fund reserves the right to cease offering its
shares at any time.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase and exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that year. 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
27
<PAGE> 435
commissions, compensation or promotional incentives ("concessions") to dealers
which sell or arrange for the sale of 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 and other employees, payment for travel expenses,
including lodging, incurred by registered representatives and other employees
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 and other employees 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.
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.
28
<PAGE> 436
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
29
<PAGE> 437
repurchases are, however, subject to a CDSC. See "Contingent Deferred Sales
Charge" below. Because the net asset value of shares of the account fluctuates,
redemptions or repurchases, which are taxable transactions, are likely to result
in gains or losses to the shareholder. When a shareholder withdraws an amount
from his account, the shareholder is deemed to have tendered for redemption a
sufficient number of full and fractional shares in his account to cover the
amount withdrawn. The proceeds of a redemption or repurchase will normally be
available within seven days, except for shares purchased or received in exchange
for shares purchased by check (including certified checks or cashier's checks).
Payment of redemption proceeds may be delayed for up to 15 days from the
purchase date in an effort to assure that such check has cleared.
REDEMPTION BY MAIL: Each shareholder may redeem all or any portion of the
shares in his account by mailing or delivering to the Shareholder Servicing
Agent (see back cover for address) a stock power with a written request for
redemption or letter of instruction, together with his share certificates (if
any were issued), all in "good order" for transfer. "Good order" generally means
that the stock power, written request for redemption, letter of instruction or
certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed in the manner set forth below
under the caption "Signature Guarantee." In addition, in some cases "good order"
will require the furnishing of additional documents. The Shareholder Servicing
Agent may make certain de minimis exceptions to the above requirements for
redemption. Within seven days after receipt of a redemption request in "good
order" by the Shareholder Servicing Agent, the Fund will make payment in cash of
the net asset value of the shares next determined after such redemption request
was received, reduced by the amount of any applicable CDSC described above and
the amount of any income tax required to be withheld, except during any period
in which the right of redemption is suspended or date of payment is postponed
because the Exchange is closed or trading on such Exchange is restricted or to
the extent otherwise permitted by the 1940 Act if an emergency exists. See "Tax
Status" below.
REDEMPTION BY TELEPHONE: Each shareholder may redeem an amount from his account
by telephoning the Shareholder Servicing Agent toll-free at (800) 225-2606.
Shareholders wishing to avail themselves of this telephone redemption privilege
must so elect on their Account Application, designate thereon a bank and account
number to receive the proceeds of such redemption, and sign the Account
Application Form with the signature(s) guaranteed in the manner set forth below
under the caption "Signature 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,
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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 during a calendar year, regardless of when during
the year they have occurred, will age one year at the close of business on
December 31 of that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied against the amount of Direct Purchases which will result in any such
charge being imposed at the lowest possible rate. The CDSC to be imposed upon
redemptions of shares will be calculated as set forth in "Purchases" above.
The applicability of a CDSC will be unaffected by exchanges or transfers of
registration, except as described in Appendix A hereto.
GENERAL: The following information applies to redemptions and repurchases of
all classes of the Fund's shares.
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SIGNATURE GUARANTEE. In order to protect shareholders against fraud, the Fund
requires, in certain instances as indicated above, that the shareholder's
signature be guaranteed. In these cases the shareholder's signature must be
guaranteed by an eligible bank, broker, dealer, credit union, national
securities exchange, registered securities association, clearing agency or
savings association. Signature guarantees shall be accepted in accordance with
policies established by the Shareholder Servicing Agent.
REINSTATEMENT PRIVILEGE. Shareholders of the Fund who have redeemed their 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 or exchanges, 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.
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<PAGE> 440
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 Fund -- Distributor" in the SAI. The amount of the
distribution fee paid by the Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, 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 0.10% 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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<PAGE> 441
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 0.35%,
1.00% and 1.00%, per annum, respectively. Prior to November 1, 1997, MFS waived
its right to receive distribution and service fees for Class A shares.
DISTRIBUTIONS
The Fund intends to pay substantially all of its net investment income to its
shareholders as dividends on a quarterly basis. In determining the net
investment income available for distributions, the Fund may rely on projections
of its anticipated net investment income over a longer term, rather than its
actual net investment income for the period. If the Fund earns less than
projected, or otherwise distributes more than its earnings for the year, a
portion of the
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distributions may constitute a return of capital. In addition, the Fund may make
one or more distributions during the calendar year to its shareholders from any
long-term capital gains and may also make one or more distributions during the
calendar year to its shareholders from short-term capital gains. Shareholders
may elect to receive dividends and capital gain distributions in either cash or
additional shares of the same class with respect to which a distribution is
made. See "Tax Status" and "Shareholder Services -- Distribution Options" below.
Distributions paid by the Fund with respect to Class A shares will generally be
greater than those paid with respect to Class B and Class C shares because
expenses attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. 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 (as well as the rate category or categories under which such gain is
taxable), 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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.
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NET ASSET VALUE
The net asset value per share of each class of the Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in the Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received 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, 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 sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.40% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
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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.
As of November 29, 1997, the MFS Defined Contribution Plan, c/o Mark Leary,
Massachusetts Financial Services, 500 Boylston Street, Boston, MA 02116-3740
owned, of record, 38.5% of the outstanding shares of the Fund, and, therefore,
controls the Fund.
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 Securities Corporation 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
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<PAGE> 445
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, and purchased by,
the public on different dates (the class "inception date"). The calculation of
total rate of return for a class of shares which has a later class inception
date than another class of shares of the Fund is based both on (i) the
performance of the Fund's newer class from its inception date and (ii) the
performance of the Fund's oldest class from its inception date up to the class
inception date of the newer class. See the SAI for further information on the
calculation of total rate of return for share classes with different class
inception 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, 1997, 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
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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 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.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of
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<PAGE> 447
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).
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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
40
<PAGE> 448
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, 1998, 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.
41
<PAGE> 449
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B 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;
- 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.
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.
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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;
- Financial hardship (as defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time);
- Termination of employment of 401(a) or ESP Plan participant (excluding,
however, a partial or other termination of the Plan);
- Tax-free return of excess 401(a) or ESP Plan contributions;
- To the extent that redemption proceeds are used to pay expenses (or certain
participant expenses) of the 401(a) or ESP Plan (e.g., participant account
fees), provided that the Plan sponsor subscribes to the MFS FUNDamental
401(k) Plan or another similar recordkeeping system made available by the
Shareholder Servicing Agent; and
- Distributions from a 401(a) or ESP Plan that has invested its assets in one
or more of the MFS Funds for more than 10 years from the later to occur of:
(i) January 1, 1993 or (ii) the date such 401(a) or ESP Plan first invests
its assets in one or more of the MFS Funds. The sales charges will be waived
in the case of a redemption of all of the 401(a) or ESP Plan's shares in all
MFS Funds (i.e., all the assets of the 401(a) or ESP Plan invested in the
MFS Funds are withdrawn), unless immediately prior to the redemption, the
aggregate amount invested by the 401(a) or ESP Plan in shares of the MFS
Funds (excluding the reinvestment of distributions) during the prior four
years equals 50% or more of the total value of the 401(a) or ESP Plan's
assets in the MFS Funds, in which case the sales charges will not be waived.
SECTION 403(B) SALARY REDUCTION ONLY PLANS ("SRO PLANS")
- Death or disability of SRO Plan participant.
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). Shares transferred:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed; and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
A-2
<PAGE> 451
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. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by Investments through certain dealers (including registered
investment advisers and financial planners) which have established certain
operational arrangements with MFD which include a requirement that such
shares be sold for the sole benefit of clients participating in a "wrap"
account, mutual fund supermarket account or a similar program under which
such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed payment
A-3
<PAGE> 452
of commissions with respect to the Initial Purchase and all subsequent
investments by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a schedule
of the amount of commissions paid by MFD to the dealer on such investments,
see "Purchases -- Class A Shares -- Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS Family of
Funds, except for Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Municipal Bond Fund, MFS Municipal Limited Maturity
Fund, MFS Money Market Fund, MFS Government Money Market Fund and MFS Cash
Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code of
1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the Shareholder
Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
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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<PAGE> 453
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
<PAGE> 454
----------------
[MFS INVESTMENT MANAGEMENT Bulk Rate
WE INVENTED THE MUTUAL FUND(TM) LOGO] U.S. Postage
Paid
MFS
----------------
MFS(R) EQUITY INCOME FUND
500 Boylston Street, Boston,MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial records
because it provides important facts
about your investment.
MEI-1-1/98/60M
<PAGE> 455
[MFS
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
LOGO]
MFS(R) EQUITY INCOME FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions................................................. 2
2. Investment Objective, Policies and Restrictions............. 2
Certain Securities and Investment Techniques................ 2
3. Management of the Fund...................................... 18
Trustees.................................................... 18
Officers.................................................... 18
Trustee Compensation Table.................................. 19
Investment Adviser.......................................... 19
Administrator............................................... 20
Custodian................................................... 20
Shareholder Servicing Agent................................. 20
Distributor................................................. 20
4. Portfolio Transactions and Brokerage Commissions............ 21
5. Shareholder Services........................................ 22
Investment and Withdrawal Programs.......................... 22
Exchange Privilege.......................................... 25
Tax-Deferred Retirement Plans............................... 25
6. Tax Status.................................................. 26
7. Distribution Plan........................................... 27
8. Determination of Net Asset Value and Performance............ 28
9. Description of Shares, Voting Rights and Liabilities........ 31
10. Independent Auditors and Financial Statements............... 31
Appendix A -- Performance Quotations........................ A-1
</TABLE>
MFS(R) EQUITY INCOME FUND
A series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
January 1, 1998. 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> 456
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Equity Income 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, 1998,
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," "Certain Securities and Investment Techniques" and "Additional Risk
Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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. Government 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 liquid assets sufficient to cover any commitments or
to limit any potential risk. Although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
2
<PAGE> 457
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.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: 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. 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 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 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
3
<PAGE> 458
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
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.
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.
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 issued by agencies or instrumentalities of the U.S.
Government, or by private originators of or investors in, mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "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 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
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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 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 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 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
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
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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 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.
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 and could involve
the loss of all or a portion of the principal amount of the investment. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies. Indexed securities may be more volatile than the
underlying instrument itself and could involve the loss of all or a portion of
the principal amount of the investment.
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.
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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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded, and applicable
laws and regulations. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
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 liquid assets. 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 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
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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.
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
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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 liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets 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 liquid assets in a segregated account
with its custodian. Put and call options on stock indices may also be covered in
such other manner as may be in accordance with the rules of 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
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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 liquid assets 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 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
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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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets, in an amount
equal to the value of its commitments under Forward Contracts.
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 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
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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 liquid assets in a segregated account with its custodian. The Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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 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
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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, 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
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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 liquid assets 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 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
14
<PAGE> 469
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 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
15
<PAGE> 470
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.
RISKS OF INVESTING IN LOWER RATED BONDS -- The 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"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps"), 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.
The Funds may also invest in fixed income securities rated 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") 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 securi-ties may also include zero coupon bonds, deferred interest
bonds and PIK bonds.
16
<PAGE> 471
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, 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 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) and non-fundamental investment
policy (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 15% 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 10% 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; currently, the 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 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
17
<PAGE> 472
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;
(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; or
(10) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of 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.)
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 and
Director (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; Colonial Insurance Company
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November 1997)
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 8/18/26)
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
Address: 36080 Shaker Blvd., Hunting Valley, 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
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (prior to September 1994)
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.
18
<PAGE> 473
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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE RETIREMENT
FEES BENEFIT ESTIMATED TOTAL
FROM ACCRUED CREDITED TRUSTEE FEES
THE AS PART OF YEARS OF FROM FUND AND
TRUSTEE FUND(1) FUND EXPENSE(1) SERVICE(2) COMPLEX(3)
------- ------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
Walter E. Robb, III.... $0 $0 6 $149,258
Marshall N. Cohan...... 0 0 6 149,258
Sir David Gibbons...... 0 0 6 136,508
Richard B. Bailey...... 0 0 6 247,168
Ward Smith............. 0 0 10 149,258
Abby M. O'Neill........ 0 0 7 123,758
Dr. Lawrence Cohn...... 0 0 16 136,508
J. Dale Sherratt....... 0 0 18 149,258
</TABLE>
- ---------------
(1) For the fiscal year ending August 31, 1997.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1996. All Trustees served
as Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except
Mr. Bailey, who served as Trustee of 81 funds within the MFS complex (having
aggregate net assets at December, 1996 of approximately $38.5 billion).
As of November 29, 1997, the Trustees and officers as a group owned less than 1%
of the Fund's shares, not including 72,812.49 Class I shares of the Fund (which
represent approximately 38.5% 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 29, 1997, Maura A. Shaughnessy, c/o Massachusetts Financial
Services, 500 Boylston Street, Boston, MA 02116-3740 owned approximately 15.47%
of the outstanding Class A shares of the Fund; Shirley Shames c/o Performance
Plus, 111 Speen Street, Ste 105, Framingham, MA 01701-2090 owned approximately
37.82% of the outstanding Class A shares of the Fund; The Nurme Family 1997
Trust, c/o Massachusetts Financial Services, 500 Boylston Street, Boston, MA
02116-3740 owned approximately 7.30% of the outstanding Class A shares of the
Fund; Donaldson, Lufkin & Jenrette Securities Corporation, Inc., P.O. Box 2052,
Jersey City, NJ 07303-2052 owned approximately 7.66% of the outstanding Class B
shares of the Fund; Rauscher, Pierce, Refsnes, FBO Guarantee & Trust Company,
Trustees of the Ronald Hart IRA, 1123 Belaya Lane, Houston, Texas 77090-1219
owned approximately 6.89% of the outstanding Class B shares of the Fund; Michael
T. Webb and Judy McGrete Webb, 3380 Mortar Court, Placerville, CA 95667-8312
were the owners of approximately 14.51% of the outstanding Class B shares of the
Fund; Merrill Lynch, Pierce, Fenner & Smith Inc., FBO its Customers, Attention:
Fund Administration, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, Florida
32246-6484 was the owner of approximately 11.27% and 20.71% of the outstanding
Class B and Class C shares of the Fund, respectively; PaineWebber, FBO Marwan R.
Shishakly and Nicola M. Shishakly, Trustees, 14 Avenue D' Alsace, 78110 Le
Vesinet, France was the owner of approximately 10.19% of the outstanding Class C
shares of the Fund; PaineWebber, FBO Diana Lorraine Devries, Box 61, Roxbury, CT
06783-0061 was the owner of approximately 24.82% of the outstanding Class C
shares of the Fund; Ruby Barnaby, 3108 Glenbrook, Bryant, AR 72022-7013, was the
owner of approximately 33.91% of the outstanding Class C shares of the Fund;
Linda Parrilla, TOD Carmen Parrilla and Domenico M. Parrilla, 971 E. 48th
Street, Brooklyn, NY 11203-6603 was the owner of approximately 7.13% of the
outstanding Class C shares of the Fund; and the MFS Defined Contribution Plan,
c/o Mark Leary, Massachusetts Financial Services, 500 Boylston Street, Boston,
MA 02116-3740 was the owner of approximately 99.99% of the Class I shares of the
Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to 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 an
indirect 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").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment deci-
19
<PAGE> 474
sions 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 fiscal year ended August 31, 1997, the Adviser waived its right to
receive management fees from the Fund.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment Objectives, 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period ended August 31, 1997,
MFS received $83 under the 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 September 10, 1986,
as amended (the "Agency Agreement") with the Trust. The Shareholder Servicing
Agent's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the Fund.
For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 0.13%. In addition, the Shareholder Servicing Agent
will be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. 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
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
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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. 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 inception date of Class A shares on January 2, 1996 to
the Fund's fiscal year end of August 31, 1997, 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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment 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 Conduct 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 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
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<PAGE> 476
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 $50,980 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the period ended August 31, 1996, the Fund paid total brokerage commissions
of $783 on total transactions of $713,627.
For the fiscal year ended August 31, 1997, the Fund paid total brokerage
commissions of $2,508 on total transactions of $63,760.
During the fiscal year ended August 31, 1997, the Fund acquired securities
issued by General Electric Capital, a regular broker-dealer of the Fund, which
securities had a value of $15,000 as of August 31, 1997.
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 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
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<PAGE> 477
purchases of $1 million or more) plus the value of shares credited toward
completion of the Letter of Intent do not total the sum specified, he will pay
the increased amount of the sales charge as described below. Instructions for
issuance of shares in the name of a person other than the person signing the
Letter of Intent application must be accompanied by a written statement from the
dealer stating that the shares were paid for by the person signing such Letter.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter of Intent. Dividends and
distributions of other MFS Funds automatically reinvested in shares of the Fund
pursuant to the Distribution Investment Program will also not apply toward
completion of the Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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
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<PAGE> 478
respect to Class A shares, maintaining a withdrawal plan concurrently with an
investment program would be disadvantageous because of the sales charges
included in share purchases and the imposition of a CDSC on certain redemptions.
The shareholder may deposit into the account additional shares of the Fund,
change the payee or change the dollar amount of each payment. The Shareholder
Servicing Agent may charge the account for services rendered and expenses
incurred beyond those normally assumed by the Fund with respect to the
liquidation of shares. No charge is currently assessed against the account, but
one could be instituted by the Shareholder Servicing Agent on 60 days' notice in
writing to the shareholder in the event that the Fund ceases to assume the cost
of these services. The Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another MFS
Fund. Any SWP may be terminated at any time by either the shareholder or the
Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if 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
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<PAGE> 479
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 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.
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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
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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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 without regard to the length of time shareholders have held
their shares. Such capital gains may be taxable to shareholders that are
individuals, estates, or trusts at maximum rates of 20%, 25%, or 28%, depending
upon the source of the gains. 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 bonds, 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, Forward Contracts and
swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss with
respect to
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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. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each taxable year. This election may cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those investments; in order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold. Investment income received by the Fund from
foreign securities may be subject to foreign income taxes withheld at the
source; the 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 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% (or any lower rate permitted
under an applicable treaty) on taxable dividends and other payments to Non-U.S.
Persons that are subject to such withholding. 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 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
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<PAGE> 482
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 inception date of Class A shares on January 2, 1996,
to the fiscal year ended August 31, 1997, distribution and service fees under
the Distribution Plan for Class A shares were not imposed.
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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;
Martin Luther King Day; Presidents' Day; Good Friday; Memorial Day; Independence
Day; Labor Day; Thanksgiving Day and Christmas Day.) This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Equity securities in the Fund's portfolio are
valued at the last sale price on the exchange on which they are primarily traded
or on the Nasdaq stock market 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 stock
market 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 stock market 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.
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PERFORMANCE INFORMATION
TOTAL RATE OF RETURN: The Fund will calculate its total rate of return for each
class of shares for certain periods by determining the average annual compounded
rates of return over those periods that would cause an investment of $1,000
(made with all distributions reinvested and reflecting the CDSC or the maximum
public offering price) to reach the value of that investment at the end of the
periods. The Fund may also calculate (i) a total rate of return, which is not
reduced by the CDSC (4% maximum for Class B shares and 1% maximum for Class C
shares) and therefore may result in a higher rate of return, (ii) a total rate
of return assuming an initial account value of $1,000, which will result in a
higher rate of return since the value of the initial account will not be reduced
by the sales charge (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, and purchased by, the public on different dates (the class "inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
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 Class A and Class I shares are presented in
Appendix A attached hereto under the heading "Performance Quotations." Class B
and Class C shares were not available for sale during this period.
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.
Yield quotations for Class A and Class I Shares are presented in Appendix A
attached under the heading "Performance Quotations." 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.
Current distribution rate quotations for Class A and Class I shares are
presented in Appendix A attached under the heading "Performance Quotations."
Class B and Class C shares were not available for sale during this period.
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,
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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.
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(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.
-- 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.
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-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and twelve 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). Of the twelve other series of the Trust, all offer Class A and Class B
shares, eleven offer Class C shares and eleven offer Class I shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders. The
Trust reserves the right to create and issue a number of series and additional
classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
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, 1997, the Statement of Operations for the year ended August 31, 1997,
the Statement of Changes in Net Assets for the period from January 2, 1996
(commencement of investment operations) to August 31, 1996 and the year ended
August 31, 1997, 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.
31
<PAGE> 486
APPENDIX A
PERFORMANCE INFORMATION
The performance results and quotations below should not be considered as
representative of the performance of the Fund in the future since the net asset
value and public offering price of shares of the Fund will vary. See
"Determination of Net Asset Value and Performance" in the SAI.
PERFORMANCE RESULTS -- CLASS A SHARES
<TABLE>
<CAPTION>
VALUE OF VALUE OF VALUE OF
INITIAL $10,000 CAPITAL GAIN REINVESTED TOTAL
YEAR ENDED INVESTMENT DISTRIBUTIONS DIVIDENDS VALUE
------------ --------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
December 31,
1996 $11,638 $ 0 $362 $12,000
</TABLE>
* For the period from the class inception date of January 2, 1996 to December
31, 1996.
Explanatory Notes: The results assume that income, dividends and capital gains
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 sale charge. No adjustment has been made for income taxes, if any,
payable by shareholders.
PERFORMANCE QUOTATIONS
All performance quotations are as of August 31, 1997.
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE ANNUAL TOTAL YIELD YIELD
RETURNS* (INCLUDING (WITHOUT CURRENT
----------------------- ANY ANY DISTRIBUTION
1 YEAR LIFE OF FUND WAIVERS) WAIVERS) RATE
------ ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Class A Shares with sales charge...................... 31.52% 25.32%(1) 1.06% -1.95% 1.01%
Class A Shares without sales charge................... 38.05% 29.05%(1) N/A N/A N/A
Class I Shares........................................ 37.95%(2) 29.00%(2) 1.12% -1.49% N/A
</TABLE>
- ---------------
(1) From the class inception date of January 2, 1996.
(2) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and Class A shares differ. Class I share performance
has been adjusted to reflect that Class I shares are not subject to an
initial sales charge, whereas Class A shares generally are subject to an
initial sales charge. Class I share performance has not, however, been
adjusted to reflect differences in operating expenses (e.g., Rule 12b-1
fees), which generally are lower for Class I shares.
* Total rate of return figures would have been lower if an expense limitation
was not in place.
A-1
<PAGE> 487
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
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
MEI-13-11/97/500
<PAGE> 488
<PAGE>
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
ANNUAL REPORT
AUGUST 31, 1997
o MFS(R) CORE GROWTH FUND
o MFS(R) EQUITY INCOME FUND
o MFS(R) SPECIAL OPPORTUNITIES FUND
o MFS(R) BLUE CHIP FUND
o MFS(R) CONVERTIBLE SECURITIES FUND
o MFS(R) NEW DISCOVERY FUND
o MFS(R) RESEARCH INTERNATIONAL FUND
o MFS(R) SCIENCE AND TECHNOLOGY FUND
[Graphic Omitted]
<PAGE>
<TABLE>
<S> <C>
MFS(R) CORE GROWTH FUND MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) EQUITY INCOME FUND MFS(R) NEW DISCOVERY FUND
MFS(R) SPECIAL OPPORTUNITIES FUND MFS(R) RESEARCH INTERNATIONAL FUND
MFS(R) BLUE CHIP FUND MFS(R) SCIENCE AND TECHNOLOGY FUND
Trustees
A. Keith Brodkin* - Chairman and President SECRETARY
Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
State Street Bank and Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Ernst & Young LLP
Brigham and Women's Hospital; Professor of Surgery,
Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
The Hon. Sir J. David Gibbons, KBE - Chief Executive 1-800-637-4458 anytime from a touch-tone telephone.
Officer, Edmund Gibbons Ltd.; Chairman, Bank of
N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
Abby M. O'Neill - Private Investor; Director, Rockefeller 1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Financial Services, Inc. (investment advisers) Eastern time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, Benchmark INVESTOR SERVICE
Advisors, Inc. (corporate financial consultants); President, MFSService Center, Inc.
Benchmark Consulting Group, Inc. (office services); P.O. Box 2281
Trustee, Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice President, Director For general information, call toll free: 1-800-225-2606
and Secretary, Massachusetts Financial Services Company any business day from 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call toll free:
Massachusetts Financial Services Company 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
J. Dale Sherratt - President, Insight Resources, Inc. equipped with a Telecommunications Device for the Deaf.)
(acquisition planning specialists)
For share prices, account balances, and exchanges, call toll
Ward Smith - Former Chairman (until 1994), NACCO free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
Industries; Director, Sundstrand Corporation touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO] For the fourth year in a row, MFS
Distributor earned a #1 ranking in the DALBAR, Inc.
MFS Fund Distributors, Inc. Broker/Dealer Survey, Main Office Operations
500 Boylston Street Service Quality Category. The firm achieved a
Boston, MA 02116-3741 3.42 overall score on a scale of 1 to 4 in the
1997 survey. A total of 111 firms responded,
PORTFOLIO MANAGERS* offering input on the quality of service they
Irfan Ali received from 29 mutual fund companies
John F. Brennan, Jr. nationwide. The survey contained questions
Mitchell D. Dynan about service quality in 11 categories,
Judith Noelle Lamb including "knowledge of operations contact,"
Robert J. Manning "keeping you informed," and "ease of doing
Lisa B. Nurme business" with the firm.
Kevin R. Parke
Stephen Pesek
Brian E. Stack
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*AFFILIATED WITH THE INVESTMENT ADVISER
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule
out the possibility of future monetary tightening in the second half of the
year if, as we now expect, the economy strengthens during the balance of 1997.
Therefore, our risk/reward outlook for the fixed-income markets is neutral,
and we believe that fixed-income investors should think in terms of earning
the coupon income from their investments rather than seeking possible gains
from price appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEWS
MFS Core Growth Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 45.22%, and Class I shares returned 45.31%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
Four general themes best describe the Fund's current holdings, which are built
from the bottom up based on individual stock selection. First, the Fund seeks
companies with high unit sales growth that can support above-average revenue
growth. Second, the Fund looks for companies that 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 seem able to
control their own destinies through internal changes such as 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 that, in our opinion, have the potential to benefit from a fundamental
mismatch in the balance between supply and demand.
Positions in several industry sectors have been added to the Fund or have been
increased in recent months, including drug store chains, in which we expect to
see growth as the population ages, and entertainment companies, in which
consolidations are continuing. We have also increased the Fund's holdings in the
oil service sector, which is benefiting from a mismatch in supply and demand, as
well as in package delivery companies, which are capitalizing on the strong
economy and wage pressures at United Parcel Service.
/s/ Stephen Pesek
Stephen Pesek
Portfolio Manager
MFS Equity Income Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 38.05%, and Class I shares returned 37.95%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500.
The Fund's top holdings remain in the financial services, utilities, energy, and
industrial goods and services sectors. Within financial services, the Fund
remains heavily weighted in insurance stocks, in which restructuring and
consolidation are leading to improved returns and better valuations. The Fund's
utility holdings are concentrated in gas distribution companies, high-quality,
low-cost electric utilities, and well-positioned local and long-distance
telephone companies. Essentially, the Fund is seeking to invest in companies
that we believe are well insulated from heightened competition and/ or companies
that may benefit from continuing consolidation in these industries. The energy
sector remains a key one for the Fund, especially those companies that are
dedicated to increasing production, cutting costs, and improving returns in
lagging businesses such as refining. Pollution control is a growing portion of
the Fund's holdings in industrial goods and services. This industry has
underperformed the market for several years but is now refocusing on its core
business, embracing cost cutting, and allocating capital more carefully.
The Fund continues to seek holdings in companies that we believe provide
attractive dividend yields and reasonable valuations, characteristics that we
feel could provide protection against price declines in a volatile market.
/s/ Lisa B. Nurme
Lisa B. Nurme
Portfolio Manager
MFS Special Opportunities Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 31.84%, and Class I shares returned 32.23%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500 and to a 15.55% return for
the average high-yield corporate bond fund as tracked by CDA/ Wiesenberger, an
independent firm that reports mutual fund performance.
The Fund continues to have the majority of its assets in common stocks because
we have found few attractive investments in the distressed and high-yield
markets. The Fund's investment strategy continues to incorporate both growth
and value disciplines. We have found investment opportunities in companies
that have recently emerged from bankruptcy, companies with financially
leveraged capital structures but with strong cash flow and solid earnings
prospects, and companies with attractive growth prospects but with valuations
that don't fully reflect these prospects. Our overall stock market perspective
continues to be cautious; however, we have been able to find an adequate
number of special situations for investment. The weighting of high-yield and
distressed bonds is likely to increase as more-appealing investment ideas
become available.
/s/ John F. Brennan, Jr. /s/ Robert J. Manning
John F. Brennan, Jr. Robert J. Manning
Portfolio Manager Portfolio Manager
MFS Blue Chip Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
17.70%. These returns, which include the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 22.91% return for the S&P
500 for the same period.
The Fund's investment strategy continues to be predicated on the assumption that
the global economy will grow slowly during 1998 and that U.S. interest rates
will remain fairly stable. In the United States, this assumption is supported by
the longevity of the current economic recovery and the high levels of consumer
debt. Economic growth remains moderate in a good part of Europe. Double-digit
unemployment rates in France (in addition to tax increases) and Germany should
prevent these economies from accelerating. Japan is weak, and economic growth in
other Asian countries could slow as interest rates rise.
The Fund is positioned relatively defensively, with the bulk of its investments
in companies that we believe can sustain double-digit earnings growth in a
slow-growth environment. Earnings ultimately drive stock prices, and investors
will bid up the share prices of companies that can achieve above-average
earnings growth.
The Fund's holdings are diverse and spread across many industries. However,
consistent with this defensive posture, the Fund continues to be overweighted in
the consumer staples and health care sectors. Conversely, the Fund is
significantly underweighted in basic materials and automobiles and housing. The
industrial goods sector is overweighted but aerospace and defense companies have
been emphasized. We believe this sector should perform relatively well in a
slow-growth economy. Similarly, the retail weighting is greater than the
market's, but all of this is in supermarkets and drug stores. The financial
services sector is overweighted, with an emphasis on high-quality regional banks
and insurance companies. The weightings in energy and utilities and
communications approximate those of the market, with the primary energy holdings
being large multinational oil companies. While the utility holdings offer modest
price appreciation, they are viewed as the ballast in the portfolio and
contribute to the Fund's yield. Emphasis has also been placed on companies that
have significant recurring revenue streams and/or that participate in dynamic,
high-growth markets. Examples would be First Data, DST Systems, and Service
Corporation International. For the same reasons, the bulk of the Fund's
technology investments are in the software industry.
/s/ Mitchell D. Dynan
Mitchell D. Dynan
Portfolio Manager
MFS Convertible Securities Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 14.70%, while its
Class I shares returned 14.60%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 15.98%
return for the Merrill Lynch All Convertibles Index, an unmanaged index of
convertible securities, and to a 14.48% return for the average convertible
securities fund for the same period as tracked by Lipper Analytical Services,
Inc., an independent firm that reports mutual fund performance.
The Fund is taking an extremely defensive posture due to the stock market's
current high valuation and its increased volatility in order to preserve
capital. Convertible securities comprise 80% of the portfolio, versus the
required 65% minimum. Increased demand for the convertible asset class has led
to a more expensive convertible market, as illustrated by the aggressive pricing
of new issues. In response, the portfolio is skewed toward convertibles that are
technically cheap; that is, those whose price movements correlate well with
upward price movements in the underlying common stock and that have
above-average yield.
The Fund's overall strategy is to invest in companies that we believe are
benefiting from one or more of the following trends: industry consolidation,
market dominance, and cost containment. Performance was favorably impacted by
overweightings in industrial goods and services companies, including Browning
Ferris, Corning, and U.S. Filter; leisure companies, which included American
Radio Systems and Royal Caribbean Cruises; financial services companies such as
Frontier Insurance and MGIC Investment Corp.; and technology companies,
including Baan and Data General. Conversely, companies in the basic materials
sector, such as RMI Titanium and Titanium Metals, detracted from year-to-date
performance. A value-oriented approach will continue to be used to evaluate
company fundamentals and the technical aspects of convertible securities.
/s/ Judith Noelle Lamb
Judith Noelle Lamb
Portfolio Manager
MFS New Discovery Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 30.70%, while its
Class I shares returned 30.80%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 17.97%
return for the Russell 2000 Total Return Index, an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks that are traded on
the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
The Fund invests principally in the shares of emerging companies that we believe
have the potential to grow into large enterprises. We maintain significant
weightings in the technology, health care, lodging, media, and business and
information services industries. We regard these as fundamentally attractive
sectors within which innovative and well-managed companies can be expected to
experience sustainable unit and earnings growth well above that seen in the
broader economy.
Among the factors contributing to the Fund's favorable performance were gains in
the shares of Summit Design, a provider of electronic design and automation
software, and Idexx Laboratories, a manufacturer of veterinary diagnostics
equipment and consumables. In addition, advances were recorded by broadcasters
American Radio Systems and Jacor Communications. The portfolio also benefited
from appreciation in the shares of Affiliated Computer Services and in high- end
hotel operators such as Wyndham, Renaissance, and Doubletree hotels.
Our research efforts continue to identify many attractively valued, emerging
growth companies that we believe can deliver exceptional long-term returns.
This, coupled with a market backdrop that suggests the potential for renewed
interest in smaller-company shares, makes us optimistic about performance
prospects for the year ahead.
/s/ Brian E. Stack
Brian E. Stack
Portfolio Manager
MFS Research International Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
9.60%. These returns, which assume the reinvestment of distributions but exclude
the effects of any sales charges, compare to a 4.39% return for the Morgan
Stanley Capital International EAFE (Europe, Australia, Far East) Index, an
unmanaged index of international stocks.
The top five sectors in the Fund are financial services (at 14.8% of assets),
technology (12.1%), utilities and communications (11.8%), leisure (11.0%), and
industrial goods and services (9.3%). The three top holdings are Nippon
Broadcasting, Secom, and Canon. Nippon Broadcasting is the world's largest radio
network operating company and has held the top audience ratings in Japan for the
past 22 years. We believe the company can continue to increase earnings by 10%
to 15% per year over the next several years. Secom holds a dominant 60% market
share of the electronic security market in Japan and holds over a 70% market
share through subsidiaries in Korea, Taiwan, Thailand, Malaysia, and Singapore.
We expect Canon's underlying operating growth to be at 12% in the coming year.
The company's valuation is currently cheap for a quality growth company.
In the technology sector, Sony's new digital product launches and strong product
pipeline continue to offer the company significant opportunity, while its new
management's compensation is directly tied to the company's performance. Through
major distributors in Europe and Japan, Sony Pictures will soon exploit the
3,400 movie titles it has in its motion picture bank. As a result, we expect
operating profits to grow at an average of over 20% over the next couple of
years.
Within the financial services sector, several banks and insurance companies in
Hong Kong, Great Britain, France, and Japan continue to demonstrate good
earnings growth that, coupled with substantial cost savings, should yield
excellent results.
The Fund is based upon the international research analysts' best ideas within
their industries. Stocks are selected after careful, in-depth, fundamental
analysis of companes' earnings outlooks. Although each analyst incorporates
general economic forecasts into his or her decision-making process, ultimately,
stocks selected for the Fund represent companies that the analysts believe offer
the best possibilities for capital appreciation regardless of the economic
outlook. These companies typically demonstrate dominant and/or growing market
share, quality new and existing products, superior management teams, and strong
financial statements. Sector and industry weightings are a result of the "best
ideas" stock-selection process. However, the analysts revisit weightings
regularly to assure agreement within the changing economic landscape. We will
continue to use a bottom-up, fundamental approach to investing in companies for
the Fund.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The committee of MFS equity research analysts is responsible for the day-to-
day management of the Fund under the general supervision of Mr. Parke.
MFS Science and Technology Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
25.30%. These returns, which assume the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 23.44% return for the
NASDAQ Composite Index, an unmanaged index of common stocks traded on NASDAQ,
and to a 19.78% return for the average technology fund as tracked by CDA/
Wiesenberger, an independent firm that reports mutual fund performance.
The Fund continues to seek companies that we believe are fast growing, have
market share leadership, and have a defensible strategic position. Holdings
remain focused in the computer software, networking, business services, and
semiconductor areas. To date, the Fund has not made significant investments in
the health care sector.
The Fund's performance has been favorably impacted by stock selection and by a
generally strong technology market. The volatility of the technology sector has
also provided attractive buying opportunities during times of price weakness.
Top holdings include Oracle Systems, Microsoft, and Computer Associates
International. All three of these stocks have seen outstanding price
appreciation driven by a healthy industry environment and by each management's
ability to deliver superior financial results. We believe the outlook for the
technology sector remains highly attractive, while the outlook for the health
care sector should start to improve.
/s/ Irfan Ali
Irfan Ali
Portfolio Manager
<PAGE>
PORTFOLIO MANAGERS' PROFILES
Each portfolio manager has acted in that capacity since the commencement of
investment operations of each Fund.
MFS CORE GROWTH FUND
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.
MFS EQUITY INCOME FUND
Lisa B. 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.
MFS SPECIAL OPPORTUNITIES FUND
John F. Brennan, Jr., has been a member of the MFS investment staff since 1985.
A graduate of the University of Rhode Island and the Stanford University
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 in 1995.
Robert J. 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 the
Boston College Graduate School of Management, he was named Vice President
Investments in 1988 and Senior Vice President in 1993.
MFS BLUE CHIP FUND
Mitchell D. Dynan joined the MFS Research Department in 1986. A graduate of
Tufts University, he was named Assistant Vice President - Investments in 1987
and Vice President - Investments in 1988.
MFS CONVERTIBLE SECURITIES FUND
Judith Noelle Lamb joined MFS in 1992 as Vice President and analyst
specializing in convertible securities. She is a graduate of New York
University and the New York University Graduate School
of Business.
MFS NEW DISCOVERY FUND
Brian E. Stack joined the MFS Research Department as Vice President Investments
in 1993. A graduate of Boston College and the Darden School of Business at the
University of Virginia, he has worked as an equity analyst since 1987.
MFS RESEARCH INTERNATIONAL FUND
The committee of MFS equity research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Kevin R. Parke. A
graduate of Lehigh University and the Harvard University Graduate School of
Business Administration, Mr. Parke joined the MFS Research Department in 1985 as
an industry specialist and was named Assistant Vice President - Investments in
1987, Vice President - Investments in 1988, Senior Vice President in 1993,
Director of Equity Research in 1995, and Executive Vice President in 1997.
MFS SCIENCE AND TECHNOLOGY FUND
Irfan Ali joined MFS in 1993 as an industry specialist. A graduate of Harvard
College and the Harvard University Graduate School of Business Administration,
he was named Assistant Vice President in 1996 and Vice President in 1997.
<PAGE>
INVESTMENT OBJECTIVES
MFS CORE GROWTH FUND
The objective of the Fund 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 that 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).
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS EQUITY INCOME FUND
The primary objective of the Fund is reasonable income and the secondary
objective is 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.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
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 that represent uncommon value by having the potential
for significant capital appreciation over a period of 12 months or longer.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS BLUE CHIP FUND
The objective of the 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 that the Fund's investment
adviser believes have above-average capital appreciation potential. The Fund may
invest up to 35% of its total assets in other securities (including emerging
growth companies) offering an opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS CONVERTIBLE SECURITIES FUND
The objective of the 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 nonconvertible corporate and U.S.
government fixed-income securities, equity securities, and money market
instruments. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS NEW DISCOVERY FUND
The objective of the 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 that the Fund's manager believes offer superior
prospects for growth. The Fund 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.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS RESEARCH INTERNATIONAL FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies whose principal activities are located outside the United States
and may invest up to 35% of its total assets in other securities offering an
opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS SCIENCE AND TECHNOLOGY FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies that the Fund's manager 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). The Fund may also invest up to 35%
of its total assets in other securities offering an opportunity for capital
appreciation. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
PERFORMANCE SUMMARY
Currently, each Fund offers only Class A and Class I shares, 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.
The information below and on the following page illustrates the historical
performance of the Funds' Class A shares in comparison to various market
indicators. Class A share performance results reflect no sales charge; benchmark
comparisons are unmanaged and do not reflect any fees or expenses. The
performance of other share classes will be greater than or less than the line
shown, based on differences in charges and fees paid by shareholders investing
in different classes. It is not possible to invest directly in an index.
MFS CORE GROWTH FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2,
1996, through August 31, 1997)
MFS Core S&P 500 Consumer
Growth Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 12,330 $ 10,745 $ 10,253
2/97 $ 15,303 $ 13,166 $ 10,405
8/97 $ 17,905 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class A) at net asset value +45.22% +41.95%
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class I) at net asset value +45.31% +42.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS EQUITY INCOME FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Equity S&P 500 Consumer
Income Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,070 $ 10,745 $ 10,253
2/97 $ 13,312 $ 13,166 $ 10,405
8/97 $ 15,282 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class A) at net asset value +38.05% +29.05%
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class I) at net asset value +37.95% +29.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS SPECIAL OPPORTUNITIES FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Special S&P 500 Consumer
Opportunities Fund Composite Price Index
- Class A Index - U.S.
------------------ --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,360 $ 10,745 $ 10,253
2/97 $ 12,789 $ 13,166 $ 10,405
8/97 $ 14,976 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MFS Special Opportunities Fund (Class A) at net asset value +31.84% +27.49%
- ------------------------------------------------------------------------------------
MFS Special Opportunities Fund (Class I) at net asset value +32.23% +27.72%
- ------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------------
Average high-yield corporate bond fund* +15.55% +13.22%
- ------------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class I shares, which became available on January 2, 1997, have no sales charge
or Rule 12b-1 fees and are only available to certain institutional investors.
Class I share results include the performance and the operating expenses of
Class A shares for periods prior to the commencement of offering of Class I
shares. Because operating expenses attributable to Class A shares are greater
than those of Class I shares, Class I share performance generally would have
been higher than Class A share performance. The Class A share performance
included within the Class I share performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
DIVIDENDS-RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE PERCENTAGE OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR THE FUNDS
WAS:
FUND DIVIDENDS-RECEIVED DEDUCTION
----------------------------------------------
MFS CORE GROWTH FUND 2.64%
MFS EQUITY INCOME FUND 21.37%
MFS SPECIAL OPPORTUNITIES FUND 4.84%
MFS BLUE CHIP FUND 48.57%
MFS CONVERTIBLE SECURITIES FUND 91.49%
MFS NEW DISCOVERY FUND 0.36%
MFS RESEARCH INTERNATIONAL FUND 0.04%
MFS SCIENCE AND TECHNOLOGY FUND 4.16%
FOREIGN TAX CREDIT
THE RESEARCH INTERNATIONAL FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY
11.8% OF ITS ORDINARY INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO
HAVE PAID FOREIGN TAXES EQUIVALENT TO APPROXIMATELY 1.1% OF ITS ORDINARY
INCOME.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CORE GROWTH FUND
Stocks - 96.2%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 90.9%
Aerospace - 0.6%
Thiokol Corp. 200 $ 15,925
- -------------------------------------------------------------------------------
Airlines - 0.5%
Continental Airlines Holdings, Inc.* 400 $ 14,650
- -------------------------------------------------------------------------------
Automotive - 0.5%
Hayes Wheels International, Inc.* 400 $ 13,000
- -------------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Comerica, Inc. 200 $ 14,163
Northern Trust Corp. 400 21,250
----------
$ 35,413
- -------------------------------------------------------------------------------
Business Machines - 2.1%
Affiliated Computer Services, Inc., "A"* 500 $ 13,125
Sun Microsystems, Inc.* 300 14,400
Texas Instruments, Inc. 275 31,247
----------
$ 58,772
- -------------------------------------------------------------------------------
Business Services - 3.1%
At Home Corp.* 100 $ 1,913
Computer Sciences Corp.* 350 26,031
Corporate Family Solutions, Inc.* 100 1,500
CUC International, Inc.* 1,200 28,200
Ikon Office Solutions, Inc. 800 20,800
Innova Corp.* 100 2,200
Lamalie Associates, Inc.* 100 1,900
Pierce Leahy Corp.* 100 2,725
----------
$ 85,269
- -------------------------------------------------------------------------------
Chemicals - 1.6%
Air Products & Chemicals, Inc. 300 $ 24,469
Ferro Corp. 500 18,813
----------
$ 43,282
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.7%
Microsoft Corp.* 150 $ 19,828
- -------------------------------------------------------------------------------
Computer Software - Systems - 8.0%
Aehr Test Systems* 100 $ 1,750
Aris Corp.* 100 2,450
BMC Software, Inc.* 300 18,788
Cadence Design Systems, Inc.* 600 28,538
Compaq Computer Corp.* 650 42,575
Computer Associates International, Inc. 500 33,438
Compuware Corp.* 550 33,963
Lear Corp.* 100 4,581
Oracle Systems Corp.* 900 34,313
Peritus Software Services, Inc.* 100 2,500
Synopsys, Inc.* 450 15,581
TSI International Software Ltd.* 100 1,225
----------
$ 219,702
- -------------------------------------------------------------------------------
Consumer Goods and Services - 7.5%
Colgate-Palmolive Co. 200 $ 12,550
Meyer Fred, Inc.* 400 20,800
Philip Morris Cos., Inc. 950 41,444
RJR Nabisco Holdings Corp. 550 19,147
Tyco International Ltd.* 1,440 112,950
----------
$ 206,891
- -------------------------------------------------------------------------------
Containers - 3.1%
AptarGroup, Inc. 350 $ 19,688
Corning, Inc. 550 29,081
Jefferson Smurfit Corp.* 700 13,606
Stone Container Corp. 1,300 22,425
----------
$ 84,800
- -------------------------------------------------------------------------------
Electrical Equipment - 0.5%
Westinghouse Electric Corp. 500 $ 12,875
- -------------------------------------------------------------------------------
Electronics - 7.7%
Altera Corp.* 350 $ 18,638
Analog Devices, Inc.* 500 16,563
Atmel Corp.* 700 24,762
Intel Corp. 600 55,275
International Rectifier Corp.* 600 13,688
KLA-Tencor Corp.* 200 14,175
Kulicke & Soffa Industries, Inc.* 600 27,563
Teradyne, Inc.* 750 41,766
----------
$ 212,430
- -------------------------------------------------------------------------------
Entertainment - 5.5%
American Radio Systems Corp., "A"* 650 $ 32,013
Clear Channel Communications, Inc.* 500 33,969
Gemstar Group Ltd.* 800 16,400
ITT Corp.* 250 15,703
LIN Television Corp.* 500 23,719
Univision Communications, Inc., "A"* 600 30,750
----------
$ 152,554
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
American Express Co. 325 $ 25,269
Associates First Capital Corp., "A" 200 11,613
Federal National Mortgage Assn. 500 22,000
Morgan Stanley, Dean Witter, Discover and Co. 300 14,438
----------
$ 73,320
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Archer-Daniels-Midland Co. 525 $ 11,353
Wrigley (Wm) Junior Co. 300 21,750
----------
$ 33,103
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Champion International Corp. 400 $ 23,675
- -------------------------------------------------------------------------------
Insurance - 5.5%
Chubb Corp. 225 $ 15,047
CIGNA Corp. 150 27,506
Conseco, Inc. 775 33,325
Frontier Insurance Group, Inc. 100 3,500
Hartford Life, Inc., "A" 100 3,731
Lincoln National Corp. 350 23,428
Nationwide Financial Services, Inc., "A" 100 2,775
Progressive Corp. 150 14,850
Reliastar Financial Corp. 250 18,688
Travelers Group, Inc. 150 9,525
----------
$ 152,375
- -------------------------------------------------------------------------------
Machinery - 0.1%
JLK Direct Distribution, Inc., "A"* 100 $ 2,413
- -------------------------------------------------------------------------------
Medical and Health Products - 6.8%
Arterial Vascular Engineering, Inc.* 600 $ 22,200
Boston Scientific Corp.* 400 28,200
Bristol-Myers Squibb Co. 400 30,400
McKesson Corp. 275 25,764
Mentor Corp. 1,000 30,750
Ocular Sciences, Inc.* 100 1,913
Schering Plough Corp. 960 46,080
Schick Technologies, Inc.* 100 2,650
----------
$ 187,957
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 5.0%
AmeriSource Health Corp. "A"* 600 $ 30,037
HEALTHSOUTH Corp.* 800 19,950
Mariner Health Group, Inc.* 300 4,350
Medtronic, Inc. 50 4,519
Orthalliance, Inc.* 100 1,388
St. Jude Medical, Inc.* 650 24,741
United Healthcare Corp. 840 40,845
Vencor, Inc.* 300 12,038
----------
$ 137,868
- -------------------------------------------------------------------------------
Office Equipment - 1.1%
Office Depot, Inc.* 1,600 $ 29,500
- -------------------------------------------------------------------------------
Oil Services - 4.0%
Trico Marine Services, Inc.* 400 $ 12,400
Baker Hughes, Inc. 200 8,475
Cal Dive International, Inc.* 100 3,400
Camco International, Inc. 250 17,219
Cooper Cameron Corp.* 300 19,463
Friede Goldman International, Inc.* 100 4,025
Noble Drilling Corp.* 800 22,750
Weatherford Enterra, Inc.* 500 23,031
----------
$ 110,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pollution Control - 0.9%
Republic Industries, Inc.* 500 $ 12,281
Waste Management, Inc. 400 12,800
----------
$ 25,081
- -------------------------------------------------------------------------------
Printing and Publishing - 0.7%
CMP Media, Inc.* 100 $ 2,675
Quipp, Inc.* 1,200 18,000
----------
$ 20,675
- -------------------------------------------------------------------------------
Railroads - 2.3%
Burlington Northern Santa Fe Railway Co. 225 $ 20,630
Kansas City Southern Industries, Inc. 200 14,975
Wisconsin Central Transportation Corp.* 900 27,900
----------
$ 63,505
- -------------------------------------------------------------------------------
Real Estate - 0.2%
Equity Office Properties Trust* 200 $ 5,838
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
Hilton Hotels Corp. 950 $ 29,153
Prime Hospitality Corp.* 500 9,500
Trendwest Resorts, Inc.* 100 1,825
----------
$ 40,478
- -------------------------------------------------------------------------------
Special Products and Services - 0.8%
Keystone International, Inc. 600 $ 22,613
- -------------------------------------------------------------------------------
Stores - 7.6%
CVS Corp. 800 $ 45,100
Dollar General Corp. 450 18,647
Linens 'N Things, Inc.* 450 13,050
Penney (J.C.), Inc. 400 24,000
Rite Aid Corp. 1,900 95,119
Viking Office Products, Inc.* 700 14,788
----------
$ 210,704
- -------------------------------------------------------------------------------
Telecommunications - 4.8%
3Com Corp.* 400 $ 19,975
Ascend Communications, Inc.* 250 10,609
Aspect Telecommunications Corp.* 1,200 26,400
Bay Networks, Inc.* 550 19,456
Cable Design Technologies Corp.* 500 16,719
Cisco Systems, Inc.* 250 18,844
Intermedia Communications, Inc.* 350 12,513
Qwest Communications International, Inc.* 200 8,150
----------
$ 132,666
- -------------------------------------------------------------------------------
Transportation - 1.3%
Caliber Systems, Inc. 500 $ 20,875
CNF Transportation, Inc. 400 14,450
----------
$ 35,325
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.7%
Sprint Corp. 400 $ 18,787
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,506,512
- -------------------------------------------------------------------------------
Foreign Stocks - 5.3%
Canada - 1.3%
Canadian National Railway Co. (Railroads) 500 $ 24,844
Coca-Cola Beverages Ltd. (Beverages)* 700 11,074
----------
$ 35,918
- -------------------------------------------------------------------------------
Ireland - 0.7%
Elan Corp. PLC, ADR (Health Products)* 450 $ 20,475
- -------------------------------------------------------------------------------
Netherlands - 0.6%
Akzo Nobel (Chemicals) 100 $ 15,466
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Kuoni Reisen Holdings AG (Transportation) 6 $ 24,620
- -------------------------------------------------------------------------------
United Kingdom - 1.8%
Danka Business Systems PLC, ADR (Business Services) 475 $ 22,206
British Petroleum PLC, ADR (Oil and Gas) 200 16,925
Grand Metropolitan PLC (Food and Beverage Products) 1,300 11,934
----------
$ 51,065
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 147,544
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,371,295) $2,654,056
- -------------------------------------------------------------------------------
Short-Term Obligation - 3.3%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 90 $ 89,987
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,461,282) $2,744,043
Other Assets, Less Liabilities - 0.5% 12,077
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,756,120
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS EQUITY INCOME FUND
Stocks - 89.3%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 78.1%
Aerospace - 3.9%
Allied Signal, Inc. 210 $ 17,338
General Dynamics Corp. 210 16,721
United Technologies Corp. 300 23,419
----------
$ 57,478
- -------------------------------------------------------------------------------
Agricultural Products - 1.1%
Case Corp. 240 $ 16,095
- -------------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Unifi, Inc. 390 $ 14,966
- -------------------------------------------------------------------------------
Automotive - 1.4%
Ford Motor Co. 200 $ 8,600
TRW, Inc. 240 12,510
----------
$ 21,110
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.6%
Bank of New York, Inc. 280 $ 12,495
CCB Financial Corp. 190 15,366
Comerica, Inc. 200 14,163
First Commerce Corp. 300 16,013
First Hawaiian, Inc. 350 12,906
National City Corp. 240 13,560
Northern Trust Corp. 250 13,281
PNC Bank Corp. 320 13,840
----------
$ 111,624
- -------------------------------------------------------------------------------
Business Machines - 1.1%
International Business Machines Corp. 160 $ 16,140
- -------------------------------------------------------------------------------
Cellular Telephones - 1.3%
Century Telephone Enterprises, Inc. 520 $ 18,883
- -------------------------------------------------------------------------------
Chemicals - 4.9%
Air Products & Chemicals, Inc. 260 $ 21,206
Dexter Corp. 200 7,600
Du Pont (E.I.) de Nemours & Co., Inc. 240 14,955
Ferro Corp. 380 14,298
Nalco Chemical Co. 370 14,800
----------
$ 72,859
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.5%
Meyer Fred, Inc.* 240 $ 12,480
Philip Morris Cos., Inc. 550 23,994
RJR Nabisco Holdings Corp. 240 8,355
Rubbermaid, Inc. 200 5,000
Tyco International Ltd. 200 15,687
----------
$ 65,516
- -------------------------------------------------------------------------------
Electrical Equipment - 3.3%
Cooper Industries, Inc. 320 $ 17,060
General Electric Co. 240 15,000
Hubbell, Inc. 350 16,056
----------
$ 48,116
- -------------------------------------------------------------------------------
Energy - 2.3%
Dresser Industries, Inc. 360 $ 15,030
Unocal Corp. 500 19,531
----------
$ 34,561
- -------------------------------------------------------------------------------
Financial Institutions - 1.7%
American Express Co. 150 $ 11,662
Union Planters Corp. 260 13,325
----------
$ 24,987
- -------------------------------------------------------------------------------
Food and Beverage Products - 3.2%
Archer-Daniels-Midland Co. 646 $ 13,970
General Mills, Inc. 80 5,130
Hormel Foods Corp. 480 14,280
Quaker Oats Co. 300 14,100
----------
$ 47,480
- -------------------------------------------------------------------------------
Food Products - 1.1%
Smucker (J.M.) Co. 650 $ 15,966
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.9%
Champion International Corp. 260 $ 15,389
Weyerhaeuser Co. 240 13,860
----------
$ 29,249
- -------------------------------------------------------------------------------
Insurance - 7.2%
Allstate Corp. 170 $ 12,421
Chubb Corp. 260 17,387
CIGNA Corp. 80 14,670
Conseco, Inc. 360 15,480
Hartford Financial Services Group, Inc. 150 11,963
Lincoln National Corp. 300 20,081
Torchmark Corp. 360 13,567
----------
$ 105,569
- -------------------------------------------------------------------------------
Medical and Health Products - 1.2%
Bristol-Myers Squibb Co. 240 $ 18,240
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
United Healthcare Corp. 140 $ 6,808
- -------------------------------------------------------------------------------
Oils - 5.2%
Atlantic Richfield Co. 180 $ 13,500
Chevron Corp. 220 17,036
Exxon Corp. 250 15,297
Texaco, Inc. 150 17,288
USX-Marathon Group 420 13,676
----------
$ 76,797
- -------------------------------------------------------------------------------
Pollution Control - 2.5%
Browning Ferris Industries, Inc. 490 $ 17,119
Waste Management, Inc. 600 19,200
----------
$ 36,319
- -------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.6%
Arden Realty, Inc. 240 $ 6,930
Boston Properties, Inc. 500 14,906
Kilroy Realty Corp. 300 7,669
Mid-America Apartment Communities, Inc. 480 13,170
Sovran Self Storage, Inc. 380 11,543
TriNet Corporate Realty Trust, Inc. 360 12,802
----------
$ 67,020
- -------------------------------------------------------------------------------
Stores - 3.1%
Longs Drug Stores Corp. 530 $ 13,415
Penney (J.C.), Inc. 340 20,400
Rite Aid Corp. 270 13,517
----------
$ 47,332
- -------------------------------------------------------------------------------
Supermarkets - 1.0%
Kroger Co.* 480 $ 14,460
- -------------------------------------------------------------------------------
Utilities - Electric - 4.7%
Cinergy Corp. 440 $ 14,547
FPL Group, Inc. 170 7,905
New Century Energies, Inc. 320 12,920
Pacificorp 420 8,715
Pinnacle West Capital Corp. 460 14,864
Sierra Pacific Resources 330 10,313
----------
$ 69,264
- -------------------------------------------------------------------------------
Utilities - Gas - 5.6%
Brooklyn Union Gas Co. 490 $ 14,792
Columbia Gas System, Inc. 200 13,200
Energen Corp. 300 10,819
National Fuel Gas Co. 300 13,331
Oneok, Inc. 420 13,597
UGI Corp. 630 16,459
----------
$ 82,198
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.2%
GTE Corp. 290 $ 12,923
Sprint Corp. 400 18,800
----------
$ 31,723
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,150,760
- -------------------------------------------------------------------------------
Foreign Stocks - 11.2%
Argentina - 0.5%
YPF Sociedad Anonima, ADR (Oils) 240 $ 7,815
- -------------------------------------------------------------------------------
Canada - 1.3%
Canadian National Railway Co. (Railroads) 390 $ 19,378
- -------------------------------------------------------------------------------
France - 2.1%
Alcatel Alsthom, ADR (Telecommunications) 560 $ 13,790
Elf Aquitaine, ADR (Oils) 320 17,840
----------
$ 31,630
- -------------------------------------------------------------------------------
Germany - 0.8%
Henkel Kgaa (Consumer Goods and Services) 250 $ 12,584
- -------------------------------------------------------------------------------
Italy - 0.4%
Eni S.p.A, ADR (Oils) 120 $ 6,660
- -------------------------------------------------------------------------------
Netherlands - 1.3%
Akzo Nobel (Chemicals) 120 $ 18,560
- -------------------------------------------------------------------------------
Switzerland - 1.0%
Novartis AG (Pharmaceuticals) 10 $ 14,122
- -------------------------------------------------------------------------------
United Kingdom - 3.8%
British Petroleum PLC, ADR (Oil and Gas) 333 $ 28,180
Grand Metropolitan (Food and Beverage Products) 1,550 14,229
SmithKline-Beecham PLC, ADR (Medical and Health
Products) 300 12,994
----------
$ 55,403
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 166,152
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,186,622) $1,316,912
- -------------------------------------------------------------------------------
Bonds - 0.8%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
U.S. Bonds - 0.8%
Automotive - 0.8%
Tower Automotive, Inc., 5s, 2004##
(Identified Cost, $10,000) $ 10 $ 10,800
- -------------------------------------------------------------------------------
Convertible Preferred Stocks - 5.3%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Aerospace - 0.6%
Loral Space & Communications Corp., 6s## 150 $ 8,025
- -------------------------------------------------------------------------------
Entertainment - 0.3%
Houston Industries, Inc., 7s 100 $ 5,075
- -------------------------------------------------------------------------------
Food Products - 0.7%
Ralston Purina Co., 7s, 2000 160 $ 9,530
- -------------------------------------------------------------------------------
Insurance - 0.8%
St. Paul Capital, 6s, 2025 180 $ 12,150
- -------------------------------------------------------------------------------
Medical and Health Technology Services- 0.8%
McKesson Financing Trust, 5s## 180 $ 12,375
- -------------------------------------------------------------------------------
Oils - 0.8%
Tosco Financing Trust, 5.75s## 190 $ 11,400
- -------------------------------------------------------------------------------
Utilities - Gas - 0.4%
Williams Cos., Inc., $3.50 Pref., 2049## 50 $ 5,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.9%
Salomon, Inc., 6.25s 250 $ 13,906
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $49,019) $ 77,961
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,245,641) $1,405,673
Other Assets, Less Liabilities - 4.6% 68,380
- -------------------------------------------------------------------------------
Net Assets - 100.0% $1,474,053
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SPECIAL OPPORTUNITIES FUND
Stocks - 86.2%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 76.5%
Aerospace - 5.6%
Allied Signal, Inc. 160 $ 13,210
B.E. Aerospace, Inc.* 3,500 124,250
Moog, Inc.* 1,600 58,200
Thiokol Corp. 300 23,887
----------
$ 219,547
- -------------------------------------------------------------------------------
Agricultural Products - 0.2%
AGCO Corp. 200 $ 6,500
----------
Apparel and Textiles - 0.2%
Reebok International Ltd. 200 $ 8,788
- -------------------------------------------------------------------------------
Automotive - 1.3%
Exide Corp. 2,500 $ 52,188
- -------------------------------------------------------------------------------
Banks and Credit Companies - 0.8%
Banc One Corp. 200 $ 10,725
Wells Fargo & Co. 76 19,323
----------
$ 30,048
- -------------------------------------------------------------------------------
Building - 4.4%
Newport News Shipbuilding, Inc. 300 $ 5,813
Nortek, Inc.* 3,000 75,375
Walter Industries, Inc.* 5,000 90,937
----------
$ 172,125
- -------------------------------------------------------------------------------
Business Machines - 1.4%
Compaq Computer Corp.* 875 $ 57,313
- -------------------------------------------------------------------------------
Business Services - 0.6%
Temple-Inland, Inc. 340 $ 21,930
- -------------------------------------------------------------------------------
Chemicals - 2.9%
Ferro Corp. 740 $ 27,842
NL Industries, Inc. 6,500 86,125
----------
$ 113,967
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.5%
Adobe Systems, Inc. 475 $ 18,703
- -------------------------------------------------------------------------------
Computer Software - Systems - 2.0%
Computer Associates International, Inc. 510 $ 34,106
Sybase, Inc.* 400 7,450
Synopsys, Inc.* 1,100 38,088
----------
$ 79,644
- -------------------------------------------------------------------------------
Conglomerates - 1.8%
MAXXAM, Inc.* 1,300 $ 71,500
- -------------------------------------------------------------------------------
Consumer Goods and Services - 13.0%
Darling International, Inc.* 2,300 $ 64,400
Meyer Fred, Inc.* 770 40,040
Philip Morris Cos., Inc. 870 37,954
Thermadyne Industries Holdings Corp.* 4,000 124,000
Tyco International Ltd.* 2,598 203,780
Westpoint Stevens, Inc.* 1,100 44,000
----------
$ 514,174
- -------------------------------------------------------------------------------
Containers - 4.3%
Atlantis Plastics, Inc.* 5,500 $ 32,312
Gaylord Container Corp.* 10,000 94,375
Jefferson Smurfit Corp.* 920 17,883
Stone Container Corp. 1,400 24,150
----------
$ 168,720
- -------------------------------------------------------------------------------
Electrical Equipment - 0.2%
Belden, Inc. 200 $ 7,750
- -------------------------------------------------------------------------------
Electronics - 1.0%
Atmel Corp.* 200 $ 7,075
Intel Corp. 65 5,988
Sony Corp. 50 4,406
Teradyne, Inc.* 370 20,605
----------
$ 38,074
- -------------------------------------------------------------------------------
Entertainment - 3.0%
American Radio Systems Corp., "A"* 802 $ 39,498
Casino America, Inc.* 1,100 3,025
Harrah's Entertainment, Inc.* 1,600 35,900
LIN Television Corp.* 350 16,603
Sodak Gaming, Inc.* 1,700 23,163
----------
$ 118,189
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Donaldson Lufkin & Jenrette, Inc. 320 $ 19,000
Federal Home Loan Mortgage Corp. 460 14,979
Union Planters Corp. 200 10,250
----------
$ 44,229
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.5%
Smith's Food & Drug Centers, Inc., "B"* 1,120 $ 61,320
- -------------------------------------------------------------------------------
Insurance - 3.5%
Chubb Corp. 400 $ 26,750
CIGNA Corp. 120 22,005
Conseco, Inc. 650 27,950
Hartford Financial Services Group, Inc. 250 19,938
Lincoln National Corp. 300 20,081
Reliastar Financial Corp. 310 23,172
----------
$ 139,896
- -------------------------------------------------------------------------------
Machinery - 0.3%
Greenfield Industries, Inc. 400 $ 10,550
- -------------------------------------------------------------------------------
Medical and Health Products - 0.6%
Bristol-Myers Squibb Co. 300 $ 22,800
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Integrated Health Services, Inc. 560 $ 18,480
St. Jude Medical, Inc.* 490 18,651
Tenet Healthcare Corp.* 700 19,075
United Healthcare Corp. 530 25,771
----------
$ 81,977
- -------------------------------------------------------------------------------
Metals and Minerals - 1.4%
Commonwealth Industries, Inc. 3,000 $ 57,375
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Dawson Production Services, Inc.* 2,100 $ 39,375
- -------------------------------------------------------------------------------
Oils - 1.3%
Enron Oil & Gas Co. 1,000 $ 24,125
Texaco, Inc. 220 25,355
----------
$ 49,480
- -------------------------------------------------------------------------------
Photographic Products - 1.4%
Anacomp, Inc.* 3,725 $ 56,806
- -------------------------------------------------------------------------------
Pollution Control - 0.7%
Waste Management, Inc. 900 $ 28,800
- -------------------------------------------------------------------------------
Railroads - 0.9%
Wisconsin Central Transportation Corp.* 1,140 $ 35,340
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.2%
Hilton Hotels Corp. 640 $ 19,640
Promus Hotel Corp.* 2,800 108,675
----------
$ 128,315
- -------------------------------------------------------------------------------
Special Products and Services - 1.0%
Keystone International, Inc. 1,100 $ 41,456
- -------------------------------------------------------------------------------
Stores - 6.0%
Arbor Drugs, Inc. 300 $ 7,163
Carson Pirie Scott & Co.* 1,800 63,900
CVS Corp. 700 39,462
Gantos, Inc.* 15,000 35,625
Gymboree Corp.* 220 5,390
Phar Mor, Inc.* 5,700 42,394
Rite Aid Corp. 850 42,553
----------
$ 236,487
- -------------------------------------------------------------------------------
Supermarkets - 2.0%
Ingles Markets, Inc. 3,900 $ 52,162
Safeway, Inc.* 512 26,080
----------
$ 78,242
- -------------------------------------------------------------------------------
Telecommunications - 3.8%
Cellular Communications International* 2,600 $ 93,600
HSN, Inc.* 1,775 58,575
----------
$ 152,175
- -------------------------------------------------------------------------------
Utilities - Electric - 1.1%
El Paso Electric Co.* 6,800 $ 42,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.4%
Sprint Corp. 370 $ 17,390
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 3,023,673
- -------------------------------------------------------------------------------
Foreign Stocks - 9.7%
Canada - 2.4%
Canadian National Railway Co. (Railroads) 810 $ 40,247
Gulf Canada Resources Ltd. (Oil Services)* 7,000 56,438
----------
$ 96,685
- -------------------------------------------------------------------------------
Hong Kong - 0.8%
Semi-Tech (Global) Ltd. (Electronics)* 21,000 $ 31,436
- -------------------------------------------------------------------------------
Japan - 0.7%
Canon, Inc., ADR (Special Products and Services) 145 $ 20,173
Sony Corp. (Electronics) 100 8,707
----------
$ 28,880
- -------------------------------------------------------------------------------
Netherlands - 0.3%
Akzo Nobel (Chemicals) 70 $ 10,826
- -------------------------------------------------------------------------------
Portugal - 0.4%
Banco Totta E Acores (Financial Institutions) 800 $ 14,351
- -------------------------------------------------------------------------------
South Korea - 0.2%
SK Telecom Ltd, ADR (Telecommunications)* 800 $ 7,200
- -------------------------------------------------------------------------------
Sweden - 0.3%
Sparbanken Sverige AB (Banks and Credit Cos.) 500 $ 10,821
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Novartis AG (Pharmaceuticals) 25 $ 35,305
- -------------------------------------------------------------------------------
United Kingdom - 3.7%
British Petroleum PLC, ADR (Oil and Gas) 422 $ 35,712
Central Transport Rental Group PLC, ADR (Special
Products and Services)* 48,187 33,129
Gallaher Group PLC, ADR
(Consumer Goods and Services)* 1,100 19,731
News Corp. Ltd., ADR (Entertainment) 2,900 43,863
Storehouse PLC (Retail)* 2,200 8,164
Tomkins PLC (Diversified Operations) 1,600 7,752
----------
$ 148,351
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 383,855
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,790,956) $3,407,528
- -------------------------------------------------------------------------------
Preferred Stock - 1.0%
- -------------------------------------------------------------------------------
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)* 22 $ 18,040
Supermarkets General Holdings Corp. (Supermarkets)* 1,100 22,275
- -------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $47,819) $ 40,315
- -------------------------------------------------------------------------------
Warrants - 0.6%
- -------------------------------------------------------------------------------
Gothic Energy Corp.* 30,000 $ 21,563
Peoples Choice TV Corp.* 45 0
Renaissance Cosmetics, Inc.* 20 2,000
Semi Tech Global* 2,100 509
- -------------------------------------------------------------------------------
Total Warrants (Identified Cost, $21,666) $ 24,072
- -------------------------------------------------------------------------------
Bonds - 1.7%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Automotive - 0.5%
Harvard Industries, Inc., 11.125s, 2005 $ 45 $ 18,900
- -------------------------------------------------------------------------------
Entertainment - 0.1%
Marvel Holdings, Inc., 0s, 1998 $ 30 $ 4,200
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.7%
Santa Fe Hotel, Inc., 11s, 2000 $ 35 $ 28,525
- -------------------------------------------------------------------------------
Telecommunications - 0.4%
Peoples Choice TV Corp., 13.125s, 2004 $ 45 $ 15,188
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $65,666) $ 66,813
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.8%
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $150 $ 149,978
- -------------------------------------------------------------------------------
Put Options Purchased - 0.7%
- -------------------------------------------------------------------------------
NUMBER OF CONTRACTS
- -------------------------------------------------------------------------------
Standard & Poor Index 500 Put (Identified Cost, $38,812) 4 $ 28,650
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $3,114,897) $3,717,356
- -------------------------------------------------------------------------------
Securities Sold Short - (3.2)%
- --------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Advanced Micro Devices, Inc.* (500) $ (18,719)
Arcadia Financial Ltd.* (1,800) (17,775)
Jayhawk Acceptance Corp.* (2,800) (3,325)
LCI International, Inc. (1,700) (40,800)
Station Casinos, Inc.* (2,300) (17,393)
Western Digital Corp.* (600) (28,875)
- -------------------------------------------------------------------------------
Total Securities Sold Short (Proceeds Received, $122,480) $ (126,887)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 9.2% 364,342
- -------------------------------------------------------------------------------
Net Assets - 100.0% $3,954,811
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS BLUE CHIP FUND
Stocks - 99.0%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 97.5%
Aerospace - 4.1%
General Dynamics Corp. 100 $ 7,963
Lockheed-Martin Corp. 150 15,553
United Technologies Corp. 80 6,245
----------
$ 29,761
- -------------------------------------------------------------------------------
Automotive - 1.0%
Goodrich (B.F.) Co. 170 $ 7,161
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.5%
Chase Manhattan Corp. 110 $ 12,231
Comerica, Inc. 145 10,268
Corestates Financial Corp. 140 8,610
National City Corp. 120 6,780
Norwest Corp. 120 6,892
U.S. Bancorp 110 9,632
----------
$ 54,413
- -------------------------------------------------------------------------------
Business Machines - 1.9%
International Business Machines Corp. 140 $ 14,122
- -------------------------------------------------------------------------------
Business Services - 3.3%
DST Systems, Inc.* 380 $ 13,751
First Data Corp. 250 10,266
----------
$ 24,017
- -------------------------------------------------------------------------------
Cellular Telephones - 1.0%
AirTouch Communications, Inc.* 220 $ 7,439
- -------------------------------------------------------------------------------
Chemicals - 3.3%
Air Products & Chemicals, Inc. 100 $ 8,156
Du Pont (E.I.) de Nemours & Co., Inc. 140 8,724
Praxair, Inc. 130 6,947
----------
$ 23,827
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.6%
Microsoft Corp.* 90 $ 11,897
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.7%
BMC Software, Inc.* 150 $ 9,393
Computer Associates International, Inc. 130 8,694
Oracle Systems Corp.* 240 9,150
----------
$ 27,237
- -------------------------------------------------------------------------------
Consumer Goods and Services - 11.0%
Avon Products, Inc. 100 $ 6,406
Colgate-Palmolive Co. 80 5,020
Gillette Co. 100 8,281
Philip Morris Cos., Inc. 330 14,396
Procter & Gamble Co. 70 9,315
Service Corp. International 300 9,600
Sherwin Williams Co. 200 5,488
Tyco International Ltd.* 275 21,570
----------
$ 80,076
- -------------------------------------------------------------------------------
Electrical Equipment - 3.2%
General Electric Co. 260 $ 16,250
Honeywell, Inc. 100 6,912
----------
$ 23,162
- -------------------------------------------------------------------------------
Electronics - 1.3%
Intel Corp. 100 $ 9,213
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Federal Home Loan Mortgage Corp. 235 $ 7,652
- -------------------------------------------------------------------------------
Food and Beverage Products - 8.3%
Coca-Cola Co. 140 $ 8,024
CPC International, Inc. 80 7,130
Hershey Foods Corp. 130 6,939
Interstate Bakeries Corp. 125 7,328
McCormick & Co., Inc. 330 7,796
Nabisco Holdings Corp. 170 7,055
PepsiCo, Inc. 190 6,840
Ralston-Ralston Purina Co. 100 9,000
----------
$ 60,112
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Kimberly-Clark Corp. 120 $ 5,693
- -------------------------------------------------------------------------------
Insurance - 8.0%
Allstate Corp. 140 $ 10,229
CIGNA Corp. 60 11,002
Hartford Financial Services Group, Inc. 120 9,570
MBIA, Inc. 100 11,325
Progressive Corp. 80 7,920
Torchmark Corp. 220 8,291
----------
$ 58,337
- -------------------------------------------------------------------------------
Medical and Health Products - 9.0%
American Home Products Corp. 120 $ 8,640
Bristol-Myers Squibb Co. 140 10,640
Johnson & Johnson 200 11,338
Lilly (Eli) & Co. 80 8,370
Merck & Co., Inc. 100 9,181
Pfizer, Inc. 310 17,166
----------
$ 65,335
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Cardinal Health, Inc. 100 $ 6,625
HEALTHSOUTH Corp.* 300 7,481
United Healthcare Corp. 160 7,780
----------
$ 21,886
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Schlumberger Ltd. 100 $ 7,619
- -------------------------------------------------------------------------------
Oils - 6.1%
Chevron Corp. 100 $ 7,744
Exxon Corp. 320 19,580
Mobil Corp. 140 10,185
Texaco, Inc. 60 6,915
----------
$ 44,424
- -------------------------------------------------------------------------------
Railroads - 1.3%
Burlington Northern Santa Fe 100 $ 9,169
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
HFS, Inc.* 200 $ 11,138
- -------------------------------------------------------------------------------
Stores - 2.4%
CVS Corp. 100 $ 5,637
Rite Aid Corp. 240 12,015
----------
$ 17,652
- -------------------------------------------------------------------------------
Supermarkets - 3.4%
Kroger Co.* 480 $ 14,460
Safeway, Inc.* 200 10,187
----------
$ 24,647
- -------------------------------------------------------------------------------
Utilities - Electric - 3.3%
Cinergy Corp. 210 $ 6,943
CMS Energy Corp. 160 5,750
Pinnacle West Capital Corp. 170 5,493
Public Service Co. of New Mexico 300 5,475
----------
$ 23,661
- -------------------------------------------------------------------------------
Utilities - Gas - 2.6%
Columbia Gas System, Inc. 110 $ 7,260
Pacific Enterprises 180 5,929
Union Pacific Resources Group, Inc. 220 5,500
----------
$ 18,689
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.8%
BellSouth Corp. 155 $ 6,820
SBC Communications, Inc. 125 6,797
Sprint Corp. 150 7,050
----------
$ 20,667
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 709,006
- -------------------------------------------------------------------------------
Foreign Stocks - 1.5%
United Kingdom - 1.5%
British Petroleum PLC, ADR (Oil and Gas)
(Identified Cost, $9,035) 131 $ 11,086
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $624,151) $ 720,092
Other Assets, Less Liabilities - 1.0% 7,397
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 727,489
- -------------------------------------------------------------------------------
* Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CONVERTIBLE SECURITIES FUND
Convertible Preferred Stocks - 50.8%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
Aerospace - 0.8%
Loral Space & Communications Corp., 6s## 100 $ 5,350
- -------------------------------------------------------------------------------
Airlines - 0.6%
Continental Airlines Finance Trust, 8.5s 50 $ 4,100
- -------------------------------------------------------------------------------
Chemicals - 0.4%
Atlantic Richfield Co., 9.01s 120 $ 2,850
- -------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
Wang Labs, Inc., 6.5s*## 50 $ 2,494
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.6%
Corning Delaware L.P., 6s 200 $ 16,600
- -------------------------------------------------------------------------------
Entertainment - 6.3%
American Radio Systems Corp., 7s*## 225 $ 14,681
Golden Books Financing Trust, 8.75s*## 200 10,500
Houston Industries, Inc./Time Warner, 7s* 100 5,075
Royal Caribbean Cruises Ltd., 7.25s 150 10,238
----------
$ 40,494
- -------------------------------------------------------------------------------
Financial Institutions - 8.6%
Finova Finance Trust, 5.5s, 2016 250 $ 15,500
Jefferson Pilot Corp., 7.25s, 2000 100 10,513
Merrill Lynch/MGIC Investment Corp., 6.5s 150 12,975
Merrill Lynch/IMC Global, 6.25s 150 5,606
Salomon/Financial Security Insurance, 7.625s 300 10,575
----------
$ 55,169
- -------------------------------------------------------------------------------
Food - 0.9%
Ralston Purina Interstate Bakeries, 7s* 100 $ 5,956
- -------------------------------------------------------------------------------
Food and Beverage Products - 2.5%
Dole Food, 7s 425 $ 16,150
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.4%
International Paper Capital Trust, 5.25s 150 $ 8,775
- -------------------------------------------------------------------------------
Insurance - 5.9%
American Heritage Life Investment, 8.5s* 100 $ 5,950
Conseco, Inc., 7s 100 14,556
Frontier Financing Trust, 6.25s*## 100 8,025
SunAmerica, Inc., $3.188 150 6,647
SunAmerica, Inc., $3.10 25 2,875
----------
$ 38,053
- -------------------------------------------------------------------------------
Machinery & Tools - 1.8%
Greenfield Capital Trust, 6s, 2016* 250 $ 11,812
- -------------------------------------------------------------------------------
Medical Equipment - 1.1%
McKesson Financing Trust, 5s## 100 $ 6,875
- -------------------------------------------------------------------------------
Metals and Minerals - 1.7%
Timet Capital Trust, 6.625s*## 100 $ 5,913
USX Marathon/RMI Titanium, 6.75s* 200 5,050
----------
$ 10,963
- -------------------------------------------------------------------------------
Oil & Gas - 1.9%
Tosco Financing Trust, 5.75s## 200 $ 12,000
- -------------------------------------------------------------------------------
Pollution Control - 2.6%
Browning Ferris Industries, Inc., 7.25s 500 $ 16,531
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.3%
Hilton Hotels Corp., 8s 100 $ 2,800
Host Marriott Financial Trust, 6.75s*## 300 18,450
----------
$ 21,250
- -------------------------------------------------------------------------------
Steel - 0.5%
AK Steel Holding Corp., 7s 75 $ 2,962
- -------------------------------------------------------------------------------
Stores - 1.6%
AnnTaylor Finance Trust, 8.5s*# 75 $ 4,406
K-Mart Financing I, 7.75s 100 5,894
----------
$ 10,300
- -------------------------------------------------------------------------------
Telecommunications - 1.0%
Intermedia Communication, Inc., 7s*## 100 $ 2,700
IXC Communications Inc., 7.25s*## 20 2,570
Qualcomm Financial Trust, 5.75s*## 25 1,116
----------
$ 6,386
- -------------------------------------------------------------------------------
Transportation - 0.6%
Hvide Capital Trust, 6.5s *## 60 $ 3,803
- -------------------------------------------------------------------------------
Utilities - Electric - 1.8%
Calenergy Capital Trust III, 6.5s*## 250 $ 11,750
- -------------------------------------------------------------------------------
Utilities - Gas - 0.9%
Enron Corp., 6.25s 250 $ 5,734
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
Salomon/Cincinnati Bell, 6.25s 175 $ 9,734
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $292,959) $ 326,091
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 Omitted)
- -------------------------------------------------------------------------------
Convertible Bonds - 27.5%
- --------------------------------------------------------------------------------
Aerospace - 1.4%
Hexcel Corp., 7s, 2003 $ 5 $ 9,287
- -------------------------------------------------------------------------------
Building - 0.3%
Continental Homes Holding Corp., 6.875s, 2002 $ 2 $ 2,248
- -------------------------------------------------------------------------------
Business Services - 1.6%
Protection One Alarm Monitoring, 6.75s, 2003 $ 9 $ 10,114
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.9%
Adaptec, Inc., 4.75s, 2004## $ 8 $ 9,240
Data General Corp., 6s, 2004## 6 9,413
Read Rite Corp., 6.5s, 2004 3 3,135
Wind River Systems Inc., 5s, 2002## 3 3,386
----------
$ 25,174
- -------------------------------------------------------------------------------
Electronics - 3.9%
Cymer, Inc., 3.5s (7.25s, 8/1/00), 2004## $ 6 $ 7,162
Photronics, Inc., 6s, 2004 2 2,545
Solectron Corp., 6s, 2006## 3 4,196
Xilinx, Inc., 5.25s, 2002## 10 11,225
----------
$ 25,128
- -------------------------------------------------------------------------------
Medical and Health Products - 0.3%
North American Vaccine, Inc., 6.5s, 2003## $ 2 $ 1,843
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.4%
FPA Medical Management, Inc., 6.5s, 2001## $ 5 $ 6,675
Healthsource, Inc., 5s, 2003 2 2,010
----------
$ 8,685
- -------------------------------------------------------------------------------
Oil Services - 3.9%
Diamond Offshore Drilling, Inc., 3.75s, 2007 $ 5 $ 6,525
Nabors Industries, Inc., 5s, 2006 3 6,015
Parker Drilling Co., 5.5s, 2004 6 6,540
Pogo Producing Co., 5.5s, 2006 5 5,906
----------
$ 24,986
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.5%
Dura Pharmaceuticals Inc., 3.5s, 2002 $ 3 $ 2,921
- -------------------------------------------------------------------------------
Pollution Control - 3.7%
Sanifill, Inc., 5s, 2006 $ 5 $ 7,856
U.S. Filter Corp., 6s, 2005 5 10,075
USA Waste Services, Inc., 4s, 2002 5 5,700
----------
$ 23,631
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.9%
Hilton Hotels Corp., 5s, 2006 $ 5 $ 5,675
- -------------------------------------------------------------------------------
Special Products and Services - 3.6%
Corporate Express, Inc., 4.5s, 2000 $ 10 $ 9,150
Personnel Group Of America Inc., 5.75s, 2004## 6 7,088
Sunrise Assisted Living Inc., 5.5s, 2002## 3 3,210
United States Office Products Company, 5.5s, 2001 3 3,697
----------
$ 23,145
- -------------------------------------------------------------------------------
Stores - 2.1%
Home Depot, Inc., 3.25s, 2001 $ 5 $ 5,800
Office Depot, Inc., 0s, 2008 5 2,988
Saks Holdings, Inc., 5.5s, 2006 5 4,337
----------
$ 13,125
- -------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $152,930) $ 175,962
- -------------------------------------------------------------------------------
Stocks - 14.4%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
U.S. Stocks - 12.8%
Aerospace - 0.6%
United Technologies Corp. 50 $ 3,903
- -------------------------------------------------------------------------------
Building - 0.7%
Newport News Shipbuilding, Inc. 220 $ 4,263
- -------------------------------------------------------------------------------
Chemicals - 0.2%
Du Pont (E.I.) de Nemours & Co., Inc. 25 $ 1,558
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
Colgate-Palmolive Co. 60 $ 3,765
Gillette Co. 60 4,969
Procter & Gamble Co. 25 3,326
Tyco International Ltd.* 48 3,765
----------
$ 15,825
- -------------------------------------------------------------------------------
Electrical Equipment - 0.4%
General Electric Co. 40 $ 2,500
- -------------------------------------------------------------------------------
Electronics - 1.1%
Intel Corp. 20 $ 1,843
Solectron Corporation* 50 2,094
Sony Corp. 35 3,084
----------
$ 7,021
- -------------------------------------------------------------------------------
Insurance - 0.6%
Hartford Life, Inc., "A"* 100 $ 3,731
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Bristol-Myers Squibb Co. 75 $ 5,700
Johnson & Johnson 50 2,835
McKesson Corp. 25 2,342
----------
$ 10,877
- -------------------------------------------------------------------------------
Oils - 0.7%
Devon Energy Corp. 100 $ 4,269
- -------------------------------------------------------------------------------
Pollution Control - 0.8%
Browning Ferris Industries, Inc. 100 $ 3,494
U.S. Filter Corp.* 50 1,800
----------
$ 5,294
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.2%
Hilton Hotels Corp. 50 $ 1,534
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
Stanley Works 100 $ 4,256
- -------------------------------------------------------------------------------
Stores - 0.6%
Rite Aid Corp. 75 $ 3,755
- -------------------------------------------------------------------------------
Telecommunications - 2.0%
IXC Communications Inc.* 50 $ 1,350
Lucent Technologies, Inc. 100 7,787
Qwest Communications International, Inc.* 100 4,075
----------
$ 13,212
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 81,998
- -------------------------------------------------------------------------------
Foreign Stocks - 1.6%
Sweden - 0.2%
Skandia Foersaekrings AB (Insurance) 40 $ 1,544
- -------------------------------------------------------------------------------
Switzerland - 0.7%
Novartis AG (Pharmaceuticals) 3 $ 4,237
- -------------------------------------------------------------------------------
United Kingdom - 0.7%
British Petroleum PLC, ADR (Oil and Gas) 50 $ 4,231
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 10,012
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $77,794) $ 92,010
- -------------------------------------------------------------------------------
Foreign Preferred Stocks - 1.6%
- -------------------------------------------------------------------------------
Australia - 1.6%
National Australia Bank Ltd., 7.875s Capital Unit
Exchangeable 350 $ 9,997
- -------------------------------------------------------------------------------
Total Foreign Preferred Stocks (Identified Cost, $8,750) $ 9,997
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -------------------------------------------------------------------------------
<PAGE>
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost$ 20 $ 19,997
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $552,430) $ 624,057
Other Assets, Less Liabilities - 2.6% 16,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 640,527
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS NEW DISCOVERY FUND
Stocks - 94.6%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 93.8%
Aerospace - 1.0%
Fairchild Corp.* 1,000 $ 21,063
- -------------------------------------------------------------------------------
Airlines - 0.5%
Atlas Air, Inc.* 400 $ 11,100
- -------------------------------------------------------------------------------
Business Machines - 2.3%
Affiliated Computer Services, Inc., "A"* 1,750 $ 45,937
- -------------------------------------------------------------------------------
Business Services - 17.8%
AccuStaff, Inc.* 1,500 $ 39,844
BDM International, Inc.* 500 12,625
BISYS Group, Inc.* 500 16,875
Claremont Technology Group, Inc.* 400 7,100
Comdisco, Inc. 450 12,234
Corporate Family Solutions, Inc.* 100 1,500
Dendrite International, Inc.* 600 11,325
Diamond Offshore Drilling, Inc. 300 16,388
Diamond Technology Partner, Inc.* 600 9,225
DST Systems, Inc.* 100 3,619
Fine Host Corp.* 200 6,950
First USA Paymentech, Inc.* 700 21,262
Interim Services, Inc.* 700 34,562
Learning Tree International, Inc.* 750 20,625
May and Speh, Inc.* 1,300 16,575
Mecon, Inc.* 3,000 15,000
NOVA Corp.* 1,000 25,375
Personnel Group of America, Inc.* 300 10,050
PMT Services, Inc.* 1,100 18,563
Robert Half International, Inc.* 200 11,675
Staff Leasing, Inc.* 100 1,975
Technology Solutions Co.* 525 12,206
TeleSpectrum Worldwide, Inc.* 2,100 9,581
Teletech Holdings, Inc.* 900 14,737
Transaction System Architects, Inc.* 300 10,388
----------
$ 360,259
- -------------------------------------------------------------------------------
Computer Software - Systems - 16.1%
Aehr Test Systems* 100 $ 1,750
American Business Information, Inc.* 500 13,687
Aspen Technology, Inc.* 300 10,238
Black Box Corp.* 220 8,003
Cadence Design Systems, Inc.* 685 32,580
Compuware Corp.* 450 27,787
Daou Systems, Inc.* 400 9,500
Data Systems Network Corp.* 2,500 39,062
Fair, Isaac & Co., Inc. 200 8,438
IKOS Systems, Inc.* 1,300 19,256
Intelligroup, Inc.* 100 1,488
Metromail Corp.* 700 15,225
Peerless Systems Corp.* 900 13,163
RWD Technologies, Inc.* 100 1,925
Simulation Sciences, Inc.* 2,100 29,662
Smart Modular Technologies, Inc.* 500 29,500
Summit Design, Inc.* 2,700 32,400
Synopsys, Inc.* 200 6,925
USCS International, Inc.* 650 11,619
Vantive Corp.* 200 6,100
Xionics Document Technologies, Inc.* 650 8,775
----------
$ 327,083
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.9%
Alternative Resources Corp.* 1,000 $ 22,375
Ballantyne of Omaha, Inc.* 800 15,600
Blyth Industries, Inc.* 100 3,694
Cole National Corp.* 100 4,456
Meta Group, Inc.* 400 8,350
Schweitzer-Mauduit International, Inc. 450 18,000
Silgan Holdings, Inc.* 650 26,650
----------
$ 99,125
- -------------------------------------------------------------------------------
Containers - 2.4%
AptarGroup, Inc. 200 $ 11,250
Gaylord Container Corp.* 1,900 17,931
Stone Container Corp. 1,100 18,975
----------
$ 48,156
- -------------------------------------------------------------------------------
Electrical Equipment - 1.3%
AFC Cable Systems, Inc.* 600 $ 18,000
QLogic Corp.* 200 7,850
----------
$ 25,850
- -------------------------------------------------------------------------------
Electronics - 5.5%
Actel Corp.* 600 $ 12,188
Burr Brown* 550 19,525
DuPont Photomasks, Inc.* 200 13,100
International Rectifier Corp.* 600 13,687
Microchip Technology, Inc.* 300 12,131
Photronic, Inc.* 100 5,900
PMC Sierra, Inc.* 700 20,081
SDL, Inc.* 900 15,975
----------
$ 112,587
- -------------------------------------------------------------------------------
Entertainment - 5.7%
American Radio Systems Corp., "A"* 300 $ 14,775
Cox Radio, Inc.* 900 24,075
Gemstar Group Ltd.* 1,100 22,550
Heftel Broadcasting Corp.* 200 12,400
Jacor Communications, Inc., "A"* 500 22,000
LIN Television Corp.* 400 18,975
----------
$ 114,775
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
BA Merchants Services, Inc.* 500 $ 9,156
Financial Federal Corp.* 900 14,119
Franklin Resources, Inc. 350 27,081
TCF Financial Corp. 100 5,331
----------
$ 55,687
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Smith's Food & Drug Centers, Inc., "B"* 150 $ 8,212
Suiza Foods Corp.* 400 16,500
----------
$ 24,712
- -------------------------------------------------------------------------------
Insurance - 2.7%
CapMAC Holdings, Inc. 300 $ 8,325
Compdent Corp.* 500 12,125
Equitable of Iowa Cos. 150 9,769
Hartford Life, Inc.,"A" 100 3,731
Life Re Corp. 400 20,525
----------
$ 54,475
- -------------------------------------------------------------------------------
Machinery - 1.4%
Greenfield Industries, Inc. 200 $ 5,275
Hirsch International Group* 900 22,950
----------
$ 28,225
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Phycor, Inc.* 150 $ 4,416
Rexall Sundown, Inc.* 500 17,375
Steris Corp.* 350 13,125
----------
$ 34,916
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 9.1%
AmeriSource Health Corp., "A"* 200 $ 10,013
CRA Managed Care, Inc.* 200 11,100
HCIA, Inc.* 700 10,850
Hologic, Inc.* 650 15,762
IDEXX Labs, Inc.* 1,300 24,456
IDX Systems Corp.* 300 10,163
NCS Healthcare, Inc.* 200 4,925
Orthalliance, Inc.* 100 1,388
Orthodontic Centers America, Inc.* 200 3,425
Physician Sales and Service, Inc.* 200 3,400
Physician Support Systems, Inc.* 1,200 20,250
Quorum Health Group, Inc.* 250 8,516
Renal Treatment Centers, Inc.* 500 16,937
Total Renal Care Holdings, Inc.* 300 13,725
United Dental Care, Inc.* 1,300 22,912
United Payors & United Providers, Inc.* 400 5,900
----------
$ 183,722
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Hanover Compressor* 100 2,363
----------
$ 5,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.3%
Kos Pharmaceuticals, Inc.* 200 $ 6,900
- -------------------------------------------------------------------------------
Printing and Publishing - 1.0%
Applied Graphics Technologies* 500 $ 20,625
- -------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Capstar Hotel Co.* 300 $ 9,825
Doubletree Corp.* 250 12,500
HFS, Inc.* 500 27,844
Interstate Hotels Co.* 750 21,469
Prime Hospitality Corp.* 850 16,150
Promus Hotel Corp.* 200 7,762
Roadhouse Grill, Inc.* 1,400 7,525
Trendwest Resorts, Inc.* 100 1,825
----------
$ 104,900
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
CHS Electronics, Inc.* 100 $ 3,863
Equity Corp. International* 450 10,378
----------
$ 14,241
- -------------------------------------------------------------------------------
Stores - 4.7%
AnnTaylor Stores Corp.* 500 $ 8,563
Corporate Express, Inc.* 600 10,237
CVS Corp. 400 22,550
Gymboree Corp.* 450 11,025
Mazel Stores, Inc.* 300 6,375
Petco Animal Supplies, Inc.* 400 11,850
PETsMART, Inc.* 600 5,138
U.S. Office Products Co.* 300 9,825
Viking Office Products, Inc.* 500 10,562
----------
$ 96,125
- -------------------------------------------------------------------------------
Telecommunications - 4.4%
APAC Teleservices, Inc.* 600 $ 9,900
Aspect Telecommunications Corp.* 1,800 39,600
Cable Design Technologies Corp.* 400 13,375
Intermedia Communications, Inc.* 400 14,300
Transaction Network Services, Inc.* 600 8,625
VDI Media* 300 4,275
----------
$ 90,075
- -------------------------------------------------------------------------------
Transportation - 0.1%
Carey International, Inc.* 100 $ 1,388
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.6%
Brooks Fiber Properties, Inc.* 350 $ 11,769
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,903,933
- -------------------------------------------------------------------------------
Foreign Stocks - 0.8%
Ireland - 0.1%
Warner Chilcott Laboratories* 100 $ 1,850
- -------------------------------------------------------------------------------
Mexico - 0.1%
TV Azteca, S.A. de C V (Broadcasting)* 100 $ 1,800
- -------------------------------------------------------------------------------
United Kingdom - 0.6%
News Corp. Ltd., ADR (Entertainment) 900 $ 13,612
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 17,262
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,742,794) $1,921,195
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.7%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97,
at Amortized Cost $ 75 $ 74,989
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,817,783) $1,996,184
Other Assets, Less Liabilities - 1.7% 33,679
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,029,863
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS RESEARCH INTERNATIONAL FUND
Stocks - 97.1%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 2.6%
Agricultural Products - 1.1%
AGCO Corp. 760 $ 24,700
- -------------------------------------------------------------------------------
Insurance - 0.5%
Equitable of Iowa Cos. 190 $ 12,374
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.0%
MCI Communications Corp. 865 $ 24,652
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 61,726
- -------------------------------------------------------------------------------
Foreign Stocks - 94.5%
Australia - 1.3%
Q.B.E. Insurance Group Ltd. (Insurance) 5,805 $ 31,338
- -------------------------------------------------------------------------------
Brazil - 0.8%
Telecomunicacoes Brasileiras SA, ADR
(Telecommunications) 152 $ 17,936
- -------------------------------------------------------------------------------
Canada - 1.6%
Canadian National Railway Co. (Railroads) 773 $ 38,408
- -------------------------------------------------------------------------------
Chile - 1.0%
Chilectra SA, ADR (Utilities - Electric) 785 $ 24,224
- -------------------------------------------------------------------------------
China - 0.4%
China Southern Airlines Ltd. (Airlines) 300 $ 9,431
- -------------------------------------------------------------------------------
Czech Republic - 1.1%
Tabak (Tobacco) 100 $ 25,187
- -------------------------------------------------------------------------------
Finland - 0.9%
Huhtamaki Oy Group (Food Company) 230 $ 9,081
TT Tieto Oy (Computer Software - Systems) 135 12,122
----------
$ 21,203
- -------------------------------------------------------------------------------
France - 5.2%
Chargeurs SA (Apparels and Textiles) 250 $ 14,779
Rhone-Poulenc SA (Pharmaceuticals)* 786 28,756
Societe Nationale Elf Aquitaine (Oils) 330 36,577
Televison Francaise (Broadcasting) 270 21,946
Union des Assurances Federales SA (Insurance) 190 19,655
----------
$ 121,713
- -------------------------------------------------------------------------------
Germany - 3.7%
Adidas AG (Apparel and Textiles) 96 $ 11,537
Henkel Kgaa (Consumer Goods and Services) 538 27,081
Phoenix AG (Auto Parts) 1,225 21,322
Prosieben Media AG (Broadcasting) 200 9,029
SAP AG, Preferred (Computer Software - Systems) 79 18,028
----------
$ 86,997
- -------------------------------------------------------------------------------
Greece - 2.1%
Athens Medical Care SA (Medical and Health Technology
and Services) 1,800 $ 17,260
Hellenic Telecommunication Organization SA
(Telecommunications) 880 19,520
Papastratos Cigarettes SA (Consumer Goods and
Services) 660 11,232
----------
$ 48,012
- -------------------------------------------------------------------------------
Hong Kong - 8.9%
Asia Satellite Telecommunications Holdings Ltd.
(Telecommunications)* 9,000 $ 25,087
Citic Pacific Ltd. (Conglomerates) 5,000 26,649
Dah Sing Financial Group (Banks and Credit Cos.) 2,600 $ 10,871
Hong Kong Electric Holdings Ltd. (Utilities -
Electric) 8,000 27,978
Hutchison Whampoa (Real Estate) 1,000 8,324
Ka Wah Bank (Bank and Credit Cos.) 1,000 2,446
Li & Fung Ltd. (Wholesale) 36,000 36,701
Liu Chong Hing Bank (Banks and Credit Cos.) 3,000 7,994
Vanda Systems & Communication Holdings Ltd.
(Computers Software - Systems) 44,000 24,984
Wharf Holdings Ltd. (Real Estate) 6,000 21,719
Wing Hang Bank Ltd. (Banks and Credit Cos.) 3,600 15,331
----------
$ 208,084
- -------------------------------------------------------------------------------
Indonesia - 0.5%
PT Indosat (Telecommunications) 500 $ 1,031
PT Indosat, ADR (Telecommunications) 270 5,856
PT Semen Gresik (Building Materials) 4,500 4,639
----------
$ 11,526
- -------------------------------------------------------------------------------
Ireland - 2.4%
Allied Irish Banks (Banks and Credit Cos.) 2,486 $ 20,989
Anglo Irish Bank Corp. (Banks and Credit Cos.) 16,800 23,957
Smurfit Jefferson (Paper/Plastic) 3,700 12,292
----------
$ 57,238
- -------------------------------------------------------------------------------
Italy - 3.3%
Gucci Group Designs NV (Apparel and Textiles) 304 $ 18,506
INA - Instituto Nazionale delle Assicurazioni
(Insurance) 8,225 11,980
Industrie Natuzzi S.P.A., ADR (Consumer Goods and
Services) 974 26,785
Telecom Italia S.P.A., Saving Shares
(Telecommunications) 12,235 20,416
----------
$ 77,687
- -------------------------------------------------------------------------------
Japan - 23.4%
Bank of Tokyo Mitsubishi (Banks and Credit Cos.) 1,000 $ 18,159
Bridgestone Corp. (Tire and Rubber) 1,000 22,139
Canon, Inc. (Special Products and Services) 2,000 55,224
DDI Corp. (Telecommunications) 3 15,672
Fuji Photo Film Co Ltd., ADR (Photographic Products) 600 22,950
Fujimi Inc. (Distribution Wholesale) 400 22,388
Hirose Electric Co. (Electronics) 100 7,007
Jusco Co. (Retail) 1,000 26,700
Keyence Corp. (Electronics) 110 16,053
Kinki Coca-Cola Bottling Co. (Beverages) 1,000 12,438
Kirin Beverage Corp. (Beverages) 2,000 32,338
Nippon Broadcasting (Broadcasting) 1,000 73,880
Nippon Telephone & Telegraph Co. (Utilities -
Telephone) 2 18,740
Osaka Sanso Kogyo Ltd. (Chemicals) 4,000 8,458
Secom Co. (Consumer Goods and Services) 1,000 71,061
Sony Corp. (Electronics) 300 26,119
Takeda Chemical Industries (Pharmaceuticals) 1,000 26,617
TDK Corp., ADR (Electronics) 680 52,955
Terumo Corp. (Computers) 1,000 18,242
----------
$ 547,140
- -------------------------------------------------------------------------------
Malaysia - 0.2%
UMW Holdings Berhad (Automobiles) 2,000 $ 5,377
- -------------------------------------------------------------------------------
Mexico - 1.0%
Companhia Cerveja Ria Brahma (Broadcasting) 1,400 $ 18,988
TV Azteca SA De CV (Television) 300 5,400
----------
$ 24,388
- -------------------------------------------------------------------------------
Netherlands - 5.1%
Ahrend Kon (Office Furnishers) 630 $ 20,557
Akzo Nobel (Chemicals) 160 24,746
Brunel International NV (Human Resources) 300 6,183
Computer Services (Computers) 2,000 19,038
Fugro NV (Engineering) 100 3,410
Philips Electronics NV (Manufacturing) 260 18,460
Royal Dutch Petroleum (Oils) 544 27,547
----------
$ 119,941
- -------------------------------------------------------------------------------
Peru - 0.9%
Telefonica del Peru SA, ADR (Telecommunications) 870 $ 20,336
- -------------------------------------------------------------------------------
Philippines - 0.2%
Alsons Cement Corp. (Building Materials)*## 41,500 $ 3,860
- -------------------------------------------------------------------------------
Poland - 0.3%
Bank Handlowy Warsza (Banks and Credit Cos.)+ 200 $ 2,525
Kghm Polska Miedz SA (Diversified - Metals)## 400 4,884
----------
$ 7,409
- -------------------------------------------------------------------------------
Portugal - 2.3%
Banco Espirito Santo e Comercial de Lisboa SA (Banks
and Credit Cos.) 500 $ 12,268
Banco Totta E Acores (Financial Institutions) 1,275 22,872
Telecel - Comunicacaoes Pessoais SA
(Telecommunication) 240 17,457
----------
$ 52,597
- -------------------------------------------------------------------------------
Singapore - 2.7%
City Developments Ltd. (Real Estate) 2,000 $ 12,637
Hong Leong Finance Ltd. (Finance)+ 3,000 5,855
Mandarin Oriental International, Ltd.
(Restaurants and Lodgings) 27,000 30,240
Singapore Land Ltd. (Conglomerates) 3,000 13,298
----------
$ 62,030
- -------------------------------------------------------------------------------
Spain - 1.0%
Abengoa SA (Construction)* 300 $ 13,260
Acerinox SA (Iron and Steel) 64 10,507
----------
$ 23,767
- -------------------------------------------------------------------------------
Sweden - 3.1%
Astra AB (Pharmaceuticals) 1,053 $ 16,726
Skandia Foersaekrings AB (Insurance) 705 27,214
Sparbanken Sverige AB (Banks and Credit Cos.) 1,271 27,508
----------
$ 71,448
- -------------------------------------------------------------------------------
Switzerland - 3.5%
Kuoni Reisen Holdings AG (Transportation) 9 $ 36,930
Novartis AG (Pharmaceuticals) 31 43,778
----------
$ 80,708
- -------------------------------------------------------------------------------
Taiwan - 1.6%
ASE Test Limited (Electronics) 500 $ 36,500
- -------------------------------------------------------------------------------
United Kingdom - 15.1%
ASDA Group PLC (Supermarkets) 9,401 $ 21,937
Bank of Scotland (Banks and Credit Cos.) 1,700 11,433
British Aerospace PLC (Aerospace and Defense) 1,486 34,772
British Petroleum PLC (Oil and Gas) 2,155 30,103
Carlton Communicatons PLC (Broadcasting) 2,660 21,165
Corporate Services Group (Business Services) 5,200 16,348
Grand Metropolitan (Food and Beverage Products) 2,910 26,714
Jarvis Hotels PLC (Restaurants and Lodging)*+ 10,900 27,378
JBA Holdings Diversified Operations) 900 12,397
Kwik-Fit Holdings PLC (Retail) 7,704 37,453
Lloyds TSB Group PLC (Banks and Credit Cos.) 2,382 27,445
PowerGen PLC (Utilities - Electric)* 2,113 26,708
Storehouse PLC (Retail)* 6,100 22,637
Tomkins PLC (Diversified Operations) 5,100 24,711
Williams Holdings (Diversified Operations) 2,200 12,424
----------
$ 353,625
- -------------------------------------------------------------------------------
Venezuela - 0.9%
Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telecommunications)* 509 $ 20,996
- -------------------------------------------------------------------------------
Total Foreign Stocks $2,209,106
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,318,693) $2,270,832
- -------------------------------------------------------------------------------
Short-Term Obligations - 2.6%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 60 $ 59,991
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,378,684) $2,330,823
Other Assets, Less Liabilities - 0.3% 5,265
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,336,088
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+Restricted security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SCIENCE AND TECHNOLOGY FUND
Stocks - 88.4%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 85.2%
Apparel and Textiles - 0.1%
Polo Ralph Lauren Corp.* 100 $ 2,625
- -------------------------------------------------------------------------------
Business Machines - 5.4%
Affiliated Computer Services, Inc., "A"* 1,880 $ 49,350
Compaq Computer Corp.* 200 13,100
Silicon Graphics, Inc.* 500 13,719
Sun Microsystems, Inc.* 1,240 59,520
----------
$ 135,689
- -------------------------------------------------------------------------------
Business Services - 6.1%
AccuStaff, Inc.* 2,180 $ 57,906
First Data Corp. 780 32,029
First USA Paymentech, Inc.* 1,320 40,095
Galieo International, Inc.* 100 2,644
Hall Kinion & Associates, Inc.* 100 2,137
Lamalie Associates, Inc.* 100 1,900
Teletech Holdings, Inc.* 1,000 16,375
----------
$ 153,086
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 14.0%
Activision, Inc.* 1,500 $ 19,500
Adobe Systems, Inc. 1,165 45,872
Autodesk, Inc.* 1,710 74,812
Electronic Arts, Inc.* 1,200 36,975
Microsoft Corp.* 1,000 132,187
Midway Games, Inc.* 960 20,280
Spectrum Holobyte, Inc.* 4,600 22,138
----------
$ 351,764
- -------------------------------------------------------------------------------
Computer Software - Services - 0.9%
Ingram Micro, Inc.* 750 $ 21,563
- -------------------------------------------------------------------------------
Computer Software - Systems - 32.5%
BMC Software, Inc.* 1,180 $ 73,897
Cadence Design Systems, Inc.* 2,831 134,649
Computer Associates International, Inc. 2,095 140,103
Compuware Corp.* 1,660 102,505
Engineering Animation, Inc.* 470 17,977
Great Plains Software, Inc.* 100 2,638
Oracle Systems Corp.* 3,480 132,675
Peoplesoft, Inc.* 660 37,125
Peritus Software Services, Inc.* 100 2,500
Rational Software Corp.* 1,010 16,665
Summit Design, Inc.* 4,400 52,800
Sybase, Inc.* 380 7,078
Synopsys, Inc.* 2,830 97,989
TSI International Software Ltd.* 100 1,225
----------
$ 819,826
- -------------------------------------------------------------------------------
Electronics - 5.1%
Atmel Corp.* 440 $ 15,565
Intel Corp. 340 31,322
Sony Corp. 250 22,031
Teradyne, Inc.* 900 50,119
Xilinx, Inc.* 200 9,500
----------
$ 128,537
- -------------------------------------------------------------------------------
Medical and Health Products - 2.0%
Bristol-Myers Squibb Co. 610 $ 46,360
Ocular Sciences, Inc.* 100 1,912
Schick Technologies, Inc.* 100 2,650
----------
$ 50,922
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.6%
Centennial Healthcare Corp.* 100 $ 2,012
HBO & Co. 1,085 77,713
Horizon CMS Healthcare Corp.* 700 14,394
Monarch Dental Corp.* 100 1,813
Oxford Health Plans, Inc.* 370 27,056
Pacificare Health Systems, Inc., "B"* 130 8,889
United Healthcare Corp. 1,240 60,295
----------
$ 192,172
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Domain Energy Corp.* 100 1,525
Hanover Compressor* 100 2,363
----------
$ 7,288
- -------------------------------------------------------------------------------
Printing and Publishing - 0.1%
CMP Media, Inc.* 100 $ 2,675
- -------------------------------------------------------------------------------
Stores - 0.2%
CVS Corp. 100 $ 5,638
- -------------------------------------------------------------------------------
Telecommunications - 9.3%
Ascend Communications, Inc.* 1,105 $ 46,893
Aspect Telecommunications Corp.* 2,770 60,940
Cabletron Systems, Inc.* 700 21,175
Cisco Systems, Inc.* 1,055 79,521
Lucent Technologies, Inc. 290 22,584
Qwest Communications International, Inc.* 100 4,075
----------
$ 235,188
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
MCI Communications Corp. 1,410 $ 40,185
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,147,158
- -------------------------------------------------------------------------------
Foreign Stocks - 3.2%
Germany - 1.7%
SAP AG, Preferred (Computer Software - Systems) 185 $ 42,217
- -------------------------------------------------------------------------------
Japan - 1.5%
Canon, Inc., ADR (Special Products and Services) 80 $ 11,130
Sony Corp. (Electronics) 300 26,120
----------
$ 37,250
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 79,467
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,850,603) $2,226,625
- -------------------------------------------------------------------------------
Short-Term Obligations - 11.5%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 290 $ 289,957
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,140,560) $2,516,582
Other Assets, Less Liabilities - 0.1% 2,168
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,518,750
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
AUGUST 31, 1997 FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost,
$2,461,282, $1,245,641 and $3,114,897,
respectively) $2,744,043 $1,405,673 $3,717,356
Cash 1,141 19,505 489
Deposit with brokers for securities sold short -- -- 95,437
Foreign currency, at value (identified cost, $0,
$0 and $4,055, respectively) -- -- 4,042
Receivable for Fund shares sold -- 50,000 --
Receivable for investments sold 37,779 6,595 262,105
Net receivable for foreign currency exchange
contracts closed or subject to master netting
agreements -- -- 175
Interest and dividends receivable 897 2,892 2,064
Receivable from investment adviser 10,414 -- 17,514
Deferred organization expenses 1,669 1,676 1,688
Other assets 1,288 -- --
---------- ---------- ----------
Total assets $2,797,231 $1,486,341 $4,100,870
---------- ---------- ----------
Liabilities:
Securities sold short, at value (proceeds
received, $0, $0 and $122,480, respectively) $ -- $ -- $ 126,887
Payable for investments purchased 29,934 10,405 5,991
Accrued expenses and other liabilities 11,177 1,883 13,181
---------- ---------- ----------
Total liabilities $ 41,111 $ 12,288 $ 146,059
---------- ---------- ----------
Net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Net assets consist of:
Paid-in capital $2,164,935 $1,179,568 $3,083,892
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 282,768 160,027 598,225
Accumulated undistributed net realized gain on
investments and foreign currency transactions 107,865 123,884 244,151
Accumulated undistributed net investment income 200,552 10,574 28,543
---------- ---------- ----------
Total $2,756,120 $1,474,053 $3,954,811
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 67,032 34,434 140,925
Class I 107,057 65,074 149,230
---------- ---------- ----------
Total shares of beneficial interest
outstanding 174,089 99,508 290,155
========== ========== ==========
Net assets:
Class A $1,060,643 $ 510,280 $1,919,478
Class I 1,695,477 963,773 2,035,333
---------- ---------- ----------
Total net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price
per share (net assets / shares of beneficial interest outstanding) $15.82 $14.82 $13.62
====== ====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $15.84 $14.81 $13.64
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $624,151,
$552,430 and $1,817,783, respectively) $ 720,092 $ 624,057 $1,996,184
Cash 6,338 3,982 33,748
Foreign currency, at value (identified cost, $0, $26
and $0, respectively) -- 26 --
Receivable for investments sold -- 9,904 --
Interest and dividends receivable 1,149 2,643 180
---------- ---------- ----------
Total assets $ 727,579 $ 640,612 $2,030,112
---------- ---------- ----------
Liabilities:
Accrued expenses and other liabilities $ 90 $ 85 $ 249
---------- ---------- ----------
Net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Net assets consist of:
Paid-in capital $ 617,975 $ 557,991 $1,579,754
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 95,941 71,627 178,401
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 12,369 (1,197) 126,577
Accumulated undistributed net investment income 1,204 12,106 145,131
---------- ---------- ----------
Total $ 727,489 $ 640,527 $2,029,863
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 41,316 50,266 41,008
Class I 20,514 5,555 114,238
---------- ---------- ----------
Total shares of beneficial interest outstanding 61,830 55,821 155,246
========== ========== ==========
Net assets:
Class A $ 486,110 $ 576,830 $ 536,157
Class I 241,379 63,697 1,493,706
---------- ---------- ----------
Total net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price per share (net assets /
shares of beneficial interest outstanding) $11.77 $11.48 $13.07
====== ====== ======
Class I shares:
Net asset value and redemption price per share (net assets / shares of
beneficial interest outstanding) $11.77 $11.47 $13.08
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
AUGUST 31, 1997 FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost, $2,378,684 and
$2,140,560, respectively) $2,330,823 $2,516,582
Cash 924 3,165
Foreign currency, at value (identified cost, $1,560 and $46,
respectively) 1,164 43
Receivable for Fund shares sold 10,000 --
Receivable for investments sold 17,901 --
Interest and dividends receivable 4,591 54
Receivable from investment adviser 6,854 8,711
Other assets -- 250
---------- ----------
Total assets $2,372,257 $2,528,805
---------- ----------
Liabilities:
Payable for investments purchased $ 26,952 $ --
Accrued expenses and other liabilities 9,217 10,055
---------- ----------
Total liabilities $ 36,169 $ 10,055
---------- ----------
Net assets $2,336,088 $2,518,750
========== ==========
Net assets consist of:
Paid-in capital $2,134,309 $2,036,119
Unrealized appreciation (depreciation) on investments and
translation of
assets and liabilities in foreign currencies (48,333) 376,018
Accumulated undistributed net realized gain (loss) on
investments and
foreign currency transactions 239,440 (69,545)
Accumulated undistributed net investment income 10,672 176,158
---------- ----------
Total $2,336,088 $2,518,750
---------- ----------
Shares of beneficial interest outstanding:
Class A 119,940 70,359
Class I 93,365 130,608
---------- ----------
Total shares of beneficial interest outstanding 213,305 200,967
========== ==========
Net assets:
Class A $1,313,579 $ 881,888
Class I 1,022,509 1,636,862
---------- ----------
Total net assets $2,336,088 $2,518,750
========== ==========
Class A shares:
Net asset value and offering and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
YEAR ENDED AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 217,465 $ 27,016 $ 21,095
Interest 7,705 2,229 22,623
---------- ---------- ----------
Total investment income $ 225,170 $ 29,245 $ 43,718
---------- ---------- ----------
Expenses -
Management fee $ 12,775 $ 6,926 $ 23,164
Shareholder servicing agent fee 2,233 1,209 4,030
Distribution and service fee - Class A 4,216 2,468 9,410
Administrative fee 27 83 --
Registration fee 2,763 2,335 --
Auditing fee 5,101 5,501 8,272
Postage 341 82 119
Printing 2,928 1,635 --
Legal fee 3,223 2,618 2,026
Custodian fee 5,695 5,166 5,902
Amortization of organization expenses 434 434 434
Miscellaneous 4,671 354 325
---------- ---------- ----------
Total expenses $ 44,407 $ 28,811 $ 53,682
Fees paid indirectly (690) (388) (1,010)
Reduction of expenses by investment adviser,
shareholder servicing
agent and distributor (19,224) (14,434) (36,604)
---------- ---------- ----------
Net expenses $ 24,493 $ 13,989 $ 16,068
---------- ---------- ----------
Net investment income $ 200,677 $ 15,256 $ 27,650
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 147,884 $ 130,162 $ 314,835
Securities sold short -- -- (6,786)
Foreign currency transactions (112) (8) (173)
---------- ---------- ----------
Net realized gain on investments and
foreign currency transactions $ 147,772 $ 130,154 $ 307,876
---------- ---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ 264,806 $ 134,063 $ 542,028
Securities sold short -- -- 14,842
Translation of assets and liabilities in foreign
currencies 12 (5) 173
---------- ---------- ----------
Net change in unrealized appreciation $ 264,818 $ 134,058 $ 557,043
---------- ---------- ----------
Net realized and unrealized gain on investments
and
foreign currency $ 412,590 $ 264,212 $ 864,919
---------- ---------- ----------
Increase in net assets from operations $ 613,267 $ 279,468 $ 892,569
========== ========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- --------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND* FUND*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 6,880 $ 12,186 $ 155,787
Interest 978 5,669 6,670
---------- ---------- ----------
Total investment income $ 7,858 $ 17,855 $ 162,457
---------- ---------- ----------
Expenses -
Management fee $ 2,849 $ 2,458 $ 8,539
Shareholder servicing agent fee 576 497 1,498
Distribution and service fee - Class A 1,480 1,738 1,286
Administrative fee 52 44 132
Registration fee 4,030 4,000 4,505
Auditing fee 5,500 5,900 6,000
Printing 2,237 1,135 2,892
Postage 42 -- 25
Legal fee 3,871 3,214 4,534
Custodian fee 392 459 720
Miscellaneous 557 213 271
---------- ---------- ----------
Total expenses $ 21,586 $ 19,658 $ 30,402
Fees paid indirectly (173) (168) (451)
Reduction of expenses by investment adviser,
shareholder servicing
agent, and distributor (14,749) (13,739) (12,625)
---------- ---------- ----------
Net expenses $ 6,664 $ 5,751 $ 17,326
---------- ---------- ----------
Net investment income $ 1,194 $ 12,104 $ 145,131
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,369 $ 5,932 $ 126,577
Securities sold short -- (7,129) --
Foreign currency transactions 10 2 --
---------- ---------- ----------
Net realized gain (loss) on investments and
foreign currency
transactions $ 12,379 $ (1,195) $ 126,577
---------- ---------- ----------
Change in unrealized appreciation on investments and
translation
of assets and liabilities in foreign currencies $ 95,941 $ 71,627 $ 178,401
---------- ---------- ----------
Net realized and unrealized gain on investments
and foreign
currency $ 108,320 $ 70,432 $ 304,978
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
========== ========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income:
Income -
Dividends $ 32,673 $ 183,332
Interest 4,208 12,047
Foreign taxes withheld (3,096)
---------- ----------
Total investment income $ 33,785 $ 195,379
---------- ----------
Expenses -
Management fee $ 14,026 $ 10,517
Shareholder servicing agent fee 1,819 1,845
Distribution and service fee - Class A 4,164 2,112
Administrative fee 168 166
Registration fee 4,500 4,010
Auditing fees 5,500 5,500
Postage 468 129
Printing 3,357 3,181
Legal fees 3,451 5,691
Custodian fee 4,387 910
Miscellaneous 1,762 327
---------- ----------
Total expenses $ 43,602 $ 34,388
Fees paid indirectly (480) (559)
Reduction of expenses by investment adviser, shareholder
servicing agent, and distributor (20,009) (14,474)
---------- ----------
Net expenses $ 23,113 $ 19,355
---------- ----------
Net investment income $ 10,672 $ 176,024
---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 241,403 $ (69,545)
Foreign currency transactions (1,963) 134
---------- ----------
Net realized gain (loss) on investments and foreign
currency
transactions $ 239,440 $ (69,411)
---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ (47,861) $ 376,022
Translation of assets and liabilities in foreign currencies (472) (4)
---------- ----------
Net change in unrealized appreciation (depreciation) $ (48,333) $ 376,018
---------- ----------
Net realized and unrealized gain on investments and
foreign currency $ 191,107 $ 306,607
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 200,677 $ (362)
Net realized gain on investments and foreign
currency transactions 147,772 66,889
Net unrealized gain on investments and foreign
currency translation 264,818 17,950
---------- ----------
Increase in net assets from operations $ 613,267 $ 84,477
---------- ----------
Distributions declared to shareholders from net
realized gain on investments - Class A $ (106,559) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,273,798 $ 605,756
Net asset value of shares issued to shareholders
in reinvestment of distributions 106,552 --
Cost of shares reacquired (817,088) (4,083)
---------- ----------
Increase in net assets from Fund share
transactions $1,563,262 $ 601,673
---------- ----------
Total increase in net assets $2,069,970 $ 686,150
Net assets:
At beginning of period 686,150 --
---------- ----------
At end of period (including accumulated
undistributed net investment income (loss) of
$200,552 and $(13), respectively) $2,756,120 $ 686,150
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 15,256 $ 4,878
Net realized gain on investments and foreign
currency transactions 130,154 7,246
Net unrealized gain on investments and foreign
currency translation 134,058 25,969
---------- ----------
Increase in net assets from operations $ 279,468 $ 38,093
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (9,552) $ --
From net realized gain on investments - Class A (13,524) --
---------- ----------
Total distributions declared to shareholders $ (23,076) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $1,191,109 $ 449,397
Net asset value of shares issued to shareholders
in reinvestment of distributions 23,074 --
Cost of shares reacquired (473,902) (10,110)
---------- ----------
Increase in net assets from Fund share
transactions $ 740,281 $ 439,287
---------- ----------
Total increase in net assets $ 996,673 $ 477,380
Net assets:
At beginning of period 477,380 --
---------- ----------
At end of period (including accumulated
undistributed net investment income
of $10,574 and $4,878, respectively) $1,474,053 $ 477,380
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,650 $ 10,016
Net realized gain on investments and foreign
currency transactions 307,876 168,487
Net unrealized gain on investments and foreign
currency translation 557,043 41,182
---------- ----------
Increase in net assets from operations $ 892,569 $ 219,685
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (8,950) $ --
From net realized gain on investments - Class A (232,385) --
---------- ----------
Total distributions declared to shareholders $ (241,335) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,798,830 $2,038,964
Net asset value of shares issued to shareholders
in reinvestment of distributions 241,330 --
Cost of shares reacquired (1,995,218) (14)
---------- ----------
Increase in net assets from Fund share
transactions $1,044,942 $2,038,950
---------- ----------
Total increase in net assets $1,696,176 $2,258,635
Net assets:
At beginning of period 2,258,635 --
---------- ----------
At end of period (including accumulated
undistributed net investment income of $28,543
and $10,016, respectively) $3,954,811 $2,258,635
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997* FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,194 $ 12,104 $ 145,131
Net realized gain (loss) on investments and
foreign currency transactions 12,379 (1,195) 126,577
Net unrealized gain on investments and foreign
currency translation 95,941 71,627 178,401
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
---------- ---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 720,959 $ 559,838 $1,935,566
Cost of shares reacquired (102,984) (1,847) (355,812)
---------- ---------- ----------
Increase in net assets from Fund share
transactions $ 617,975 $ 557,991 $1,579,754
---------- ---------- ----------
Total increase in net assets $ 727,489 $ 640,527 $2,029,863
Net assets:
At beginning of period -- -- --
---------- ---------- ----------
At end of period (including accumulated
undistributed net investment income of $1,204,
$12,106 and $145,131, respectively) $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997* FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,672 $ 176,024
Net realized gain (loss) on investments and foreign currency
transactions 239,440 (69,411)
Net unrealized gain (loss) on investments and foreign
currency translation (48,333) 376,018
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,472,688 $2,470,527
Cost of shares reacquired (338,379) (434,408)
---------- ----------
Increase in net assets from Fund share transactions $2,134,309 $2,036,119
---------- ----------
Total increase in net assets $2,336,088 $2,518,750
Net assets:
At beginning of period -- --
---------- ----------
At end of period (including accumulated undistributed net
investment income of $10,672 and $176,158, respectively) $2,336,088 $2,518,750
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 12.33 $ 10.00 $ 12.99
---------- ---------- ----------
Income from investment operations# -
Net investment income (loss)(S) $ 1.24 $ (0.01) $ 1.50
Net realized and unrealized gain on investments and
foreign currency transactions 3.93 2.34 1.35
---------- ---------- ----------
Total from investment operations $ 5.17 $ 2.33 $ 2.85
---------- ---------- ----------
Less distributions declared to shareholders from net
realized gain on investments $ (1.68) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 15.82 $ 12.33 $ 15.84
========== ========== ==========
Total return 45.22% 23.30%++ 21.94%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.45% 1.50%+ 1.48%+
Net investment income (loss) 9.12% (0.11)%+ 14.08%+
Portfolio turnover 1,043% 204% 1,043%
Average commission rate $ 0.0248 $ 0.0411 $ 0.0248
Net assets at end of period
(000 omitted) $ 1,061 $ 686 $ 1,695
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the periods
indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 1.06 $ (0.18) $ 1.40
Ratios (to average net assets):
Expenses## 2.82% 4.28%+ 2.35%
Net investment income (loss) 7.75% (2.34)%+ 13.20%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.07 $ 10.00 $ 12.20
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.13 $ 0.15
Net realized and unrealized gain on investments and
foreign currency transactions 3.91 0.94 2.46
---------- ---------- ----------
Total from investment operations $ 4.13 $ 1.07 $ 2.61
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.16) $ -- $ --
From net realized gain on investments (0.22) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (0.38) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 14.82 $ 11.07 $ 14.81
========== ========== ==========
Total return 38.05% 10.70%++ 21.39%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50% 1.50%+ 1.50%+
Net investment income 1.75% 1.83%+ 1.51%+
Portfolio turnover 118% 56% 118%
Average commission rate $ 0.0393 $ 0.0331 $ 0.0393
Net assets at end of
period (000 omitted) $ 510 $ 477 $ 964
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had been waived by the Fund and/or if actual expenses were over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.02 $ (0.06) $ 0.03
Ratios (to average net assets):
Expenses## 3.40% 4.67%+ 2.67%+
Net investment income (loss) (0.15)% (0.78)%+ 0.35%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.36 $ 10.00 $ 11.39
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.08 $ 0.06 $ 0.11
Net realized and unrealized gain on investments
and foreign currency transactions 3.35 1.30 2.14
---------- ---------- ----------
Total from investment operations $ 3.43 $ 1.36 $ 2.25
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.04) $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.13) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (1.17) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 13.62 $ 11.36 $ 13.64
========== ========== ==========
Total return 31.84% 13.60%++ 19.75%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.74% 1.50%+ 0.18%+
Net investment income 0.65% 0.78%+ 1.26%+
Portfolio turnover 161% 108% 161%
Average commission rate $ 0.0387 $ 0.0361 $ 0.0387
Net assets at end of period (000 omitted) $ 1,920 $ 2,259 $ 2,035
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. (S)The Adviser voluntarily agreed to
maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for the periods indicated. If these fees
had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the net investment income
(loss) per share and ratios would have been:
Net investment income (loss) $ (0.06) $ (0.01) $ 0.01
Ratios (to average net assets):
Expenses## 1.92% 2.97%+ 1.36%+
Net investment income (loss) (0.53)% (0.16)%+ 0.08%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
BLUE CHIP FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.02 $ 0.02
Net realized and unrealized gain on
investments 1.75 1.75
---------- ----------
Total from investment operations $ 1.77 $ 1.77
---------- ----------
Net asset value - end of period $ 11.77 $ 11.77
========== ==========
Total return 17.70%++ 17.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 0.28%+ 0.24%+
Portfolio turnover 32% 32%
Average commission rate $ 0.0427 $ 0.0427
Net assets at end of period (000 omitted) $ 486 $ 241
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The Investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income loss per share and the ratios would have been:
Net investment loss $ (0.26) $ (0.23)
Ratios (to average net assets):
Expenses## 5.04%+ 4.54%+
Net investment loss (3.25)%+ (2.80)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations -
Net investment income(S) $ 0.25 $ 0.26
Net realized and unrealized gain on
investments 1.23 1.21
---------- ----------
Total from investment operations $ 1.48 $ 1.47
---------- ----------
Net asset value - end of period $ 11.48 $ 11.47
========== ==========
Total return 14.70%++ 14.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 3.16%+ 3.19%+
Portfolio turnover 76% 76%
Average commission rate $ 0.0453 $ 0.0453
Net assets at end of period (000 omitted) $ 577 $ 64
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's daily net
assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.04) $ --
Ratios (to average net assets):
Expenses## 5.19%+ 4.69%+
Net investment income (loss) (0.53)%+ --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
NEW DISCOVERY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.98 $ 1.01
Net realized and unrealized gain on
investments 2.09 2.07
---------- ----------
Total from investment operations $ 3.07 $ 3.08
---------- ----------
Net asset value - end of period $ 13.07 $ 13.08
========== ==========
Total return 30.70%++ 30.80%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 12.41%+ 12.65%+
Portfolio turnover 887% 887%
Average commission rate $ 0.0250 $ 0.0250
Net assets at end of period (000 omitted) $ 536 $ 1,494
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.89 $ 0.92
Ratios (to average net assets):
Expenses## 3.10%+ 2.52%+
Net investment income 10.81%+ 11.63%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.06 $ 0.07
Net realized and unrealized gain on
investments 0.89 0.88
---------- ----------
Total from investment operations $ 0.95 $ 0.95
---------- ----------
Net asset value - end of period $ 10.95 $ 10.95
========== ==========
Total return 9.60%++ 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.68%+ 1.68%+
Net investment income 0.71%+ 0.85%+
Portfolio turnover 137% 137%
Average commission rate $ 0.0198 $ 0.0198
Net assets at end of period (000 omitted) $ 1,314 $ 1,022
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.75% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment loss $ (0.01) $ --
Ratios (to average net assets):
Expenses## 3.31%+ 2.81%+
Net investment loss (0.92)%+ (0.28)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.84 $ 1.05
Net realized and unrealized gain on
investments and foreign currency transactions 1.69 1.48
---------- ----------
Total from investment operations $ 2.53 $ 2.53
---------- ----------
Net asset value - end of period $ 12.53 $ 12.53
========== ==========
Total return 25.30%++ 25.30%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.40%+ 1.41%+
Net investment income 10.73%+ 13.11%+
Portfolio turnover 792% 792%
Average commission rate $ 0.0243 $ 0.0243
Net assets at end of period (000 omitted) $ 882 $ 1,637
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
period indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.73 $ 0.98
Ratios (to average net assets):
Expenses## 2.77%+ 2.28%+
Net investment income 9.36%+ 12.24%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund,
MFS Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund, MFS Science and Technology Fund are diversified
series of MFS Series Trust I (the Trust), and MFS Special Opportunities Fund is
a non-diversified series of 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 reported at market value using last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues and forward contracts and interest rate
swaps, 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. 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. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Futures contracts, options, and options on futures
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by each 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 each
Fund's operations.
Forward Foreign Currency Exchange Contracts - Each 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 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. Each Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, each Fund 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, each Fund 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 as unrealized until the contract settlement date. On contract
settlement date, the gains or losses are recorded as realized gains or losses on
foreign currency transactions.
Written Options - Each Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, each Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by each Fund. Each 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 part of an income producing strategy reflecting the view of each
Fund's management on the direction of interest rates.
Short Sales - The Special Opportunities Fund, the Convertible Securities Fund,
the New Discovery Fund, and the Science and Technology Fund may enter into short
sales. A short sale transaction involves selling a security which a Fund does
not own with the intent of purchasing it later at a lower price. A 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 a Fund must
replace the borrowed security. Losses can exceed the proceeds from short sales
and 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 a Fund may be required to pay
in connection with a short sale. Whenever a Fund engages in short sales, its
custodian segregates cash or marketable 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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. 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 and the Convertible Securities Fund may 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 Funds use the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - Each Fund's custody fee is calculated as a percentage of
each Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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 - Each 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. 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.
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 year ended August 31, 1997, the following amounts were reclassified
between accumulated undistributed net investment income and accumulated net
realized gain on investments 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>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ (10) $ (2) $ 112 $ 8
Accumulated undistributed net
investment income (loss) $ 10 $ 2 $ (112) $ (8)
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ -- $ 1,963 $ (134) $ 173
Accumulated undistributed net
investment income (loss) $ -- $ (1,963) $ 134 $ (173)
</TABLE>
At August 31, 1997, the Convertible Securities Fund, for federal income tax
purposes, had a capital loss carryforward of $1,022 which may be applied against
any net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on August 31, 2005.
Multiple Classes of Shares of Beneficial Interest - The Funds offer multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of each Fund pro
rata based on average daily net assets of each class, without distinction
between share classes. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share dividend rates
are generally due to differences in separate class expenses.
(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
0.65% of average daily net assets for the Blue Chip Fund and the Convertible
Securities Fund, at an annual rate of 0.75% of average daily net assets for the
Core Growth Fund, the Equity Income Fund, the New Discovery Fund, the Science
and Technology Fund, and the Special Opportunities Fund, and at an annual rate
of 1.00% of average daily net assets for the Research International Fund. For
the year ended August 31, 1997, the investment adviser did not impose any of its
fee, which is reflected as a reduction of expenses in the Statement of
Operations.
Each Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of each Fund's operating expenses, exclusive of
management, distribution and service fees. Each Fund in turn will pay MFS an
expense reimbursement fee not greater than 1.50% of average daily net assets,
except that the Research International Fund will pay a fee of 1.75%. 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,
1997, the aggregate unreimbursed expenses owed to MFS by each Fund amounted to:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,844 $9,046 $ -- $8,413 $1,302 $ -- $ -- $ --
</TABLE>
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 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 each Fund.
Administrator - Effective March 1, 1997, the Funds have an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Funds pay
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales on Class A shares of each Fund for the year
ended August 31, 1997.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's 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 by 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 year ended August 31, 1997,
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 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of Class A shares at an effective
annual rate of up to 0.15%. MFSC is currently waiving its fee for an indefinite
period.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments $ 801,689 $ 916,065 $ 17,817,514 $ 1,735,832
========== ========== ============= ============
Sales
- ----------
Investments $ 189,892 $ 382,668 $ 16,161,162 $ 1,069,051
========== ========== ============= ============
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments (non-U.S. government
securities) $ 14,628,778 $ 4,633,699 $ 15,372,426 $ 4,871,185
============= ============ ============= ============
Sales
- ----------
Investments (non-U.S. government
securities) $ 13,012,489 $ 2,561,525 $ 13,452,258 $ 4,574,155
============= ============ ============= ============
</TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by each Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 624,151 $ 552,605 $ 2,467,904 $1,245,767
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 99,721 $ 77,886 $ 310,563 $ 163,961
Gross unrealized depreciation (3,780) (6,434) (34,424) (4,055)
------------ ---------- ------------ ----------
Net unrealized appreciation $ 95,941 $ 71,452 $ 276,139 $ 159,906
============ ========== ============ ==========
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 1,823,392 $2,379,678 $ 2,151,232 $3,115,308
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 215,761 $ 128,745 $ 427,647 $ 687,707
Gross unrealized depreciation (42,969) (177,600) (62,297) (85,659)
------------ ---------- ------------ ----------
Net unrealized appreciation
(depreciation) $ 172,792 $ (48,855) $ 365,350 $ 602,048
============ ========== ============ ==========
</TABLE>
(5) Shares of Beneficial Interest
Each 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
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
--------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 46,967 $ 474,750 50,444 $ 504,497 59,769 $ 808,314
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- 8,292 106,552
Shares reacquired (5,651) (56,185) (178) (1,847) (56,691) (726,457)
------ ---------- ------ ---------- ------ ----------
Net increase 41,316 $ 418,565 50,266 $ 502,650 11,370 $ 188,409
====== ========== ====== ========== ====== ==========
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 28,321 $ 354,214 46,587 $ 483,036 145,874 $ 1,462,123
Shares issued to
shareholders in
reinvestment of
distributions 1,898 23,074 -- -- -- --
Shares reacquired (38,910) (473,850) (5,579) (56,315) (25,934) (255,253)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) (8,691) $ (96,562) 41,008 $ 426,721 119,940 $ 1,206,870
====== ========== ====== ========== ======= ============
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 78,193 $ 811,064 80,611 $ 941,341
Shares issued to
shareholders in
reinvestment of
distributions -- -- 21,566 241,330
Shares reacquired (7,834) (79,182) (160,079) (1,817,353)
------ ---------- ------- -----------
Net increase
(decrease) 70,359 $ 731,882 (57,902) $ (634,682)
====== ========== ======= ===========
<CAPTION>
Class A Shares
PERIOD ENDED AUGUST 31, 1996*
---------------------------------------------------------------------------------------------
CORE GROWTH FUND EQUITY INCOME FUND SPECIAL OPPORTUNITIES FUND
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 56,000 $ 605,756 44,072 $ 449,397 198,828 $ 2,038,964
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (338) (4,083) (947) (10,110) (1) (14)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) 55,662 $ 601,673 43,125 $ 439,287 198,827 $ 2,038,950
====== ========== ====== ========== ======= ============
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 24,471 $ 246,209 5,555 $ 55,341 113,207 $ 1,465,484
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (3,957) (46,799) -- -- (6,150) (90,631)
------ ---------- ----- --------- ------- ------------
Net increase 20,514 $ 199,410 5,555 $ 55,341 107,057 $ 1,374,853
====== ========== ===== ========= ======= ============
*For the period from the commencement of investment operations, January 2, 1996, through August 31, 1996.
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 65,078 $ 836,895 144,634 $ 1,452,530 100,754 $ 1,010,565
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (4) (52) (30,396) (299,497) (7,389) (83,126)
------ ---------- ------- ------------ ------ ----------
Net increase 65,074 $ 836,843 114,238 $ 1,153,033 93,365 $ 927,439
====== ========== ======= ============ ====== ==========
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 164,633 $ 1,659,463 163,990 $ 1,857,489
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- --
Shares reacquired (34,025) (355,226) (14,760) (177,865)
------- ------------ ------- ------------
Net increase 130,608 $ 1,304,237 149,230 $ 1,679,624
======= ============ ======= ============
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
(6) Line of Credit
Each Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of each
Fund's 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 Fund for the year ended August 31, 1997, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6 $3 $3 $8 $2 $8 $1 $4
</TABLE>
(7) Restricted Securities
Each 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, 1997, the
Research International Fund owned the following restricted securities
(consisting of 1.53% of its net assets) which 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 brokers or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF
FUND/DESCRIPTION ACQUISITION SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Bank Handlowy Warsza 6/18/97 200 $ 2,162 $ 2,525
Hong Leong Finance Ltd. 1/15/96 3,000 11,940 5,855
Jarvis Hotels 6/21/96 - 7/02/96 10,900 30,014 27,378
-------
$35,758
=======
</TABLE>
(8) 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 the Funds have in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts for the Special
Opportunities Fund amounted to a net receivable of $175 with Deutschebank at
August 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Growth Fund,
MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS
Convertible Securities Fund, MFS New Discovery Fund, MFS Research International
Fund and MFS Science and Technology Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund (the Funds)
(eight of the portfolios constituting MFS Series Trust I) including the
schedules of portfolio investments as of August 31, 1997, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997, by correspondence with the custodian and
brokers or by 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
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund at August 31,
1997, and the results of their operations, the changes in their net assets, and
the financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) Core Growth Fund
MFS(R) Equity Income Fund
MFS(R) Special Opportunities Fund
MFS(R) Blue Chip Fund
MFS(R) Convertible SecuritiesFund
MFS(R) New Discovery Fund
MFS(R) Research InternationalFund
MFS(R) Science and Technology Fund
500 Boylston Street
Boston, MA02116-3741
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
INC-2 10/97 970
<PAGE> 489
MFS NEW DISCOVERY FUND
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION DATED
JANUARY 1, 1998
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
-------
<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 ............................................................ 0.90%
Rule 12b-1 Fees ............................................................ None
Other Expenses (after expense limitation)(1)(2) ............................ 0.25%
-------
Total Operating Expenses (after expense limitation)(2) ..................... 1.15%
</TABLE>
(1) 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."
(2) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed 0.25%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be 1.85%
and 2.75%, respectively. See "Other Information" below.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $12
3 years......................... 37
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
-1-
<PAGE> 490
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
- ---------------------------------------------------------------------------------
<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 ### $ 1.01
Net realized and unrealized gain on investments 2.07
-----------
Total from investment operations $ 3.08
-----------
Net asset value - end of period $ 13.08
-----------
Total return 30.80%++
Ratios (to average net assets)/Supplemental data ###:
Expenses 1.50%+
Net investment income 12.65%+
Portfolio turnover 887%
Average commission rate $ 0.0250
Net assets at end of period (000 omitted) $ 1,494
</TABLE>
- --------------------------
* For the period from the inception of Class I shares, January 2, 1997,
through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
### The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived by
the Fund and/or if actual expenses had been over/under this limitation,
the net investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $ 0.92
Ratios (to average net assets):
Expenses## 2.52%+
Net investment income 11.63%+
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
-2-
<PAGE> 491
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor in
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 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 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 I shares are offered
at net asset value without an initial sales charge or CDSC and are not subject
to a distribution or service fee. Class C shares and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
-3-
<PAGE> 492
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 sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12-b-1
fees, taxes, extraordinary expenses, brokerage and transactions costs and class
specific expenses, do not exceed 0.25% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
-4-
<PAGE> 493
PROSPECTUS
JANUARY 1, 1998
MFS(R) NEW DISCOVERY CLASS A SHARES OF BENEFICIAL INTEREST
FUND CLASS B SHARES OF BENEFICIAL INTEREST
(A member of the MFS Family of Funds(R)) CLASS C SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS New Discovery Fund (the "Fund"), a diversified
series of MFS Series Trust I (the "Trust"). The investment objective of the 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. The minimum initial investment generally is $1,000 per account
(see "Information Concerning Shares of the Fund -- 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.
(continued on next page)
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.
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> 494
(continued from previous page)
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, 1998, 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 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). The SEC maintains an Internet World Wide Web site at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................ 3
2. Condensed Financial Information............................ 5
3. The Fund................................................... 5
4. Investment Objective and Policies.......................... 6
5. Certain Securities and Investment Techniques............... 7
6. Additional Risk Factors.................................... 14
7. Management of the Fund..................................... 17
8. Information Concerning Shares of the Fund.................. 19
Purchases.............................................. 19
Exchanges.............................................. 25
Redemptions and Repurchases............................ 27
Distribution Plan...................................... 29
Distributions.......................................... 32
Tax Status............................................. 32
Net Asset Value........................................ 33
Expenses............................................... 33
Description of Shares, Voting Rights and Liabilities... 34
Performance Information................................ 34
9. Shareholder Services....................................... 35
Appendix A -- Waivers of Sales Charges..................... A-1
</TABLE>
2
<PAGE> 495
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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................ 0.90% 0.90% 0.90%
Rule 12b-1 Fees................ 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses (after expense
limitation)(4)(5)............ 0.25% 0.25% 0.25%
---- ---- ----
Total Operating Expenses (after
expense limitation)(5)....... 1.50% 2.15% 2.15%
</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 "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)
0.35% per annum of the average daily net assets attributable to 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 (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. (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) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed 0.25% per annum of the
Fund's average daily net
3
<PAGE> 496
assets during the current fiscal year. Otherwise, "Other Expenses" for Class
A, Class B and Class C shares would be 1.85%, per annum, respectively and
"Total Operating Expenses" for Class A, Class B and Class C shares would be
3.10%, 3.75% and 3.75%, respectively. (See "Information Concerning Shares of
the Fund -- Expenses" below.)
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) (1)
1 year................................... $ 72 $62 $22 $32 $22
3 years.................................. 102 97 67 67 67
</TABLE>
- ---------------
(1) Assumes no redemption.
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.
4
<PAGE> 497
2. CONDENSED FINANCIAL INFORMATION
The following information 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 inception of Class A Shares on January 2, 1997 to August 31,
1997, Class B and Class C shares of the Fund were not available for sale.
FINANCIAL HIGHLIGHTS
NEW DISCOVERY FUND
<TABLE>
<CAPTION>
CLASS A
----------------
PERIOD ENDED
AUGUST 31, 1997*
----------------
<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 sec......................................... $ 0.98
Net realized and unrealized gain on investments................... 2.09
-------
Total from investment operations...................................... $ 3.07
-------
Net asset value -- end of period...................................... $ 13.07
=======
Total return.......................................................... 30.70%++
Ratios (to average net assets)/Supplemental data sec.:
Expenses.......................................................... 1.50%+
Net investment income............................................. 12.41%+
Portfolio turnover.................................................... 887%
Average commission rate............................................... $0.0250
Net assets at end of period (000 omitted)............................. $ 536
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from the inception of Class A Shares on January 2, 1997, through
August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
ss. The Adviser voluntarily agreed to maintain the expenses of the Fund at not more
than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for
the period indicated. If these fees had not been waived by the investment
adviser, distributor and shareholder servicing agent and/or if actual expenses
had been over/under this limitation, the net investment income per share and the
ratios would have been:
Net investment income............................................ $ 0.89
Ratios (to average net assets)
Expenses##..................................................... 3.10%+
Net investment income.......................................... 10.81%+
</TABLE>
3. 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
5
<PAGE> 498
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 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 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.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. The Fund seeks to
achieve its objective by investing, under normal market conditions, at least 65%
of its total assets in companies that the Adviser believes offer superior
prospects for growth. Such securities may either be listed on securities
exchanges or traded in the over-the-counter markets and may be U.S. or foreign
companies. While companies in which the Fund invests may be of any size, such as
companies in a relatively early stage of development that offer the potential
for accelerated earnings or revenue growth (emerging growth companies), or
larger or more established companies whose rates of earnings growth are expected
to accelerate because of special factors, such as rejuvenated management, new
products, or structural changes in the economy, the Fund will generally invest
in companies with small market capitalizations relative to companies included in
the Standard & Poor's 500 Stock Index. 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
6
<PAGE> 499
usually necessary to become more widely recognized as growth companies. The Fund
seeks to maintain a portfolio weighted median capitalization of $2 billion or
less.
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 Standard & Poor's Rating Service ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating Co. ("Duff &
Phelps") 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).
The Fund may engage in short sales of securities which the Adviser expects to
decline in price (see "Certain Securities and Investment Techniques -- Short
Sales" below).
Consistent with its investment objective and policies described above, the Fund
may also invest up to, but not including, 20% of its net assets in foreign
securities which are not traded on a U.S. exchange (not including American
Depositary Receipts).
The Fund may engage in certain securities transactions and investment techniques
as described under the caption "Certain Securities and 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these securities transactions and
investment techniques can be found under the caption "Certain Securities and
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.
FIXED INCOME SECURITIES: Fixed income securities in which the 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: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made, based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is 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, retains sufficient oversight, focusing on
factors such as valuation, liquidity and availability of information. Investing
in Rule 144A securities could have the effect of decreasing the level of
7
<PAGE> 500
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 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. Government 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.
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). 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 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. In general, the 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, the Fund will segregate liquid assets
sufficient to cover its commitments. Although the fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
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
8
<PAGE> 501
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.
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 may be of any size, 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.
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 issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities, and
the source of its revenues and location of its assets. The issuer's principal
activities generally are deemed to be located in a particular country if: (a)
the security is issued or guaranteed by the government of that country or any of
its agencies, authorities or instrumentalities; (b) the issuer is organized
under the laws of, and maintains a principal office in, that country; (c) the
issuer has its principal securities trading market in that country; (d) the
issuer derives 50% or more of its total revenues from goods sold or services
performed in that country; or (e) the issuer has 50% or more of its assets in
that country.
9
<PAGE> 502
SHORT SALES: If the 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. The Fund will segregate liquid assets to cover its short
sale obligations. A Fund will not sell short securities whose underlying value
exceeds 40% of its net assets.
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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself, and could involve the loss of
all or a portion of the principal amount or interest on the investment.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
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.
10
<PAGE> 503
Swap agreements are sophisticated hedging instruments that typically involve a
small investment of cash relative to the magnitude of risks assumed or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline in value
if the counterparty's creditworthiness deteriorates. The Fund may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions. Swaps, caps, floors and collars are
highly specialized activities which involve certain risks.
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. However, the writing of
options constitutes only a partial hedge, up to the amount of the premium less
any transaction costs. 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
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
11
<PAGE> 504
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 under "Additional
Risk Factors" below 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."
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
12
<PAGE> 505
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 which require 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.
13
<PAGE> 506
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 "Certain Securities and Investment Techniques" in the SAI.
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 Fund 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 Fund is not
subject to restrictions on the maturities of the fixed income securities they
hold. The Fund's investments in fixed income securities with longer terms to
maturity are subject to greater volatility than the Fund's shorter-term
obligations.
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. 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.
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
14
<PAGE> 507
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.
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 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
15
<PAGE> 508
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.
LOWER RATED BONDS: The Fund may invest in fixed income securities, and may
invest in convertible securities, rated Baa by Moody's or BBB by S&P, Fitch or
Duff & Phelps 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.
The Funds may also invest up to 10% of its net assets in securities rated 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") to the extent described
above. These securities are considered speculative and, while generally
providing greater income than investments in higher rated securities, will
involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve greater
volatility of price (especially during periods of economic uncertainty or
change) than securities in the higher rating categories. However, since yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes and short-term corporate and industry developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates (although these lower rated fixed income
securities are also affected by changes in interest rates, the market's
perception of their credit quality, and the outlook for economic growth). In the
past, economic downturns or an increase in interest rates have, under certain
circumstances, caused a higher incidence of default by the issuers of these
securities and may do so in the future, especially in the case of highly
leveraged issuers. During certain periods, the higher yields on a Fund's lower
rated high yielding fixed income securities are paid primarily because of the
increased risk of loss of principal and income, arising from such factors as the
heightened possibility of default or bankruptcy of the issuers of such
securities. Due to the fixed income payments of these securities, a Fund may
continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and
16
<PAGE> 509
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.
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. 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 Conduct Rules
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). For the fiscal year ended August 31, 1997, the Fund had a
portfolio turnover rate of over 100%. Transaction costs incurred by the Fund and
the realized capital gains and losses of the Fund may be greater than a fund
with a lesser portfolio turnover rate. 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 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). Except
with respect to the fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the time of purchase or utilization of assets; a subsequent change
in circumstances will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated October 30, 1997. The Fund's portfolio manager is Brian
E. Stack, a Vice President of the Adviser. Mr. Stack has been the portfolio
manager of the Fund since the Fund's inception and 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. Under the
Advisory Agreement, the Adviser provides the Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions
17
<PAGE> 510
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 0.90% of the Fund's average daily net assets. Prior to November 1, 1997,
the Adviser waived its right to receive management fees from the Fund. On
October 30, 1997, shareholders of the Fund approved an increase in the Fund's
management fee from 0.75% per annum to 0.90% per annum pursuant to a new
investment advisory agreement.
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 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 $69.4
billion on behalf of approximately 2.7 million investor accounts as of November
30, 1997. As of such date, the MFS organization managed approximately $20.1
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $44.2 billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, 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
R. Bordewick, Jr., James O. Yost, Ellen Moynihan and Mark E. Bradley, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as the Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Fund.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an
18
<PAGE> 511
administrative fee up to 0.015% per annum of the Fund's average daily net
assets. This fee reimburses MFS for a portion of the costs it incurs to provide
such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
This Prospectus offers 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
PERCENTAGE OF: DEALER
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.
19
<PAGE> 512
PURCHASES SUBJECT TO A CDSC (but not an initial sales charge). In the following
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i) the
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds would be in an aggregate
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent (the
"MFS Participant Recordkeeping System"); (b) the plan establishes an account
with the Shareholder Servicing Agent on or after July 1, 1996; and (c) the
aggregate purchases by the retirement plan of Class A shares of the MFS
Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE 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; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder Servicing Agent; and (c) the
sponsoring organization demonstrates to the satisfaction of MFD that, at the
time of purchase, the employer has at least 200 eligible employees and the
plan has aggregate assets of at least $2,000,000.
20
<PAGE> 513
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
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" below 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any other
entity.
21
<PAGE> 514
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" below 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
22
<PAGE> 515
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 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 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.
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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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges should be
made for investment purposes only. The Fund and MFD each reserves the right to
reject or restrict any specific purchase or exchange request. In the event that
the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request by market timers or specifically
rejecting or otherwise restricting purchase and exchange requests by market
timers. In the event that any individual or entity is determined either by the
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that year.
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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 or arrange for the sale of
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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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
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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 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
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<PAGE> 519
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.
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
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<PAGE> 520
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 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 during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares) of Direct
Purchases may be redeemed without charge ("Free Amount"). Moreover, no CDSC is
ever assessed on additional shares acquired through the automatic reinvestment
of dividends or capital gain distributions ("Reinvested Shares"). Therefore, at
the time of redemption of a particular class, (i) any Free Amount is not subject
to the CDSC and (ii) the amount of the redemption equal to the then-current
value of Reinvested Shares is not subject to the CDSC, but (iii) any amount of
the redemption in excess of the aggregate of the then-current value of
Reinvested Shares and the Free Amount is subject to a CDSC. The CDSC will first
be applied
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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 or exchanges, 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
29
<PAGE> 522
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 Fund -- Distributor" in the SAI. The amount of the
distribution fee paid by the Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
OTHER COMMON FEATURES. Fees payable under the Distribution Plan are charged to,
and therefore reduce, income allocated to shares of the Designated Class. The
provisions of the Distribution Plan relating to operating policies as well as
initial approval, 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.
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<PAGE> 523
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 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 0.35%,
1.00% and 1.00%, per annum,
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respectively. Prior to November 1, 1997, MFD waived its right to receive
distribution and service fees for Class A shares.
DISTRIBUTIONS
The 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, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. If the Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options" below. Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. 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 (as well as the rate category or categories under which such gain is
taxable), 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. The Fund is also required in
certain circumstances to apply backup withholding at the rate of
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<PAGE> 525
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, 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 sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.25% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS,
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<PAGE> 526
which will be accomplished by the payment of an expense reimbursement fee by the
Fund to MFS computed and paid monthly at a percentage of its average daily net
assets for its then current fiscal year, with a limitation that immediately
after such payment the Fund's "Other Expenses" will not exceed the Maximum
Percentage. This expense reimbursement by the Fund to MFS terminates on the
earlier of the date on which payments made by the Fund equal the prior payment
of such reimbursable expenses by MFS or 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.
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
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<PAGE> 527
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, and purchased by, the public on
different dates (the class "inception date"). The calculation of total rate of
return for a class of shares which has a later class inception date than another
class of shares of the Fund is based both on (i) the performance of the Fund's
newer class from its inception date and (ii) the performance of the Fund's
oldest class from its inception date up to the class inception date of the newer
class. See the SAI for further information on the calculation of total rate of
return for share classes with different class inception dates 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, 1997, 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
35
<PAGE> 528
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").
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.
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
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<PAGE> 529
value of all holdings of Class A, Class B and Class C shares of that shareholder
in the MFS Funds or MFS Fixed Fund (a bank collective investment fund) reaches a
discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and 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).
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 business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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.
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<PAGE> 530
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, 1998, 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.
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APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B 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;
- 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.
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<PAGE> 532
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;
- 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.
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<PAGE> 533
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by Investments through certain dealers (including
registered investment advisers and financial planners) which have
established certain operational arrangements with MFD which include a
requirement that such shares be sold for the sole benefit of clients
participating in a "wrap" account, mutual fund Supermarket account or a
similar program under which such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE FOLLOWING
CIRCUMSTANCES:
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.
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<PAGE> 534
ESP PLANS AND SRO PLANS
- Distributions made on or after the ESP or SRO Plan participant has attained
the age of 59 1/2 years old.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed
payment of commissions with respect to the Initial Purchase and all
subsequent investments by the shareholder in the Eligible Funds subject to
such requirements as may be established from time to time by MFD (for a
schedule of the amount of commissions paid by MFD to the dealer on such
investments, see "Purchases -- Class A Shares -- Purchases subject to a
CDSC" in the Prospectus). The Eligible Funds are all funds included in the
MFS Family of Funds, except for Massachusetts Investors Trust,
Massachusetts Investors Growth Stock Fund, MFS Municipal Bond Fund, MFS
Municipal Limited Maturity Fund, MFS Money Market Fund, MFS Government
Money Market Fund and MFS Cash Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares is
waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code
of 1986, as amended) of the account value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the account owner if the shares
are held solely in the deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the account owner if shares
are held either solely or jointly in the disabled individual's name or in a
living trust for the benefit of the disabled individual (in which case a
disability certification form is required to be submitted to the
Shareholder Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions made under the
following circumstances:
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<PAGE> 535
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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<PAGE> 536
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
<TABLE>
<S> <C>
STOCK WORLD
- ----------------------------------------------------------- ---------------------------------------------------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging
Markets Equity Fund
Massachusetts Investors Growth Stock Fund
MFS(R) International Growth Fund(3)
MFS(R) Mark Emerging Growth Fund
MFS(R) International Growth and
MFS(R) Equity Income Fund Income Fund(4)
MFS(R) Growth Opportunities Fund MFS(R) World Asset Allocation Fund sm
MFS(R) Large Cap Growth Fund(1) MFS(R) World Equity Fund
MFS(R) Managed Sectors Fund MFS(R) World Governments Fund
MFS(R) Mid Cap Growth Fund(2) MFS(R) World Growth Fund
MFS(R) New Discovery Fund MFS(R) World Total Return Fund
MFS(R) Research Fund
NATIONAL TAX-FREE BOND
MFS(R) Research Growth and Income Fund ---------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Strategic Growth Fund
MFS(R) Municipal High Income Fund
MFS(R) Union StandardRegistration Mark Equity Fund
MFS(R) Municipal Income Fund
MFS(R) Value Fund
STATE TAX-FREE BOND
STOCK AND BOND ---------------------------------------------------------------
- ----------------------------------------------------------- Alabama, Arkansas, California, Florida,
MFS(R) Total Return Fund Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina,
MFS(R) Utilities Fund Pennsylvania, South Carolina, Tennessee,
Virginia, West Virginia
BOND
- ----------------------------------------------------------- MONEY MARKET
MFS(R) Bond Fund ---------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Money Market Fund
MFS(R) Government Securities Fund
MFS(R) Money Market Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
LIMITED MATURITY BOND
- ----------------------------------------------------------- (1) Formerly MFSRegistration Mark Capital Growth Fund.
MFS(R) Government Limited Maturity Fund (2) Formerly MFSRegistration Mark OTC Fund.
(3) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Limited Maturity Fund International Growth Fund.
(4) Formerly MFSRegistration Mark/Foreign & Colonial
MFS(R) Municipal Limited Maturity Fund International Growth and Income Fund.
</TABLE>
<PAGE> 537
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
<PAGE> 538
----------------
[MFS INVESTMENT MANAGEMENT Bulk Rate
WE INVENTED THE MUTUAL FUND LOGO] U.S. Postage
Paid
MFS
----------------
MFS(R) NEW DISCOVERY FUND
500 Boylston Street, Boston,MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial records
because it provides important facts
about your investment.
MND-1-1/98/252M
<PAGE> 539
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
<TABLE>
MFS(R) NEW DISCOVERY FUND STATEMENT OF
ADDITIONAL INFORMATION
(A member of the MFS Family of Funds(R)) January 1, 1998
- --------------------------------------------------------------------------------------------------
<CAPTION>
Page
----
<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
Certain Securities and Investment Techniques....................................... 2
3. Management of the Fund................................................................ 15
Trustees........................................................................... 15
Officers........................................................................... 16
Trustee Compensation Table......................................................... 16
Investment Adviser................................................................. 17
Administrator...................................................................... 17
Custodian.......................................................................... 17
Shareholder Servicing Agent........................................................ 17
Distributor........................................................................ 18
4. Portfolio Transactions and Brokerage Commissions...................................... 18
5. Shareholder Services.................................................................. 19
Investment and Withdrawal Programs................................................. 19
Exchange Privilege................................................................. 22
Tax-Deferred Retirement Plans...................................................... 22
6. Tax Status............................................................................ 23
7. Distribution Plan..................................................................... 24
8. Determination of Net Asset Value and Performance...................................... 25
9. Description of Shares, Voting Rights and Liabilities.................................. 28
10. Independent Auditors and Financial Statements......................................... 28
</TABLE>
MFS(R) NEW DISCOVERY FUND
A series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
This Statement of Additional Information, as amended or supplemented from time
to time (the "SAI"), sets forth information which may be of interest to
investors but which is not necessarily included in the Fund's Prospectus dated
January 1, 1998. 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> 540
1. DEFINITIONS
"Fund" -- MFS New Discovery 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, 1998, as
amended or supplemented
from time to time.
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," "Certain Securities and Investment Techniques" and "Additional Risk
Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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. Government 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 liquid assets sufficient to cover any commitments or
to limit any potential risk. Although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
2
<PAGE> 541
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.
SHORT SALES: The Fund 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
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.
The 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 Fund may 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. The 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 the 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 liquid assets
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.
3
<PAGE> 542
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 and could involve
the loss of all or a portion of the principal amount of the investment. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies. Indexed securities may be more volatile than the
underlying instrument itself and could involve the loss of all or a portion of
the principal amount of the investment.
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 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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the
4
<PAGE> 543
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 liquid assets. 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 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
5
<PAGE> 544
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.
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 liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets 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 liquid assets in a segregated account
with its custodian. Put and call options on stock indices may also be covered in
such other manner as may be in accordance with the rules of the exchange
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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.
"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 liquid assets 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
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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 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.
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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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets, in an amount
equal to the value of its commitments under Forward Contracts.
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 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 liquid assets in a segregated account with its custodian. The Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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
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<PAGE> 548
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 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
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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, 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 liquid assets 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
11
<PAGE> 550
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 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
12
<PAGE> 551
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 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.
RISKS OF INVESTING IN LOWER RATED BONDS -- The 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
13
<PAGE> 552
("S&P"), Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps Credit Rating
Co. ("Duff & Phelps"), 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.
The Funds may also invest in fixed income securities rated 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") 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.
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, 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 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
14
<PAGE> 553
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) and non-fundamental investment
policy (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 15% 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 10% 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; currently, the 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 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;
(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; or
(10) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of 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.)
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 and
Director (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; Colonial Insurance Company,
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (prior to
November, 1997)
Address: 21 Reid Street, Hamilton, Bermuda
15
<PAGE> 554
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 8/18/26)
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
Address: 36080 Shaker Blvd., Hunting Valley, 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
ELLEN MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (prior to September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (prior to September 1994)
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.
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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE RETIREMENT
FEES BENEFIT ESTIMATED TOTAL
FROM ACCRUED AS CREDITED TRUSTEE FEES
THE PART OF FUND YEARS OF FROM FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
<S> <C> <C> <C> <C>
Walter E. Robb, III.... $0 $0 6 $149,258
Marshall N. Cohan...... 0 0 6 149,258
Sir David Gibbons...... 0 0 6 136,508
Richard B. Bailey...... 0 0 6 247,168
Ward Smith............. 0 0 10 149,258
Abby M. O'Neill........ 0 0 7 123,758
Dr. Lawrence Cohn...... 0 0 16 136,508
J. Dale Sherratt....... 0 0 18 149,258
</TABLE>
- ---------------
(1) For the fiscal year ending August 31, 1997.
(2) Based upon normal retirement age (75).
(3) Information provided is provided for calendar year 1996. All Trustees served
as Trustees of 41 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $15 billion) except Mr.
Bailey, who served as Trustee of 81 funds within the MFS complex (having
aggregate net assets at December, 1996 of approximately $38.5 billion).
As of November 29, 1997, the Trustees and officers as a group owned less than 1%
of the Fund's shares, not including 205,908.97 Class I shares of the Fund (which
represent approximately 9.3% 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 29, 1997, Dain Bosworth, Inc., FBO Charles J. Vasilius, 11201
Linda Vista Drive, Lakwood, CO 80215-1239 was the owner of approximately 5.73%
of the outstanding Class A shares of the Fund; Donaldson, Lufkin & Jenrette
Securities Corporation, Inc., P.O. Box 2052, Jersey City, NJ 07303-2052 was the
owner of approximately 5.58% of the outstanding Class A shares of the Fund;
Merrill Lynch, Pierce, Fenner & Smith Inc., FBO its Customers, Attention: Fund
Administration, 4800 Deer Lake Drive East, 3rd Floor, Jacksonville, Florida
32246-6484 was the owner of approximately 11.71% and 17.39% of the outstanding
Class B and Class C shares of the Fund, respectively; and the MFS Defined
Contribution Plan, c/o Mark Leary, Massachusetts Financial Services, 500
Boylston Street, Boston, MA 02116-3740 was the owner of approximately 99.99% of
the outstanding Class I shares of the Fund.
16
<PAGE> 555
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 an
indirect 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 October 30, 1997 (the "Advisory
Agreement"). Under the Advisory Agreement, the Adviser provides the Fund with
overall investment advisory services. Subject to such policies as the Trustees
may determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading "Management
of the Funds."
For the period from the commencement of investment operations on January 2, 1997
to the Fund's fiscal year end of August 31, 1997, the Adviser waived its right
to receive management fees from the Fund.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until October 30, 1999 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period March 1, 1997 through
August 31, 1997, MFS received $132 under the 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 September 10, 1986 as
amended, (the "Agency Agreement") with the Trust. The Shareholder Servicing
Agent's responsibilities under the Agency Agreement include administering and
performing transfer agent functions and the keeping of records in connection
with the issuance, transfer and redemption of each class of shares of the Fund.
For these services, the Shareholder Servicing Agent will receive a fee
calculated as a percentage of the average daily net assets of the Fund at an
effective annual rate of 0.13%. In addition, the Shareholder Servicing Agent
will be reimbursed by the Fund for certain expenses incurred by the Shareholder
Servicing Agent on behalf of the Fund. The Custodian has contracted with the
Shareholder Servicing Agent to perform
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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
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. 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 inception date of Class A shares on January 2, 1997 to
the Fund's fiscal year end of August 31, 1997, 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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment 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.
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<PAGE> 557
Consistent with the foregoing primary consideration, the Conduct Rules 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 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
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $50,980 of commission business from the MFS Funds
to the Pershing Division of Donaldson Lufkin & Jenrette as consideration for the
annual renewal of certain publications provided by Lipper Analytical Securities
Corporation (which provides information useful to the Trustees in reviewing the
relationship between the Fund and the Adviser).
The Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. The Adviser sometimes uses evaluations resulting
from this effort as a consideration in the selection of brokers to execute
portfolio transactions.
The management fee of the Adviser will not be reduced as a consequence of the
Adviser's receipt of brokerage and research service. To the extent the Fund's
portfolio transactions are used to obtain brokerage and research services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid for such portfolio transactions, or for such portfolio transactions and
research, by an amount which cannot be presently determined. Such services would
be useful and of value to the Adviser in serving both the Fund and other clients
and, conversely, such services obtained by the placement of brokerage business
of other clients would be useful to the Adviser in carrying out its obligations
to the Fund. While such services are not expected to reduce the expenses of the
Adviser, the Adviser would, through use of the services, avoid the additional
expenses which would be incurred if it should attempt to develop comparable
information through its own staff.
For the period ended August 31, 1997, the Fund paid total brokerage commissions
of $22,001 on total transactions of $890,727.
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
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<PAGE> 558
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 shareholder or his dealer must inform
MFD that the Letter of Intent is in effect each time shares are purchased. The
shareholder makes no commitment to purchase additional shares, but if his
purchases within 13 months (or 36 months in the case of purchases of $1 million
or more) plus the value of shares credited toward completion of the Letter of
Intent do not total the sum specified, he will pay the increased amount of the
sales charge as described below. Instructions for issuance of shares in the name
of a person other than the person signing the Letter of Intent application must
be accompanied by a written statement from the dealer stating that the shares
were paid for by the person signing such Letter. Neither income dividends nor
capital gain distributions taken in additional shares will apply toward the
completion of the Letter of Intent. Dividends and distributions of other MFS
Funds automatically reinvested in shares of the Fund pursuant to the
Distribution Investment Program will also not apply toward completion of the
Letter of Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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
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<PAGE> 559
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 shareholder may deposit into
the account additional shares of the Fund, change the payee or change the dollar
amount of each payment. The Shareholder Servicing Agent may charge the account
for services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if 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,
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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 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);
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- - 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
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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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 without regard to the length of time shareholders have held
their shares. Such capital gains may be taxable to shareholders that are
individuals, estates or trusts at maximum rates of 20%, 25%, or 28%, depending
on the source of the gain. 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 certain securities purchased at a market discount will cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those securities. In order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box," and swaps and related
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transactions will be subject to special tax rules that may affect the amount,
timing and character of Fund income and distributions to shareholders. For
example, certain positions held by the Fund on the last business day of each
taxable year will be marked to market (i.e., treated as if closed out) on that
day, and any gain or loss associated with the positions will be treated as 60%
long-term and 40% short term capital gain or loss. Certain positions held by the
Fund that substantially diminish its risk of loss with respect to other
positions in its portfolio may constitute "straddles," and may be subject to
special tax rules that would cause deferral of Fund losses, adjustments in the
holding periods of Fund securities and conversion of short-term into long-term
capital losses. Certain tax elections exist for straddles 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. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each taxable year. This election may cause the
Fund to recognize income prior to the receipt of cash payments with respect to
those investments; in order to distribute this income and avoid a tax on the
Fund, the Fund may be required to liquidate portfolio securities that it might
otherwise have continued to hold. Investment income received by the Fund from
foreign securities may be subject to foreign income taxes withheld at the
source; the 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 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% (or any lower rate permitted
under an applicable treaty) on dividends and other payments to Non-U.S. Persons
that are subject to such withholding. 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 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
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<PAGE> 563
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 inception date of Class A shares on January 2, 1997,
to the fiscal year ended August 31, 1997, distribution and service fees for
Class A shares under the Distribution Plan were not imposed.
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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;
Martin Luther King Day; Presidents' Day; Good Friday; Memorial Day; Independence
Day; Labor Day; Thanksgiving Day and Christmas Day.) This determination is made
once each day as of the close of regular trading on the Exchange by deducting
the amount of the liabilities attributable to the class from the value of the
assets attributable to the class and dividing the difference by the number of
shares of the class outstanding. Equity securities in the Fund's portfolio are
valued at the last sale price on the exchange on which they are primarily traded
or on the Nasdaq stock market 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 stock
market 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 stock market 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
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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) 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, and purchased by, the public on different dates (the "Class Inception
Date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
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, 1997 (class inception date) through the fiscal year ended August
31, 1997 was 24.48% (including the effect of sales charges) and 30.70% (without
the effect of sales charges). Class B and C shares were not available for sale
during this period. The aggregate total rate of return for Class I shares of the
Fund during the period was 30.80%.
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.
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
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<PAGE> 565
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 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(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.
-- 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.
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-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and twelve 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). Of the twelve other series of the Trust, all offer Class A and Class B
shares, eleven offer Class C shares and eleven offer Class I shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders. The
Trust reserves the right to create and issue a number of series and additional
classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
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, 1997, the Statement of Operations for the period from January 2, 1997
(commencement of investment operations) to August 31, 1997, the Statement of
Changes
28
<PAGE> 567
in Net Assets for the period from January 2, 1997 (commencement of investment
operations) to August 31, 1997, 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.
29
<PAGE> 568
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) NEW DISCOVERY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
MND-13-11/97/500
<PAGE> 569
<PAGE>
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
ANNUAL REPORT
AUGUST 31, 1997
o MFS(R) CORE GROWTH FUND
o MFS(R) EQUITY INCOME FUND
o MFS(R) SPECIAL OPPORTUNITIES FUND
o MFS(R) BLUE CHIP FUND
o MFS(R) CONVERTIBLE SECURITIES FUND
o MFS(R) NEW DISCOVERY FUND
o MFS(R) RESEARCH INTERNATIONAL FUND
o MFS(R) SCIENCE AND TECHNOLOGY FUND
[Graphic Omitted]
<PAGE>
<TABLE>
<S> <C>
MFS(R) CORE GROWTH FUND MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) EQUITY INCOME FUND MFS(R) NEW DISCOVERY FUND
MFS(R) SPECIAL OPPORTUNITIES FUND MFS(R) RESEARCH INTERNATIONAL FUND
MFS(R) BLUE CHIP FUND MFS(R) SCIENCE AND TECHNOLOGY FUND
Trustees
A. Keith Brodkin* - Chairman and President SECRETARY
Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
State Street Bank and Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Ernst & Young LLP
Brigham and Women's Hospital; Professor of Surgery,
Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
The Hon. Sir J. David Gibbons, KBE - Chief Executive 1-800-637-4458 anytime from a touch-tone telephone.
Officer, Edmund Gibbons Ltd.; Chairman, Bank of
N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
Abby M. O'Neill - Private Investor; Director, Rockefeller 1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Financial Services, Inc. (investment advisers) Eastern time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, Benchmark INVESTOR SERVICE
Advisors, Inc. (corporate financial consultants); President, MFSService Center, Inc.
Benchmark Consulting Group, Inc. (office services); P.O. Box 2281
Trustee, Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice President, Director For general information, call toll free: 1-800-225-2606
and Secretary, Massachusetts Financial Services Company any business day from 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call toll free:
Massachusetts Financial Services Company 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
J. Dale Sherratt - President, Insight Resources, Inc. equipped with a Telecommunications Device for the Deaf.)
(acquisition planning specialists)
For share prices, account balances, and exchanges, call toll
Ward Smith - Former Chairman (until 1994), NACCO free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
Industries; Director, Sundstrand Corporation touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO] For the fourth year in a row, MFS
Distributor earned a #1 ranking in the DALBAR, Inc.
MFS Fund Distributors, Inc. Broker/Dealer Survey, Main Office Operations
500 Boylston Street Service Quality Category. The firm achieved a
Boston, MA 02116-3741 3.42 overall score on a scale of 1 to 4 in the
1997 survey. A total of 111 firms responded,
PORTFOLIO MANAGERS* offering input on the quality of service they
Irfan Ali received from 29 mutual fund companies
John F. Brennan, Jr. nationwide. The survey contained questions
Mitchell D. Dynan about service quality in 11 categories,
Judith Noelle Lamb including "knowledge of operations contact,"
Robert J. Manning "keeping you informed," and "ease of doing
Lisa B. Nurme business" with the firm.
Kevin R. Parke
Stephen Pesek
Brian E. Stack
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*AFFILIATED WITH THE INVESTMENT ADVISER
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule
out the possibility of future monetary tightening in the second half of the
year if, as we now expect, the economy strengthens during the balance of 1997.
Therefore, our risk/reward outlook for the fixed-income markets is neutral,
and we believe that fixed-income investors should think in terms of earning
the coupon income from their investments rather than seeking possible gains
from price appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEWS
MFS Core Growth Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 45.22%, and Class I shares returned 45.31%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
Four general themes best describe the Fund's current holdings, which are built
from the bottom up based on individual stock selection. First, the Fund seeks
companies with high unit sales growth that can support above-average revenue
growth. Second, the Fund looks for companies that 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 seem able to
control their own destinies through internal changes such as 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 that, in our opinion, have the potential to benefit from a fundamental
mismatch in the balance between supply and demand.
Positions in several industry sectors have been added to the Fund or have been
increased in recent months, including drug store chains, in which we expect to
see growth as the population ages, and entertainment companies, in which
consolidations are continuing. We have also increased the Fund's holdings in the
oil service sector, which is benefiting from a mismatch in supply and demand, as
well as in package delivery companies, which are capitalizing on the strong
economy and wage pressures at United Parcel Service.
/s/ Stephen Pesek
Stephen Pesek
Portfolio Manager
MFS Equity Income Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 38.05%, and Class I shares returned 37.95%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500.
The Fund's top holdings remain in the financial services, utilities, energy, and
industrial goods and services sectors. Within financial services, the Fund
remains heavily weighted in insurance stocks, in which restructuring and
consolidation are leading to improved returns and better valuations. The Fund's
utility holdings are concentrated in gas distribution companies, high-quality,
low-cost electric utilities, and well-positioned local and long-distance
telephone companies. Essentially, the Fund is seeking to invest in companies
that we believe are well insulated from heightened competition and/ or companies
that may benefit from continuing consolidation in these industries. The energy
sector remains a key one for the Fund, especially those companies that are
dedicated to increasing production, cutting costs, and improving returns in
lagging businesses such as refining. Pollution control is a growing portion of
the Fund's holdings in industrial goods and services. This industry has
underperformed the market for several years but is now refocusing on its core
business, embracing cost cutting, and allocating capital more carefully.
The Fund continues to seek holdings in companies that we believe provide
attractive dividend yields and reasonable valuations, characteristics that we
feel could provide protection against price declines in a volatile market.
/s/ Lisa B. Nurme
Lisa B. Nurme
Portfolio Manager
MFS Special Opportunities Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 31.84%, and Class I shares returned 32.23%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500 and to a 15.55% return for
the average high-yield corporate bond fund as tracked by CDA/ Wiesenberger, an
independent firm that reports mutual fund performance.
The Fund continues to have the majority of its assets in common stocks because
we have found few attractive investments in the distressed and high-yield
markets. The Fund's investment strategy continues to incorporate both growth
and value disciplines. We have found investment opportunities in companies
that have recently emerged from bankruptcy, companies with financially
leveraged capital structures but with strong cash flow and solid earnings
prospects, and companies with attractive growth prospects but with valuations
that don't fully reflect these prospects. Our overall stock market perspective
continues to be cautious; however, we have been able to find an adequate
number of special situations for investment. The weighting of high-yield and
distressed bonds is likely to increase as more-appealing investment ideas
become available.
/s/ John F. Brennan, Jr. /s/ Robert J. Manning
John F. Brennan, Jr. Robert J. Manning
Portfolio Manager Portfolio Manager
MFS Blue Chip Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
17.70%. These returns, which include the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 22.91% return for the S&P
500 for the same period.
The Fund's investment strategy continues to be predicated on the assumption that
the global economy will grow slowly during 1998 and that U.S. interest rates
will remain fairly stable. In the United States, this assumption is supported by
the longevity of the current economic recovery and the high levels of consumer
debt. Economic growth remains moderate in a good part of Europe. Double-digit
unemployment rates in France (in addition to tax increases) and Germany should
prevent these economies from accelerating. Japan is weak, and economic growth in
other Asian countries could slow as interest rates rise.
The Fund is positioned relatively defensively, with the bulk of its investments
in companies that we believe can sustain double-digit earnings growth in a
slow-growth environment. Earnings ultimately drive stock prices, and investors
will bid up the share prices of companies that can achieve above-average
earnings growth.
The Fund's holdings are diverse and spread across many industries. However,
consistent with this defensive posture, the Fund continues to be overweighted in
the consumer staples and health care sectors. Conversely, the Fund is
significantly underweighted in basic materials and automobiles and housing. The
industrial goods sector is overweighted but aerospace and defense companies have
been emphasized. We believe this sector should perform relatively well in a
slow-growth economy. Similarly, the retail weighting is greater than the
market's, but all of this is in supermarkets and drug stores. The financial
services sector is overweighted, with an emphasis on high-quality regional banks
and insurance companies. The weightings in energy and utilities and
communications approximate those of the market, with the primary energy holdings
being large multinational oil companies. While the utility holdings offer modest
price appreciation, they are viewed as the ballast in the portfolio and
contribute to the Fund's yield. Emphasis has also been placed on companies that
have significant recurring revenue streams and/or that participate in dynamic,
high-growth markets. Examples would be First Data, DST Systems, and Service
Corporation International. For the same reasons, the bulk of the Fund's
technology investments are in the software industry.
/s/ Mitchell D. Dynan
Mitchell D. Dynan
Portfolio Manager
MFS Convertible Securities Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 14.70%, while its
Class I shares returned 14.60%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 15.98%
return for the Merrill Lynch All Convertibles Index, an unmanaged index of
convertible securities, and to a 14.48% return for the average convertible
securities fund for the same period as tracked by Lipper Analytical Services,
Inc., an independent firm that reports mutual fund performance.
The Fund is taking an extremely defensive posture due to the stock market's
current high valuation and its increased volatility in order to preserve
capital. Convertible securities comprise 80% of the portfolio, versus the
required 65% minimum. Increased demand for the convertible asset class has led
to a more expensive convertible market, as illustrated by the aggressive pricing
of new issues. In response, the portfolio is skewed toward convertibles that are
technically cheap; that is, those whose price movements correlate well with
upward price movements in the underlying common stock and that have
above-average yield.
The Fund's overall strategy is to invest in companies that we believe are
benefiting from one or more of the following trends: industry consolidation,
market dominance, and cost containment. Performance was favorably impacted by
overweightings in industrial goods and services companies, including Browning
Ferris, Corning, and U.S. Filter; leisure companies, which included American
Radio Systems and Royal Caribbean Cruises; financial services companies such as
Frontier Insurance and MGIC Investment Corp.; and technology companies,
including Baan and Data General. Conversely, companies in the basic materials
sector, such as RMI Titanium and Titanium Metals, detracted from year-to-date
performance. A value-oriented approach will continue to be used to evaluate
company fundamentals and the technical aspects of convertible securities.
/s/ Judith Noelle Lamb
Judith Noelle Lamb
Portfolio Manager
MFS New Discovery Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 30.70%, while its
Class I shares returned 30.80%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 17.97%
return for the Russell 2000 Total Return Index, an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks that are traded on
the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
The Fund invests principally in the shares of emerging companies that we believe
have the potential to grow into large enterprises. We maintain significant
weightings in the technology, health care, lodging, media, and business and
information services industries. We regard these as fundamentally attractive
sectors within which innovative and well-managed companies can be expected to
experience sustainable unit and earnings growth well above that seen in the
broader economy.
Among the factors contributing to the Fund's favorable performance were gains in
the shares of Summit Design, a provider of electronic design and automation
software, and Idexx Laboratories, a manufacturer of veterinary diagnostics
equipment and consumables. In addition, advances were recorded by broadcasters
American Radio Systems and Jacor Communications. The portfolio also benefited
from appreciation in the shares of Affiliated Computer Services and in high- end
hotel operators such as Wyndham, Renaissance, and Doubletree hotels.
Our research efforts continue to identify many attractively valued, emerging
growth companies that we believe can deliver exceptional long-term returns.
This, coupled with a market backdrop that suggests the potential for renewed
interest in smaller-company shares, makes us optimistic about performance
prospects for the year ahead.
/s/ Brian E. Stack
Brian E. Stack
Portfolio Manager
MFS Research International Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
9.60%. These returns, which assume the reinvestment of distributions but exclude
the effects of any sales charges, compare to a 4.39% return for the Morgan
Stanley Capital International EAFE (Europe, Australia, Far East) Index, an
unmanaged index of international stocks.
The top five sectors in the Fund are financial services (at 14.8% of assets),
technology (12.1%), utilities and communications (11.8%), leisure (11.0%), and
industrial goods and services (9.3%). The three top holdings are Nippon
Broadcasting, Secom, and Canon. Nippon Broadcasting is the world's largest radio
network operating company and has held the top audience ratings in Japan for the
past 22 years. We believe the company can continue to increase earnings by 10%
to 15% per year over the next several years. Secom holds a dominant 60% market
share of the electronic security market in Japan and holds over a 70% market
share through subsidiaries in Korea, Taiwan, Thailand, Malaysia, and Singapore.
We expect Canon's underlying operating growth to be at 12% in the coming year.
The company's valuation is currently cheap for a quality growth company.
In the technology sector, Sony's new digital product launches and strong product
pipeline continue to offer the company significant opportunity, while its new
management's compensation is directly tied to the company's performance. Through
major distributors in Europe and Japan, Sony Pictures will soon exploit the
3,400 movie titles it has in its motion picture bank. As a result, we expect
operating profits to grow at an average of over 20% over the next couple of
years.
Within the financial services sector, several banks and insurance companies in
Hong Kong, Great Britain, France, and Japan continue to demonstrate good
earnings growth that, coupled with substantial cost savings, should yield
excellent results.
The Fund is based upon the international research analysts' best ideas within
their industries. Stocks are selected after careful, in-depth, fundamental
analysis of companes' earnings outlooks. Although each analyst incorporates
general economic forecasts into his or her decision-making process, ultimately,
stocks selected for the Fund represent companies that the analysts believe offer
the best possibilities for capital appreciation regardless of the economic
outlook. These companies typically demonstrate dominant and/or growing market
share, quality new and existing products, superior management teams, and strong
financial statements. Sector and industry weightings are a result of the "best
ideas" stock-selection process. However, the analysts revisit weightings
regularly to assure agreement within the changing economic landscape. We will
continue to use a bottom-up, fundamental approach to investing in companies for
the Fund.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The committee of MFS equity research analysts is responsible for the day-to-
day management of the Fund under the general supervision of Mr. Parke.
MFS Science and Technology Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
25.30%. These returns, which assume the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 23.44% return for the
NASDAQ Composite Index, an unmanaged index of common stocks traded on NASDAQ,
and to a 19.78% return for the average technology fund as tracked by CDA/
Wiesenberger, an independent firm that reports mutual fund performance.
The Fund continues to seek companies that we believe are fast growing, have
market share leadership, and have a defensible strategic position. Holdings
remain focused in the computer software, networking, business services, and
semiconductor areas. To date, the Fund has not made significant investments in
the health care sector.
The Fund's performance has been favorably impacted by stock selection and by a
generally strong technology market. The volatility of the technology sector has
also provided attractive buying opportunities during times of price weakness.
Top holdings include Oracle Systems, Microsoft, and Computer Associates
International. All three of these stocks have seen outstanding price
appreciation driven by a healthy industry environment and by each management's
ability to deliver superior financial results. We believe the outlook for the
technology sector remains highly attractive, while the outlook for the health
care sector should start to improve.
/s/ Irfan Ali
Irfan Ali
Portfolio Manager
<PAGE>
PORTFOLIO MANAGERS' PROFILES
Each portfolio manager has acted in that capacity since the commencement of
investment operations of each Fund.
MFS CORE GROWTH FUND
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.
MFS EQUITY INCOME FUND
Lisa B. 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.
MFS SPECIAL OPPORTUNITIES FUND
John F. Brennan, Jr., has been a member of the MFS investment staff since 1985.
A graduate of the University of Rhode Island and the Stanford University
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 in 1995.
Robert J. 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 the
Boston College Graduate School of Management, he was named Vice President
Investments in 1988 and Senior Vice President in 1993.
MFS BLUE CHIP FUND
Mitchell D. Dynan joined the MFS Research Department in 1986. A graduate of
Tufts University, he was named Assistant Vice President - Investments in 1987
and Vice President - Investments in 1988.
MFS CONVERTIBLE SECURITIES FUND
Judith Noelle Lamb joined MFS in 1992 as Vice President and analyst
specializing in convertible securities. She is a graduate of New York
University and the New York University Graduate School
of Business.
MFS NEW DISCOVERY FUND
Brian E. Stack joined the MFS Research Department as Vice President Investments
in 1993. A graduate of Boston College and the Darden School of Business at the
University of Virginia, he has worked as an equity analyst since 1987.
MFS RESEARCH INTERNATIONAL FUND
The committee of MFS equity research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Kevin R. Parke. A
graduate of Lehigh University and the Harvard University Graduate School of
Business Administration, Mr. Parke joined the MFS Research Department in 1985 as
an industry specialist and was named Assistant Vice President - Investments in
1987, Vice President - Investments in 1988, Senior Vice President in 1993,
Director of Equity Research in 1995, and Executive Vice President in 1997.
MFS SCIENCE AND TECHNOLOGY FUND
Irfan Ali joined MFS in 1993 as an industry specialist. A graduate of Harvard
College and the Harvard University Graduate School of Business Administration,
he was named Assistant Vice President in 1996 and Vice President in 1997.
<PAGE>
INVESTMENT OBJECTIVES
MFS CORE GROWTH FUND
The objective of the Fund 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 that 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).
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS EQUITY INCOME FUND
The primary objective of the Fund is reasonable income and the secondary
objective is 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.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
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 that represent uncommon value by having the potential
for significant capital appreciation over a period of 12 months or longer.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS BLUE CHIP FUND
The objective of the 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 that the Fund's investment
adviser believes have above-average capital appreciation potential. The Fund may
invest up to 35% of its total assets in other securities (including emerging
growth companies) offering an opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS CONVERTIBLE SECURITIES FUND
The objective of the 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 nonconvertible corporate and U.S.
government fixed-income securities, equity securities, and money market
instruments. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS NEW DISCOVERY FUND
The objective of the 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 that the Fund's manager believes offer superior
prospects for growth. The Fund 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.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS RESEARCH INTERNATIONAL FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies whose principal activities are located outside the United States
and may invest up to 35% of its total assets in other securities offering an
opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS SCIENCE AND TECHNOLOGY FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies that the Fund's manager 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). The Fund may also invest up to 35%
of its total assets in other securities offering an opportunity for capital
appreciation. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
PERFORMANCE SUMMARY
Currently, each Fund offers only Class A and Class I shares, 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.
The information below and on the following page illustrates the historical
performance of the Funds' Class A shares in comparison to various market
indicators. Class A share performance results reflect no sales charge; benchmark
comparisons are unmanaged and do not reflect any fees or expenses. The
performance of other share classes will be greater than or less than the line
shown, based on differences in charges and fees paid by shareholders investing
in different classes. It is not possible to invest directly in an index.
MFS CORE GROWTH FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2,
1996, through August 31, 1997)
MFS Core S&P 500 Consumer
Growth Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 12,330 $ 10,745 $ 10,253
2/97 $ 15,303 $ 13,166 $ 10,405
8/97 $ 17,905 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class A) at net asset value +45.22% +41.95%
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class I) at net asset value +45.31% +42.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS EQUITY INCOME FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Equity S&P 500 Consumer
Income Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,070 $ 10,745 $ 10,253
2/97 $ 13,312 $ 13,166 $ 10,405
8/97 $ 15,282 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class A) at net asset value +38.05% +29.05%
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class I) at net asset value +37.95% +29.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS SPECIAL OPPORTUNITIES FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Special S&P 500 Consumer
Opportunities Fund Composite Price Index
- Class A Index - U.S.
------------------ --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,360 $ 10,745 $ 10,253
2/97 $ 12,789 $ 13,166 $ 10,405
8/97 $ 14,976 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MFS Special Opportunities Fund (Class A) at net asset value +31.84% +27.49%
- ------------------------------------------------------------------------------------
MFS Special Opportunities Fund (Class I) at net asset value +32.23% +27.72%
- ------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------------
Average high-yield corporate bond fund* +15.55% +13.22%
- ------------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class I shares, which became available on January 2, 1997, have no sales charge
or Rule 12b-1 fees and are only available to certain institutional investors.
Class I share results include the performance and the operating expenses of
Class A shares for periods prior to the commencement of offering of Class I
shares. Because operating expenses attributable to Class A shares are greater
than those of Class I shares, Class I share performance generally would have
been higher than Class A share performance. The Class A share performance
included within the Class I share performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
DIVIDENDS-RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE PERCENTAGE OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR THE FUNDS
WAS:
FUND DIVIDENDS-RECEIVED DEDUCTION
----------------------------------------------
MFS CORE GROWTH FUND 2.64%
MFS EQUITY INCOME FUND 21.37%
MFS SPECIAL OPPORTUNITIES FUND 4.84%
MFS BLUE CHIP FUND 48.57%
MFS CONVERTIBLE SECURITIES FUND 91.49%
MFS NEW DISCOVERY FUND 0.36%
MFS RESEARCH INTERNATIONAL FUND 0.04%
MFS SCIENCE AND TECHNOLOGY FUND 4.16%
FOREIGN TAX CREDIT
THE RESEARCH INTERNATIONAL FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY
11.8% OF ITS ORDINARY INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO
HAVE PAID FOREIGN TAXES EQUIVALENT TO APPROXIMATELY 1.1% OF ITS ORDINARY
INCOME.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CORE GROWTH FUND
Stocks - 96.2%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 90.9%
Aerospace - 0.6%
Thiokol Corp. 200 $ 15,925
- -------------------------------------------------------------------------------
Airlines - 0.5%
Continental Airlines Holdings, Inc.* 400 $ 14,650
- -------------------------------------------------------------------------------
Automotive - 0.5%
Hayes Wheels International, Inc.* 400 $ 13,000
- -------------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Comerica, Inc. 200 $ 14,163
Northern Trust Corp. 400 21,250
----------
$ 35,413
- -------------------------------------------------------------------------------
Business Machines - 2.1%
Affiliated Computer Services, Inc., "A"* 500 $ 13,125
Sun Microsystems, Inc.* 300 14,400
Texas Instruments, Inc. 275 31,247
----------
$ 58,772
- -------------------------------------------------------------------------------
Business Services - 3.1%
At Home Corp.* 100 $ 1,913
Computer Sciences Corp.* 350 26,031
Corporate Family Solutions, Inc.* 100 1,500
CUC International, Inc.* 1,200 28,200
Ikon Office Solutions, Inc. 800 20,800
Innova Corp.* 100 2,200
Lamalie Associates, Inc.* 100 1,900
Pierce Leahy Corp.* 100 2,725
----------
$ 85,269
- -------------------------------------------------------------------------------
Chemicals - 1.6%
Air Products & Chemicals, Inc. 300 $ 24,469
Ferro Corp. 500 18,813
----------
$ 43,282
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.7%
Microsoft Corp.* 150 $ 19,828
- -------------------------------------------------------------------------------
Computer Software - Systems - 8.0%
Aehr Test Systems* 100 $ 1,750
Aris Corp.* 100 2,450
BMC Software, Inc.* 300 18,788
Cadence Design Systems, Inc.* 600 28,538
Compaq Computer Corp.* 650 42,575
Computer Associates International, Inc. 500 33,438
Compuware Corp.* 550 33,963
Lear Corp.* 100 4,581
Oracle Systems Corp.* 900 34,313
Peritus Software Services, Inc.* 100 2,500
Synopsys, Inc.* 450 15,581
TSI International Software Ltd.* 100 1,225
----------
$ 219,702
- -------------------------------------------------------------------------------
Consumer Goods and Services - 7.5%
Colgate-Palmolive Co. 200 $ 12,550
Meyer Fred, Inc.* 400 20,800
Philip Morris Cos., Inc. 950 41,444
RJR Nabisco Holdings Corp. 550 19,147
Tyco International Ltd.* 1,440 112,950
----------
$ 206,891
- -------------------------------------------------------------------------------
Containers - 3.1%
AptarGroup, Inc. 350 $ 19,688
Corning, Inc. 550 29,081
Jefferson Smurfit Corp.* 700 13,606
Stone Container Corp. 1,300 22,425
----------
$ 84,800
- -------------------------------------------------------------------------------
Electrical Equipment - 0.5%
Westinghouse Electric Corp. 500 $ 12,875
- -------------------------------------------------------------------------------
Electronics - 7.7%
Altera Corp.* 350 $ 18,638
Analog Devices, Inc.* 500 16,563
Atmel Corp.* 700 24,762
Intel Corp. 600 55,275
International Rectifier Corp.* 600 13,688
KLA-Tencor Corp.* 200 14,175
Kulicke & Soffa Industries, Inc.* 600 27,563
Teradyne, Inc.* 750 41,766
----------
$ 212,430
- -------------------------------------------------------------------------------
Entertainment - 5.5%
American Radio Systems Corp., "A"* 650 $ 32,013
Clear Channel Communications, Inc.* 500 33,969
Gemstar Group Ltd.* 800 16,400
ITT Corp.* 250 15,703
LIN Television Corp.* 500 23,719
Univision Communications, Inc., "A"* 600 30,750
----------
$ 152,554
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
American Express Co. 325 $ 25,269
Associates First Capital Corp., "A" 200 11,613
Federal National Mortgage Assn. 500 22,000
Morgan Stanley, Dean Witter, Discover and Co. 300 14,438
----------
$ 73,320
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Archer-Daniels-Midland Co. 525 $ 11,353
Wrigley (Wm) Junior Co. 300 21,750
----------
$ 33,103
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Champion International Corp. 400 $ 23,675
- -------------------------------------------------------------------------------
Insurance - 5.5%
Chubb Corp. 225 $ 15,047
CIGNA Corp. 150 27,506
Conseco, Inc. 775 33,325
Frontier Insurance Group, Inc. 100 3,500
Hartford Life, Inc., "A" 100 3,731
Lincoln National Corp. 350 23,428
Nationwide Financial Services, Inc., "A" 100 2,775
Progressive Corp. 150 14,850
Reliastar Financial Corp. 250 18,688
Travelers Group, Inc. 150 9,525
----------
$ 152,375
- -------------------------------------------------------------------------------
Machinery - 0.1%
JLK Direct Distribution, Inc., "A"* 100 $ 2,413
- -------------------------------------------------------------------------------
Medical and Health Products - 6.8%
Arterial Vascular Engineering, Inc.* 600 $ 22,200
Boston Scientific Corp.* 400 28,200
Bristol-Myers Squibb Co. 400 30,400
McKesson Corp. 275 25,764
Mentor Corp. 1,000 30,750
Ocular Sciences, Inc.* 100 1,913
Schering Plough Corp. 960 46,080
Schick Technologies, Inc.* 100 2,650
----------
$ 187,957
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 5.0%
AmeriSource Health Corp. "A"* 600 $ 30,037
HEALTHSOUTH Corp.* 800 19,950
Mariner Health Group, Inc.* 300 4,350
Medtronic, Inc. 50 4,519
Orthalliance, Inc.* 100 1,388
St. Jude Medical, Inc.* 650 24,741
United Healthcare Corp. 840 40,845
Vencor, Inc.* 300 12,038
----------
$ 137,868
- -------------------------------------------------------------------------------
Office Equipment - 1.1%
Office Depot, Inc.* 1,600 $ 29,500
- -------------------------------------------------------------------------------
Oil Services - 4.0%
Trico Marine Services, Inc.* 400 $ 12,400
Baker Hughes, Inc. 200 8,475
Cal Dive International, Inc.* 100 3,400
Camco International, Inc. 250 17,219
Cooper Cameron Corp.* 300 19,463
Friede Goldman International, Inc.* 100 4,025
Noble Drilling Corp.* 800 22,750
Weatherford Enterra, Inc.* 500 23,031
----------
$ 110,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pollution Control - 0.9%
Republic Industries, Inc.* 500 $ 12,281
Waste Management, Inc. 400 12,800
----------
$ 25,081
- -------------------------------------------------------------------------------
Printing and Publishing - 0.7%
CMP Media, Inc.* 100 $ 2,675
Quipp, Inc.* 1,200 18,000
----------
$ 20,675
- -------------------------------------------------------------------------------
Railroads - 2.3%
Burlington Northern Santa Fe Railway Co. 225 $ 20,630
Kansas City Southern Industries, Inc. 200 14,975
Wisconsin Central Transportation Corp.* 900 27,900
----------
$ 63,505
- -------------------------------------------------------------------------------
Real Estate - 0.2%
Equity Office Properties Trust* 200 $ 5,838
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
Hilton Hotels Corp. 950 $ 29,153
Prime Hospitality Corp.* 500 9,500
Trendwest Resorts, Inc.* 100 1,825
----------
$ 40,478
- -------------------------------------------------------------------------------
Special Products and Services - 0.8%
Keystone International, Inc. 600 $ 22,613
- -------------------------------------------------------------------------------
Stores - 7.6%
CVS Corp. 800 $ 45,100
Dollar General Corp. 450 18,647
Linens 'N Things, Inc.* 450 13,050
Penney (J.C.), Inc. 400 24,000
Rite Aid Corp. 1,900 95,119
Viking Office Products, Inc.* 700 14,788
----------
$ 210,704
- -------------------------------------------------------------------------------
Telecommunications - 4.8%
3Com Corp.* 400 $ 19,975
Ascend Communications, Inc.* 250 10,609
Aspect Telecommunications Corp.* 1,200 26,400
Bay Networks, Inc.* 550 19,456
Cable Design Technologies Corp.* 500 16,719
Cisco Systems, Inc.* 250 18,844
Intermedia Communications, Inc.* 350 12,513
Qwest Communications International, Inc.* 200 8,150
----------
$ 132,666
- -------------------------------------------------------------------------------
Transportation - 1.3%
Caliber Systems, Inc. 500 $ 20,875
CNF Transportation, Inc. 400 14,450
----------
$ 35,325
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.7%
Sprint Corp. 400 $ 18,787
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,506,512
- -------------------------------------------------------------------------------
Foreign Stocks - 5.3%
Canada - 1.3%
Canadian National Railway Co. (Railroads) 500 $ 24,844
Coca-Cola Beverages Ltd. (Beverages)* 700 11,074
----------
$ 35,918
- -------------------------------------------------------------------------------
Ireland - 0.7%
Elan Corp. PLC, ADR (Health Products)* 450 $ 20,475
- -------------------------------------------------------------------------------
Netherlands - 0.6%
Akzo Nobel (Chemicals) 100 $ 15,466
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Kuoni Reisen Holdings AG (Transportation) 6 $ 24,620
- -------------------------------------------------------------------------------
United Kingdom - 1.8%
Danka Business Systems PLC, ADR (Business Services) 475 $ 22,206
British Petroleum PLC, ADR (Oil and Gas) 200 16,925
Grand Metropolitan PLC (Food and Beverage Products) 1,300 11,934
----------
$ 51,065
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 147,544
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,371,295) $2,654,056
- -------------------------------------------------------------------------------
Short-Term Obligation - 3.3%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 90 $ 89,987
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,461,282) $2,744,043
Other Assets, Less Liabilities - 0.5% 12,077
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,756,120
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS EQUITY INCOME FUND
Stocks - 89.3%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 78.1%
Aerospace - 3.9%
Allied Signal, Inc. 210 $ 17,338
General Dynamics Corp. 210 16,721
United Technologies Corp. 300 23,419
----------
$ 57,478
- -------------------------------------------------------------------------------
Agricultural Products - 1.1%
Case Corp. 240 $ 16,095
- -------------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Unifi, Inc. 390 $ 14,966
- -------------------------------------------------------------------------------
Automotive - 1.4%
Ford Motor Co. 200 $ 8,600
TRW, Inc. 240 12,510
----------
$ 21,110
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.6%
Bank of New York, Inc. 280 $ 12,495
CCB Financial Corp. 190 15,366
Comerica, Inc. 200 14,163
First Commerce Corp. 300 16,013
First Hawaiian, Inc. 350 12,906
National City Corp. 240 13,560
Northern Trust Corp. 250 13,281
PNC Bank Corp. 320 13,840
----------
$ 111,624
- -------------------------------------------------------------------------------
Business Machines - 1.1%
International Business Machines Corp. 160 $ 16,140
- -------------------------------------------------------------------------------
Cellular Telephones - 1.3%
Century Telephone Enterprises, Inc. 520 $ 18,883
- -------------------------------------------------------------------------------
Chemicals - 4.9%
Air Products & Chemicals, Inc. 260 $ 21,206
Dexter Corp. 200 7,600
Du Pont (E.I.) de Nemours & Co., Inc. 240 14,955
Ferro Corp. 380 14,298
Nalco Chemical Co. 370 14,800
----------
$ 72,859
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.5%
Meyer Fred, Inc.* 240 $ 12,480
Philip Morris Cos., Inc. 550 23,994
RJR Nabisco Holdings Corp. 240 8,355
Rubbermaid, Inc. 200 5,000
Tyco International Ltd. 200 15,687
----------
$ 65,516
- -------------------------------------------------------------------------------
Electrical Equipment - 3.3%
Cooper Industries, Inc. 320 $ 17,060
General Electric Co. 240 15,000
Hubbell, Inc. 350 16,056
----------
$ 48,116
- -------------------------------------------------------------------------------
Energy - 2.3%
Dresser Industries, Inc. 360 $ 15,030
Unocal Corp. 500 19,531
----------
$ 34,561
- -------------------------------------------------------------------------------
Financial Institutions - 1.7%
American Express Co. 150 $ 11,662
Union Planters Corp. 260 13,325
----------
$ 24,987
- -------------------------------------------------------------------------------
Food and Beverage Products - 3.2%
Archer-Daniels-Midland Co. 646 $ 13,970
General Mills, Inc. 80 5,130
Hormel Foods Corp. 480 14,280
Quaker Oats Co. 300 14,100
----------
$ 47,480
- -------------------------------------------------------------------------------
Food Products - 1.1%
Smucker (J.M.) Co. 650 $ 15,966
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.9%
Champion International Corp. 260 $ 15,389
Weyerhaeuser Co. 240 13,860
----------
$ 29,249
- -------------------------------------------------------------------------------
Insurance - 7.2%
Allstate Corp. 170 $ 12,421
Chubb Corp. 260 17,387
CIGNA Corp. 80 14,670
Conseco, Inc. 360 15,480
Hartford Financial Services Group, Inc. 150 11,963
Lincoln National Corp. 300 20,081
Torchmark Corp. 360 13,567
----------
$ 105,569
- -------------------------------------------------------------------------------
Medical and Health Products - 1.2%
Bristol-Myers Squibb Co. 240 $ 18,240
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
United Healthcare Corp. 140 $ 6,808
- -------------------------------------------------------------------------------
Oils - 5.2%
Atlantic Richfield Co. 180 $ 13,500
Chevron Corp. 220 17,036
Exxon Corp. 250 15,297
Texaco, Inc. 150 17,288
USX-Marathon Group 420 13,676
----------
$ 76,797
- -------------------------------------------------------------------------------
Pollution Control - 2.5%
Browning Ferris Industries, Inc. 490 $ 17,119
Waste Management, Inc. 600 19,200
----------
$ 36,319
- -------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.6%
Arden Realty, Inc. 240 $ 6,930
Boston Properties, Inc. 500 14,906
Kilroy Realty Corp. 300 7,669
Mid-America Apartment Communities, Inc. 480 13,170
Sovran Self Storage, Inc. 380 11,543
TriNet Corporate Realty Trust, Inc. 360 12,802
----------
$ 67,020
- -------------------------------------------------------------------------------
Stores - 3.1%
Longs Drug Stores Corp. 530 $ 13,415
Penney (J.C.), Inc. 340 20,400
Rite Aid Corp. 270 13,517
----------
$ 47,332
- -------------------------------------------------------------------------------
Supermarkets - 1.0%
Kroger Co.* 480 $ 14,460
- -------------------------------------------------------------------------------
Utilities - Electric - 4.7%
Cinergy Corp. 440 $ 14,547
FPL Group, Inc. 170 7,905
New Century Energies, Inc. 320 12,920
Pacificorp 420 8,715
Pinnacle West Capital Corp. 460 14,864
Sierra Pacific Resources 330 10,313
----------
$ 69,264
- -------------------------------------------------------------------------------
Utilities - Gas - 5.6%
Brooklyn Union Gas Co. 490 $ 14,792
Columbia Gas System, Inc. 200 13,200
Energen Corp. 300 10,819
National Fuel Gas Co. 300 13,331
Oneok, Inc. 420 13,597
UGI Corp. 630 16,459
----------
$ 82,198
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.2%
GTE Corp. 290 $ 12,923
Sprint Corp. 400 18,800
----------
$ 31,723
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,150,760
- -------------------------------------------------------------------------------
Foreign Stocks - 11.2%
Argentina - 0.5%
YPF Sociedad Anonima, ADR (Oils) 240 $ 7,815
- -------------------------------------------------------------------------------
Canada - 1.3%
Canadian National Railway Co. (Railroads) 390 $ 19,378
- -------------------------------------------------------------------------------
France - 2.1%
Alcatel Alsthom, ADR (Telecommunications) 560 $ 13,790
Elf Aquitaine, ADR (Oils) 320 17,840
----------
$ 31,630
- -------------------------------------------------------------------------------
Germany - 0.8%
Henkel Kgaa (Consumer Goods and Services) 250 $ 12,584
- -------------------------------------------------------------------------------
Italy - 0.4%
Eni S.p.A, ADR (Oils) 120 $ 6,660
- -------------------------------------------------------------------------------
Netherlands - 1.3%
Akzo Nobel (Chemicals) 120 $ 18,560
- -------------------------------------------------------------------------------
Switzerland - 1.0%
Novartis AG (Pharmaceuticals) 10 $ 14,122
- -------------------------------------------------------------------------------
United Kingdom - 3.8%
British Petroleum PLC, ADR (Oil and Gas) 333 $ 28,180
Grand Metropolitan (Food and Beverage Products) 1,550 14,229
SmithKline-Beecham PLC, ADR (Medical and Health
Products) 300 12,994
----------
$ 55,403
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 166,152
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,186,622) $1,316,912
- -------------------------------------------------------------------------------
Bonds - 0.8%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
U.S. Bonds - 0.8%
Automotive - 0.8%
Tower Automotive, Inc., 5s, 2004##
(Identified Cost, $10,000) $ 10 $ 10,800
- -------------------------------------------------------------------------------
Convertible Preferred Stocks - 5.3%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Aerospace - 0.6%
Loral Space & Communications Corp., 6s## 150 $ 8,025
- -------------------------------------------------------------------------------
Entertainment - 0.3%
Houston Industries, Inc., 7s 100 $ 5,075
- -------------------------------------------------------------------------------
Food Products - 0.7%
Ralston Purina Co., 7s, 2000 160 $ 9,530
- -------------------------------------------------------------------------------
Insurance - 0.8%
St. Paul Capital, 6s, 2025 180 $ 12,150
- -------------------------------------------------------------------------------
Medical and Health Technology Services- 0.8%
McKesson Financing Trust, 5s## 180 $ 12,375
- -------------------------------------------------------------------------------
Oils - 0.8%
Tosco Financing Trust, 5.75s## 190 $ 11,400
- -------------------------------------------------------------------------------
Utilities - Gas - 0.4%
Williams Cos., Inc., $3.50 Pref., 2049## 50 $ 5,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.9%
Salomon, Inc., 6.25s 250 $ 13,906
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $49,019) $ 77,961
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,245,641) $1,405,673
Other Assets, Less Liabilities - 4.6% 68,380
- -------------------------------------------------------------------------------
Net Assets - 100.0% $1,474,053
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SPECIAL OPPORTUNITIES FUND
Stocks - 86.2%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 76.5%
Aerospace - 5.6%
Allied Signal, Inc. 160 $ 13,210
B.E. Aerospace, Inc.* 3,500 124,250
Moog, Inc.* 1,600 58,200
Thiokol Corp. 300 23,887
----------
$ 219,547
- -------------------------------------------------------------------------------
Agricultural Products - 0.2%
AGCO Corp. 200 $ 6,500
----------
Apparel and Textiles - 0.2%
Reebok International Ltd. 200 $ 8,788
- -------------------------------------------------------------------------------
Automotive - 1.3%
Exide Corp. 2,500 $ 52,188
- -------------------------------------------------------------------------------
Banks and Credit Companies - 0.8%
Banc One Corp. 200 $ 10,725
Wells Fargo & Co. 76 19,323
----------
$ 30,048
- -------------------------------------------------------------------------------
Building - 4.4%
Newport News Shipbuilding, Inc. 300 $ 5,813
Nortek, Inc.* 3,000 75,375
Walter Industries, Inc.* 5,000 90,937
----------
$ 172,125
- -------------------------------------------------------------------------------
Business Machines - 1.4%
Compaq Computer Corp.* 875 $ 57,313
- -------------------------------------------------------------------------------
Business Services - 0.6%
Temple-Inland, Inc. 340 $ 21,930
- -------------------------------------------------------------------------------
Chemicals - 2.9%
Ferro Corp. 740 $ 27,842
NL Industries, Inc. 6,500 86,125
----------
$ 113,967
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.5%
Adobe Systems, Inc. 475 $ 18,703
- -------------------------------------------------------------------------------
Computer Software - Systems - 2.0%
Computer Associates International, Inc. 510 $ 34,106
Sybase, Inc.* 400 7,450
Synopsys, Inc.* 1,100 38,088
----------
$ 79,644
- -------------------------------------------------------------------------------
Conglomerates - 1.8%
MAXXAM, Inc.* 1,300 $ 71,500
- -------------------------------------------------------------------------------
Consumer Goods and Services - 13.0%
Darling International, Inc.* 2,300 $ 64,400
Meyer Fred, Inc.* 770 40,040
Philip Morris Cos., Inc. 870 37,954
Thermadyne Industries Holdings Corp.* 4,000 124,000
Tyco International Ltd.* 2,598 203,780
Westpoint Stevens, Inc.* 1,100 44,000
----------
$ 514,174
- -------------------------------------------------------------------------------
Containers - 4.3%
Atlantis Plastics, Inc.* 5,500 $ 32,312
Gaylord Container Corp.* 10,000 94,375
Jefferson Smurfit Corp.* 920 17,883
Stone Container Corp. 1,400 24,150
----------
$ 168,720
- -------------------------------------------------------------------------------
Electrical Equipment - 0.2%
Belden, Inc. 200 $ 7,750
- -------------------------------------------------------------------------------
Electronics - 1.0%
Atmel Corp.* 200 $ 7,075
Intel Corp. 65 5,988
Sony Corp. 50 4,406
Teradyne, Inc.* 370 20,605
----------
$ 38,074
- -------------------------------------------------------------------------------
Entertainment - 3.0%
American Radio Systems Corp., "A"* 802 $ 39,498
Casino America, Inc.* 1,100 3,025
Harrah's Entertainment, Inc.* 1,600 35,900
LIN Television Corp.* 350 16,603
Sodak Gaming, Inc.* 1,700 23,163
----------
$ 118,189
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Donaldson Lufkin & Jenrette, Inc. 320 $ 19,000
Federal Home Loan Mortgage Corp. 460 14,979
Union Planters Corp. 200 10,250
----------
$ 44,229
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.5%
Smith's Food & Drug Centers, Inc., "B"* 1,120 $ 61,320
- -------------------------------------------------------------------------------
Insurance - 3.5%
Chubb Corp. 400 $ 26,750
CIGNA Corp. 120 22,005
Conseco, Inc. 650 27,950
Hartford Financial Services Group, Inc. 250 19,938
Lincoln National Corp. 300 20,081
Reliastar Financial Corp. 310 23,172
----------
$ 139,896
- -------------------------------------------------------------------------------
Machinery - 0.3%
Greenfield Industries, Inc. 400 $ 10,550
- -------------------------------------------------------------------------------
Medical and Health Products - 0.6%
Bristol-Myers Squibb Co. 300 $ 22,800
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Integrated Health Services, Inc. 560 $ 18,480
St. Jude Medical, Inc.* 490 18,651
Tenet Healthcare Corp.* 700 19,075
United Healthcare Corp. 530 25,771
----------
$ 81,977
- -------------------------------------------------------------------------------
Metals and Minerals - 1.4%
Commonwealth Industries, Inc. 3,000 $ 57,375
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Dawson Production Services, Inc.* 2,100 $ 39,375
- -------------------------------------------------------------------------------
Oils - 1.3%
Enron Oil & Gas Co. 1,000 $ 24,125
Texaco, Inc. 220 25,355
----------
$ 49,480
- -------------------------------------------------------------------------------
Photographic Products - 1.4%
Anacomp, Inc.* 3,725 $ 56,806
- -------------------------------------------------------------------------------
Pollution Control - 0.7%
Waste Management, Inc. 900 $ 28,800
- -------------------------------------------------------------------------------
Railroads - 0.9%
Wisconsin Central Transportation Corp.* 1,140 $ 35,340
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.2%
Hilton Hotels Corp. 640 $ 19,640
Promus Hotel Corp.* 2,800 108,675
----------
$ 128,315
- -------------------------------------------------------------------------------
Special Products and Services - 1.0%
Keystone International, Inc. 1,100 $ 41,456
- -------------------------------------------------------------------------------
Stores - 6.0%
Arbor Drugs, Inc. 300 $ 7,163
Carson Pirie Scott & Co.* 1,800 63,900
CVS Corp. 700 39,462
Gantos, Inc.* 15,000 35,625
Gymboree Corp.* 220 5,390
Phar Mor, Inc.* 5,700 42,394
Rite Aid Corp. 850 42,553
----------
$ 236,487
- -------------------------------------------------------------------------------
Supermarkets - 2.0%
Ingles Markets, Inc. 3,900 $ 52,162
Safeway, Inc.* 512 26,080
----------
$ 78,242
- -------------------------------------------------------------------------------
Telecommunications - 3.8%
Cellular Communications International* 2,600 $ 93,600
HSN, Inc.* 1,775 58,575
----------
$ 152,175
- -------------------------------------------------------------------------------
Utilities - Electric - 1.1%
El Paso Electric Co.* 6,800 $ 42,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.4%
Sprint Corp. 370 $ 17,390
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 3,023,673
- -------------------------------------------------------------------------------
Foreign Stocks - 9.7%
Canada - 2.4%
Canadian National Railway Co. (Railroads) 810 $ 40,247
Gulf Canada Resources Ltd. (Oil Services)* 7,000 56,438
----------
$ 96,685
- -------------------------------------------------------------------------------
Hong Kong - 0.8%
Semi-Tech (Global) Ltd. (Electronics)* 21,000 $ 31,436
- -------------------------------------------------------------------------------
Japan - 0.7%
Canon, Inc., ADR (Special Products and Services) 145 $ 20,173
Sony Corp. (Electronics) 100 8,707
----------
$ 28,880
- -------------------------------------------------------------------------------
Netherlands - 0.3%
Akzo Nobel (Chemicals) 70 $ 10,826
- -------------------------------------------------------------------------------
Portugal - 0.4%
Banco Totta E Acores (Financial Institutions) 800 $ 14,351
- -------------------------------------------------------------------------------
South Korea - 0.2%
SK Telecom Ltd, ADR (Telecommunications)* 800 $ 7,200
- -------------------------------------------------------------------------------
Sweden - 0.3%
Sparbanken Sverige AB (Banks and Credit Cos.) 500 $ 10,821
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Novartis AG (Pharmaceuticals) 25 $ 35,305
- -------------------------------------------------------------------------------
United Kingdom - 3.7%
British Petroleum PLC, ADR (Oil and Gas) 422 $ 35,712
Central Transport Rental Group PLC, ADR (Special
Products and Services)* 48,187 33,129
Gallaher Group PLC, ADR
(Consumer Goods and Services)* 1,100 19,731
News Corp. Ltd., ADR (Entertainment) 2,900 43,863
Storehouse PLC (Retail)* 2,200 8,164
Tomkins PLC (Diversified Operations) 1,600 7,752
----------
$ 148,351
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 383,855
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,790,956) $3,407,528
- -------------------------------------------------------------------------------
Preferred Stock - 1.0%
- -------------------------------------------------------------------------------
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)* 22 $ 18,040
Supermarkets General Holdings Corp. (Supermarkets)* 1,100 22,275
- -------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $47,819) $ 40,315
- -------------------------------------------------------------------------------
Warrants - 0.6%
- -------------------------------------------------------------------------------
Gothic Energy Corp.* 30,000 $ 21,563
Peoples Choice TV Corp.* 45 0
Renaissance Cosmetics, Inc.* 20 2,000
Semi Tech Global* 2,100 509
- -------------------------------------------------------------------------------
Total Warrants (Identified Cost, $21,666) $ 24,072
- -------------------------------------------------------------------------------
Bonds - 1.7%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Automotive - 0.5%
Harvard Industries, Inc., 11.125s, 2005 $ 45 $ 18,900
- -------------------------------------------------------------------------------
Entertainment - 0.1%
Marvel Holdings, Inc., 0s, 1998 $ 30 $ 4,200
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.7%
Santa Fe Hotel, Inc., 11s, 2000 $ 35 $ 28,525
- -------------------------------------------------------------------------------
Telecommunications - 0.4%
Peoples Choice TV Corp., 13.125s, 2004 $ 45 $ 15,188
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $65,666) $ 66,813
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.8%
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $150 $ 149,978
- -------------------------------------------------------------------------------
Put Options Purchased - 0.7%
- -------------------------------------------------------------------------------
NUMBER OF CONTRACTS
- -------------------------------------------------------------------------------
Standard & Poor Index 500 Put (Identified Cost, $38,812) 4 $ 28,650
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $3,114,897) $3,717,356
- -------------------------------------------------------------------------------
Securities Sold Short - (3.2)%
- --------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Advanced Micro Devices, Inc.* (500) $ (18,719)
Arcadia Financial Ltd.* (1,800) (17,775)
Jayhawk Acceptance Corp.* (2,800) (3,325)
LCI International, Inc. (1,700) (40,800)
Station Casinos, Inc.* (2,300) (17,393)
Western Digital Corp.* (600) (28,875)
- -------------------------------------------------------------------------------
Total Securities Sold Short (Proceeds Received, $122,480) $ (126,887)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 9.2% 364,342
- -------------------------------------------------------------------------------
Net Assets - 100.0% $3,954,811
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS BLUE CHIP FUND
Stocks - 99.0%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 97.5%
Aerospace - 4.1%
General Dynamics Corp. 100 $ 7,963
Lockheed-Martin Corp. 150 15,553
United Technologies Corp. 80 6,245
----------
$ 29,761
- -------------------------------------------------------------------------------
Automotive - 1.0%
Goodrich (B.F.) Co. 170 $ 7,161
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.5%
Chase Manhattan Corp. 110 $ 12,231
Comerica, Inc. 145 10,268
Corestates Financial Corp. 140 8,610
National City Corp. 120 6,780
Norwest Corp. 120 6,892
U.S. Bancorp 110 9,632
----------
$ 54,413
- -------------------------------------------------------------------------------
Business Machines - 1.9%
International Business Machines Corp. 140 $ 14,122
- -------------------------------------------------------------------------------
Business Services - 3.3%
DST Systems, Inc.* 380 $ 13,751
First Data Corp. 250 10,266
----------
$ 24,017
- -------------------------------------------------------------------------------
Cellular Telephones - 1.0%
AirTouch Communications, Inc.* 220 $ 7,439
- -------------------------------------------------------------------------------
Chemicals - 3.3%
Air Products & Chemicals, Inc. 100 $ 8,156
Du Pont (E.I.) de Nemours & Co., Inc. 140 8,724
Praxair, Inc. 130 6,947
----------
$ 23,827
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.6%
Microsoft Corp.* 90 $ 11,897
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.7%
BMC Software, Inc.* 150 $ 9,393
Computer Associates International, Inc. 130 8,694
Oracle Systems Corp.* 240 9,150
----------
$ 27,237
- -------------------------------------------------------------------------------
Consumer Goods and Services - 11.0%
Avon Products, Inc. 100 $ 6,406
Colgate-Palmolive Co. 80 5,020
Gillette Co. 100 8,281
Philip Morris Cos., Inc. 330 14,396
Procter & Gamble Co. 70 9,315
Service Corp. International 300 9,600
Sherwin Williams Co. 200 5,488
Tyco International Ltd.* 275 21,570
----------
$ 80,076
- -------------------------------------------------------------------------------
Electrical Equipment - 3.2%
General Electric Co. 260 $ 16,250
Honeywell, Inc. 100 6,912
----------
$ 23,162
- -------------------------------------------------------------------------------
Electronics - 1.3%
Intel Corp. 100 $ 9,213
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Federal Home Loan Mortgage Corp. 235 $ 7,652
- -------------------------------------------------------------------------------
Food and Beverage Products - 8.3%
Coca-Cola Co. 140 $ 8,024
CPC International, Inc. 80 7,130
Hershey Foods Corp. 130 6,939
Interstate Bakeries Corp. 125 7,328
McCormick & Co., Inc. 330 7,796
Nabisco Holdings Corp. 170 7,055
PepsiCo, Inc. 190 6,840
Ralston-Ralston Purina Co. 100 9,000
----------
$ 60,112
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Kimberly-Clark Corp. 120 $ 5,693
- -------------------------------------------------------------------------------
Insurance - 8.0%
Allstate Corp. 140 $ 10,229
CIGNA Corp. 60 11,002
Hartford Financial Services Group, Inc. 120 9,570
MBIA, Inc. 100 11,325
Progressive Corp. 80 7,920
Torchmark Corp. 220 8,291
----------
$ 58,337
- -------------------------------------------------------------------------------
Medical and Health Products - 9.0%
American Home Products Corp. 120 $ 8,640
Bristol-Myers Squibb Co. 140 10,640
Johnson & Johnson 200 11,338
Lilly (Eli) & Co. 80 8,370
Merck & Co., Inc. 100 9,181
Pfizer, Inc. 310 17,166
----------
$ 65,335
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Cardinal Health, Inc. 100 $ 6,625
HEALTHSOUTH Corp.* 300 7,481
United Healthcare Corp. 160 7,780
----------
$ 21,886
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Schlumberger Ltd. 100 $ 7,619
- -------------------------------------------------------------------------------
Oils - 6.1%
Chevron Corp. 100 $ 7,744
Exxon Corp. 320 19,580
Mobil Corp. 140 10,185
Texaco, Inc. 60 6,915
----------
$ 44,424
- -------------------------------------------------------------------------------
Railroads - 1.3%
Burlington Northern Santa Fe 100 $ 9,169
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
HFS, Inc.* 200 $ 11,138
- -------------------------------------------------------------------------------
Stores - 2.4%
CVS Corp. 100 $ 5,637
Rite Aid Corp. 240 12,015
----------
$ 17,652
- -------------------------------------------------------------------------------
Supermarkets - 3.4%
Kroger Co.* 480 $ 14,460
Safeway, Inc.* 200 10,187
----------
$ 24,647
- -------------------------------------------------------------------------------
Utilities - Electric - 3.3%
Cinergy Corp. 210 $ 6,943
CMS Energy Corp. 160 5,750
Pinnacle West Capital Corp. 170 5,493
Public Service Co. of New Mexico 300 5,475
----------
$ 23,661
- -------------------------------------------------------------------------------
Utilities - Gas - 2.6%
Columbia Gas System, Inc. 110 $ 7,260
Pacific Enterprises 180 5,929
Union Pacific Resources Group, Inc. 220 5,500
----------
$ 18,689
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.8%
BellSouth Corp. 155 $ 6,820
SBC Communications, Inc. 125 6,797
Sprint Corp. 150 7,050
----------
$ 20,667
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 709,006
- -------------------------------------------------------------------------------
Foreign Stocks - 1.5%
United Kingdom - 1.5%
British Petroleum PLC, ADR (Oil and Gas)
(Identified Cost, $9,035) 131 $ 11,086
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $624,151) $ 720,092
Other Assets, Less Liabilities - 1.0% 7,397
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 727,489
- -------------------------------------------------------------------------------
* Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CONVERTIBLE SECURITIES FUND
Convertible Preferred Stocks - 50.8%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
Aerospace - 0.8%
Loral Space & Communications Corp., 6s## 100 $ 5,350
- -------------------------------------------------------------------------------
Airlines - 0.6%
Continental Airlines Finance Trust, 8.5s 50 $ 4,100
- -------------------------------------------------------------------------------
Chemicals - 0.4%
Atlantic Richfield Co., 9.01s 120 $ 2,850
- -------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
Wang Labs, Inc., 6.5s*## 50 $ 2,494
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.6%
Corning Delaware L.P., 6s 200 $ 16,600
- -------------------------------------------------------------------------------
Entertainment - 6.3%
American Radio Systems Corp., 7s*## 225 $ 14,681
Golden Books Financing Trust, 8.75s*## 200 10,500
Houston Industries, Inc./Time Warner, 7s* 100 5,075
Royal Caribbean Cruises Ltd., 7.25s 150 10,238
----------
$ 40,494
- -------------------------------------------------------------------------------
Financial Institutions - 8.6%
Finova Finance Trust, 5.5s, 2016 250 $ 15,500
Jefferson Pilot Corp., 7.25s, 2000 100 10,513
Merrill Lynch/MGIC Investment Corp., 6.5s 150 12,975
Merrill Lynch/IMC Global, 6.25s 150 5,606
Salomon/Financial Security Insurance, 7.625s 300 10,575
----------
$ 55,169
- -------------------------------------------------------------------------------
Food - 0.9%
Ralston Purina Interstate Bakeries, 7s* 100 $ 5,956
- -------------------------------------------------------------------------------
Food and Beverage Products - 2.5%
Dole Food, 7s 425 $ 16,150
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.4%
International Paper Capital Trust, 5.25s 150 $ 8,775
- -------------------------------------------------------------------------------
Insurance - 5.9%
American Heritage Life Investment, 8.5s* 100 $ 5,950
Conseco, Inc., 7s 100 14,556
Frontier Financing Trust, 6.25s*## 100 8,025
SunAmerica, Inc., $3.188 150 6,647
SunAmerica, Inc., $3.10 25 2,875
----------
$ 38,053
- -------------------------------------------------------------------------------
Machinery & Tools - 1.8%
Greenfield Capital Trust, 6s, 2016* 250 $ 11,812
- -------------------------------------------------------------------------------
Medical Equipment - 1.1%
McKesson Financing Trust, 5s## 100 $ 6,875
- -------------------------------------------------------------------------------
Metals and Minerals - 1.7%
Timet Capital Trust, 6.625s*## 100 $ 5,913
USX Marathon/RMI Titanium, 6.75s* 200 5,050
----------
$ 10,963
- -------------------------------------------------------------------------------
Oil & Gas - 1.9%
Tosco Financing Trust, 5.75s## 200 $ 12,000
- -------------------------------------------------------------------------------
Pollution Control - 2.6%
Browning Ferris Industries, Inc., 7.25s 500 $ 16,531
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.3%
Hilton Hotels Corp., 8s 100 $ 2,800
Host Marriott Financial Trust, 6.75s*## 300 18,450
----------
$ 21,250
- -------------------------------------------------------------------------------
Steel - 0.5%
AK Steel Holding Corp., 7s 75 $ 2,962
- -------------------------------------------------------------------------------
Stores - 1.6%
AnnTaylor Finance Trust, 8.5s*# 75 $ 4,406
K-Mart Financing I, 7.75s 100 5,894
----------
$ 10,300
- -------------------------------------------------------------------------------
Telecommunications - 1.0%
Intermedia Communication, Inc., 7s*## 100 $ 2,700
IXC Communications Inc., 7.25s*## 20 2,570
Qualcomm Financial Trust, 5.75s*## 25 1,116
----------
$ 6,386
- -------------------------------------------------------------------------------
Transportation - 0.6%
Hvide Capital Trust, 6.5s *## 60 $ 3,803
- -------------------------------------------------------------------------------
Utilities - Electric - 1.8%
Calenergy Capital Trust III, 6.5s*## 250 $ 11,750
- -------------------------------------------------------------------------------
Utilities - Gas - 0.9%
Enron Corp., 6.25s 250 $ 5,734
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
Salomon/Cincinnati Bell, 6.25s 175 $ 9,734
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $292,959) $ 326,091
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 Omitted)
- -------------------------------------------------------------------------------
Convertible Bonds - 27.5%
- --------------------------------------------------------------------------------
Aerospace - 1.4%
Hexcel Corp., 7s, 2003 $ 5 $ 9,287
- -------------------------------------------------------------------------------
Building - 0.3%
Continental Homes Holding Corp., 6.875s, 2002 $ 2 $ 2,248
- -------------------------------------------------------------------------------
Business Services - 1.6%
Protection One Alarm Monitoring, 6.75s, 2003 $ 9 $ 10,114
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.9%
Adaptec, Inc., 4.75s, 2004## $ 8 $ 9,240
Data General Corp., 6s, 2004## 6 9,413
Read Rite Corp., 6.5s, 2004 3 3,135
Wind River Systems Inc., 5s, 2002## 3 3,386
----------
$ 25,174
- -------------------------------------------------------------------------------
Electronics - 3.9%
Cymer, Inc., 3.5s (7.25s, 8/1/00), 2004## $ 6 $ 7,162
Photronics, Inc., 6s, 2004 2 2,545
Solectron Corp., 6s, 2006## 3 4,196
Xilinx, Inc., 5.25s, 2002## 10 11,225
----------
$ 25,128
- -------------------------------------------------------------------------------
Medical and Health Products - 0.3%
North American Vaccine, Inc., 6.5s, 2003## $ 2 $ 1,843
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.4%
FPA Medical Management, Inc., 6.5s, 2001## $ 5 $ 6,675
Healthsource, Inc., 5s, 2003 2 2,010
----------
$ 8,685
- -------------------------------------------------------------------------------
Oil Services - 3.9%
Diamond Offshore Drilling, Inc., 3.75s, 2007 $ 5 $ 6,525
Nabors Industries, Inc., 5s, 2006 3 6,015
Parker Drilling Co., 5.5s, 2004 6 6,540
Pogo Producing Co., 5.5s, 2006 5 5,906
----------
$ 24,986
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.5%
Dura Pharmaceuticals Inc., 3.5s, 2002 $ 3 $ 2,921
- -------------------------------------------------------------------------------
Pollution Control - 3.7%
Sanifill, Inc., 5s, 2006 $ 5 $ 7,856
U.S. Filter Corp., 6s, 2005 5 10,075
USA Waste Services, Inc., 4s, 2002 5 5,700
----------
$ 23,631
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.9%
Hilton Hotels Corp., 5s, 2006 $ 5 $ 5,675
- -------------------------------------------------------------------------------
Special Products and Services - 3.6%
Corporate Express, Inc., 4.5s, 2000 $ 10 $ 9,150
Personnel Group Of America Inc., 5.75s, 2004## 6 7,088
Sunrise Assisted Living Inc., 5.5s, 2002## 3 3,210
United States Office Products Company, 5.5s, 2001 3 3,697
----------
$ 23,145
- -------------------------------------------------------------------------------
Stores - 2.1%
Home Depot, Inc., 3.25s, 2001 $ 5 $ 5,800
Office Depot, Inc., 0s, 2008 5 2,988
Saks Holdings, Inc., 5.5s, 2006 5 4,337
----------
$ 13,125
- -------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $152,930) $ 175,962
- -------------------------------------------------------------------------------
Stocks - 14.4%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
U.S. Stocks - 12.8%
Aerospace - 0.6%
United Technologies Corp. 50 $ 3,903
- -------------------------------------------------------------------------------
Building - 0.7%
Newport News Shipbuilding, Inc. 220 $ 4,263
- -------------------------------------------------------------------------------
Chemicals - 0.2%
Du Pont (E.I.) de Nemours & Co., Inc. 25 $ 1,558
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
Colgate-Palmolive Co. 60 $ 3,765
Gillette Co. 60 4,969
Procter & Gamble Co. 25 3,326
Tyco International Ltd.* 48 3,765
----------
$ 15,825
- -------------------------------------------------------------------------------
Electrical Equipment - 0.4%
General Electric Co. 40 $ 2,500
- -------------------------------------------------------------------------------
Electronics - 1.1%
Intel Corp. 20 $ 1,843
Solectron Corporation* 50 2,094
Sony Corp. 35 3,084
----------
$ 7,021
- -------------------------------------------------------------------------------
Insurance - 0.6%
Hartford Life, Inc., "A"* 100 $ 3,731
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Bristol-Myers Squibb Co. 75 $ 5,700
Johnson & Johnson 50 2,835
McKesson Corp. 25 2,342
----------
$ 10,877
- -------------------------------------------------------------------------------
Oils - 0.7%
Devon Energy Corp. 100 $ 4,269
- -------------------------------------------------------------------------------
Pollution Control - 0.8%
Browning Ferris Industries, Inc. 100 $ 3,494
U.S. Filter Corp.* 50 1,800
----------
$ 5,294
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.2%
Hilton Hotels Corp. 50 $ 1,534
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
Stanley Works 100 $ 4,256
- -------------------------------------------------------------------------------
Stores - 0.6%
Rite Aid Corp. 75 $ 3,755
- -------------------------------------------------------------------------------
Telecommunications - 2.0%
IXC Communications Inc.* 50 $ 1,350
Lucent Technologies, Inc. 100 7,787
Qwest Communications International, Inc.* 100 4,075
----------
$ 13,212
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 81,998
- -------------------------------------------------------------------------------
Foreign Stocks - 1.6%
Sweden - 0.2%
Skandia Foersaekrings AB (Insurance) 40 $ 1,544
- -------------------------------------------------------------------------------
Switzerland - 0.7%
Novartis AG (Pharmaceuticals) 3 $ 4,237
- -------------------------------------------------------------------------------
United Kingdom - 0.7%
British Petroleum PLC, ADR (Oil and Gas) 50 $ 4,231
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 10,012
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $77,794) $ 92,010
- -------------------------------------------------------------------------------
Foreign Preferred Stocks - 1.6%
- -------------------------------------------------------------------------------
Australia - 1.6%
National Australia Bank Ltd., 7.875s Capital Unit
Exchangeable 350 $ 9,997
- -------------------------------------------------------------------------------
Total Foreign Preferred Stocks (Identified Cost, $8,750) $ 9,997
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -------------------------------------------------------------------------------
<PAGE>
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost$ 20 $ 19,997
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $552,430) $ 624,057
Other Assets, Less Liabilities - 2.6% 16,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 640,527
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS NEW DISCOVERY FUND
Stocks - 94.6%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 93.8%
Aerospace - 1.0%
Fairchild Corp.* 1,000 $ 21,063
- -------------------------------------------------------------------------------
Airlines - 0.5%
Atlas Air, Inc.* 400 $ 11,100
- -------------------------------------------------------------------------------
Business Machines - 2.3%
Affiliated Computer Services, Inc., "A"* 1,750 $ 45,937
- -------------------------------------------------------------------------------
Business Services - 17.8%
AccuStaff, Inc.* 1,500 $ 39,844
BDM International, Inc.* 500 12,625
BISYS Group, Inc.* 500 16,875
Claremont Technology Group, Inc.* 400 7,100
Comdisco, Inc. 450 12,234
Corporate Family Solutions, Inc.* 100 1,500
Dendrite International, Inc.* 600 11,325
Diamond Offshore Drilling, Inc. 300 16,388
Diamond Technology Partner, Inc.* 600 9,225
DST Systems, Inc.* 100 3,619
Fine Host Corp.* 200 6,950
First USA Paymentech, Inc.* 700 21,262
Interim Services, Inc.* 700 34,562
Learning Tree International, Inc.* 750 20,625
May and Speh, Inc.* 1,300 16,575
Mecon, Inc.* 3,000 15,000
NOVA Corp.* 1,000 25,375
Personnel Group of America, Inc.* 300 10,050
PMT Services, Inc.* 1,100 18,563
Robert Half International, Inc.* 200 11,675
Staff Leasing, Inc.* 100 1,975
Technology Solutions Co.* 525 12,206
TeleSpectrum Worldwide, Inc.* 2,100 9,581
Teletech Holdings, Inc.* 900 14,737
Transaction System Architects, Inc.* 300 10,388
----------
$ 360,259
- -------------------------------------------------------------------------------
Computer Software - Systems - 16.1%
Aehr Test Systems* 100 $ 1,750
American Business Information, Inc.* 500 13,687
Aspen Technology, Inc.* 300 10,238
Black Box Corp.* 220 8,003
Cadence Design Systems, Inc.* 685 32,580
Compuware Corp.* 450 27,787
Daou Systems, Inc.* 400 9,500
Data Systems Network Corp.* 2,500 39,062
Fair, Isaac & Co., Inc. 200 8,438
IKOS Systems, Inc.* 1,300 19,256
Intelligroup, Inc.* 100 1,488
Metromail Corp.* 700 15,225
Peerless Systems Corp.* 900 13,163
RWD Technologies, Inc.* 100 1,925
Simulation Sciences, Inc.* 2,100 29,662
Smart Modular Technologies, Inc.* 500 29,500
Summit Design, Inc.* 2,700 32,400
Synopsys, Inc.* 200 6,925
USCS International, Inc.* 650 11,619
Vantive Corp.* 200 6,100
Xionics Document Technologies, Inc.* 650 8,775
----------
$ 327,083
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.9%
Alternative Resources Corp.* 1,000 $ 22,375
Ballantyne of Omaha, Inc.* 800 15,600
Blyth Industries, Inc.* 100 3,694
Cole National Corp.* 100 4,456
Meta Group, Inc.* 400 8,350
Schweitzer-Mauduit International, Inc. 450 18,000
Silgan Holdings, Inc.* 650 26,650
----------
$ 99,125
- -------------------------------------------------------------------------------
Containers - 2.4%
AptarGroup, Inc. 200 $ 11,250
Gaylord Container Corp.* 1,900 17,931
Stone Container Corp. 1,100 18,975
----------
$ 48,156
- -------------------------------------------------------------------------------
Electrical Equipment - 1.3%
AFC Cable Systems, Inc.* 600 $ 18,000
QLogic Corp.* 200 7,850
----------
$ 25,850
- -------------------------------------------------------------------------------
Electronics - 5.5%
Actel Corp.* 600 $ 12,188
Burr Brown* 550 19,525
DuPont Photomasks, Inc.* 200 13,100
International Rectifier Corp.* 600 13,687
Microchip Technology, Inc.* 300 12,131
Photronic, Inc.* 100 5,900
PMC Sierra, Inc.* 700 20,081
SDL, Inc.* 900 15,975
----------
$ 112,587
- -------------------------------------------------------------------------------
Entertainment - 5.7%
American Radio Systems Corp., "A"* 300 $ 14,775
Cox Radio, Inc.* 900 24,075
Gemstar Group Ltd.* 1,100 22,550
Heftel Broadcasting Corp.* 200 12,400
Jacor Communications, Inc., "A"* 500 22,000
LIN Television Corp.* 400 18,975
----------
$ 114,775
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
BA Merchants Services, Inc.* 500 $ 9,156
Financial Federal Corp.* 900 14,119
Franklin Resources, Inc. 350 27,081
TCF Financial Corp. 100 5,331
----------
$ 55,687
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Smith's Food & Drug Centers, Inc., "B"* 150 $ 8,212
Suiza Foods Corp.* 400 16,500
----------
$ 24,712
- -------------------------------------------------------------------------------
Insurance - 2.7%
CapMAC Holdings, Inc. 300 $ 8,325
Compdent Corp.* 500 12,125
Equitable of Iowa Cos. 150 9,769
Hartford Life, Inc.,"A" 100 3,731
Life Re Corp. 400 20,525
----------
$ 54,475
- -------------------------------------------------------------------------------
Machinery - 1.4%
Greenfield Industries, Inc. 200 $ 5,275
Hirsch International Group* 900 22,950
----------
$ 28,225
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Phycor, Inc.* 150 $ 4,416
Rexall Sundown, Inc.* 500 17,375
Steris Corp.* 350 13,125
----------
$ 34,916
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 9.1%
AmeriSource Health Corp., "A"* 200 $ 10,013
CRA Managed Care, Inc.* 200 11,100
HCIA, Inc.* 700 10,850
Hologic, Inc.* 650 15,762
IDEXX Labs, Inc.* 1,300 24,456
IDX Systems Corp.* 300 10,163
NCS Healthcare, Inc.* 200 4,925
Orthalliance, Inc.* 100 1,388
Orthodontic Centers America, Inc.* 200 3,425
Physician Sales and Service, Inc.* 200 3,400
Physician Support Systems, Inc.* 1,200 20,250
Quorum Health Group, Inc.* 250 8,516
Renal Treatment Centers, Inc.* 500 16,937
Total Renal Care Holdings, Inc.* 300 13,725
United Dental Care, Inc.* 1,300 22,912
United Payors & United Providers, Inc.* 400 5,900
----------
$ 183,722
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Hanover Compressor* 100 2,363
----------
$ 5,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.3%
Kos Pharmaceuticals, Inc.* 200 $ 6,900
- -------------------------------------------------------------------------------
Printing and Publishing - 1.0%
Applied Graphics Technologies* 500 $ 20,625
- -------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Capstar Hotel Co.* 300 $ 9,825
Doubletree Corp.* 250 12,500
HFS, Inc.* 500 27,844
Interstate Hotels Co.* 750 21,469
Prime Hospitality Corp.* 850 16,150
Promus Hotel Corp.* 200 7,762
Roadhouse Grill, Inc.* 1,400 7,525
Trendwest Resorts, Inc.* 100 1,825
----------
$ 104,900
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
CHS Electronics, Inc.* 100 $ 3,863
Equity Corp. International* 450 10,378
----------
$ 14,241
- -------------------------------------------------------------------------------
Stores - 4.7%
AnnTaylor Stores Corp.* 500 $ 8,563
Corporate Express, Inc.* 600 10,237
CVS Corp. 400 22,550
Gymboree Corp.* 450 11,025
Mazel Stores, Inc.* 300 6,375
Petco Animal Supplies, Inc.* 400 11,850
PETsMART, Inc.* 600 5,138
U.S. Office Products Co.* 300 9,825
Viking Office Products, Inc.* 500 10,562
----------
$ 96,125
- -------------------------------------------------------------------------------
Telecommunications - 4.4%
APAC Teleservices, Inc.* 600 $ 9,900
Aspect Telecommunications Corp.* 1,800 39,600
Cable Design Technologies Corp.* 400 13,375
Intermedia Communications, Inc.* 400 14,300
Transaction Network Services, Inc.* 600 8,625
VDI Media* 300 4,275
----------
$ 90,075
- -------------------------------------------------------------------------------
Transportation - 0.1%
Carey International, Inc.* 100 $ 1,388
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.6%
Brooks Fiber Properties, Inc.* 350 $ 11,769
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,903,933
- -------------------------------------------------------------------------------
Foreign Stocks - 0.8%
Ireland - 0.1%
Warner Chilcott Laboratories* 100 $ 1,850
- -------------------------------------------------------------------------------
Mexico - 0.1%
TV Azteca, S.A. de C V (Broadcasting)* 100 $ 1,800
- -------------------------------------------------------------------------------
United Kingdom - 0.6%
News Corp. Ltd., ADR (Entertainment) 900 $ 13,612
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 17,262
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,742,794) $1,921,195
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.7%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97,
at Amortized Cost $ 75 $ 74,989
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,817,783) $1,996,184
Other Assets, Less Liabilities - 1.7% 33,679
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,029,863
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS RESEARCH INTERNATIONAL FUND
Stocks - 97.1%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 2.6%
Agricultural Products - 1.1%
AGCO Corp. 760 $ 24,700
- -------------------------------------------------------------------------------
Insurance - 0.5%
Equitable of Iowa Cos. 190 $ 12,374
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.0%
MCI Communications Corp. 865 $ 24,652
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 61,726
- -------------------------------------------------------------------------------
Foreign Stocks - 94.5%
Australia - 1.3%
Q.B.E. Insurance Group Ltd. (Insurance) 5,805 $ 31,338
- -------------------------------------------------------------------------------
Brazil - 0.8%
Telecomunicacoes Brasileiras SA, ADR
(Telecommunications) 152 $ 17,936
- -------------------------------------------------------------------------------
Canada - 1.6%
Canadian National Railway Co. (Railroads) 773 $ 38,408
- -------------------------------------------------------------------------------
Chile - 1.0%
Chilectra SA, ADR (Utilities - Electric) 785 $ 24,224
- -------------------------------------------------------------------------------
China - 0.4%
China Southern Airlines Ltd. (Airlines) 300 $ 9,431
- -------------------------------------------------------------------------------
Czech Republic - 1.1%
Tabak (Tobacco) 100 $ 25,187
- -------------------------------------------------------------------------------
Finland - 0.9%
Huhtamaki Oy Group (Food Company) 230 $ 9,081
TT Tieto Oy (Computer Software - Systems) 135 12,122
----------
$ 21,203
- -------------------------------------------------------------------------------
France - 5.2%
Chargeurs SA (Apparels and Textiles) 250 $ 14,779
Rhone-Poulenc SA (Pharmaceuticals)* 786 28,756
Societe Nationale Elf Aquitaine (Oils) 330 36,577
Televison Francaise (Broadcasting) 270 21,946
Union des Assurances Federales SA (Insurance) 190 19,655
----------
$ 121,713
- -------------------------------------------------------------------------------
Germany - 3.7%
Adidas AG (Apparel and Textiles) 96 $ 11,537
Henkel Kgaa (Consumer Goods and Services) 538 27,081
Phoenix AG (Auto Parts) 1,225 21,322
Prosieben Media AG (Broadcasting) 200 9,029
SAP AG, Preferred (Computer Software - Systems) 79 18,028
----------
$ 86,997
- -------------------------------------------------------------------------------
Greece - 2.1%
Athens Medical Care SA (Medical and Health Technology
and Services) 1,800 $ 17,260
Hellenic Telecommunication Organization SA
(Telecommunications) 880 19,520
Papastratos Cigarettes SA (Consumer Goods and
Services) 660 11,232
----------
$ 48,012
- -------------------------------------------------------------------------------
Hong Kong - 8.9%
Asia Satellite Telecommunications Holdings Ltd.
(Telecommunications)* 9,000 $ 25,087
Citic Pacific Ltd. (Conglomerates) 5,000 26,649
Dah Sing Financial Group (Banks and Credit Cos.) 2,600 $ 10,871
Hong Kong Electric Holdings Ltd. (Utilities -
Electric) 8,000 27,978
Hutchison Whampoa (Real Estate) 1,000 8,324
Ka Wah Bank (Bank and Credit Cos.) 1,000 2,446
Li & Fung Ltd. (Wholesale) 36,000 36,701
Liu Chong Hing Bank (Banks and Credit Cos.) 3,000 7,994
Vanda Systems & Communication Holdings Ltd.
(Computers Software - Systems) 44,000 24,984
Wharf Holdings Ltd. (Real Estate) 6,000 21,719
Wing Hang Bank Ltd. (Banks and Credit Cos.) 3,600 15,331
----------
$ 208,084
- -------------------------------------------------------------------------------
Indonesia - 0.5%
PT Indosat (Telecommunications) 500 $ 1,031
PT Indosat, ADR (Telecommunications) 270 5,856
PT Semen Gresik (Building Materials) 4,500 4,639
----------
$ 11,526
- -------------------------------------------------------------------------------
Ireland - 2.4%
Allied Irish Banks (Banks and Credit Cos.) 2,486 $ 20,989
Anglo Irish Bank Corp. (Banks and Credit Cos.) 16,800 23,957
Smurfit Jefferson (Paper/Plastic) 3,700 12,292
----------
$ 57,238
- -------------------------------------------------------------------------------
Italy - 3.3%
Gucci Group Designs NV (Apparel and Textiles) 304 $ 18,506
INA - Instituto Nazionale delle Assicurazioni
(Insurance) 8,225 11,980
Industrie Natuzzi S.P.A., ADR (Consumer Goods and
Services) 974 26,785
Telecom Italia S.P.A., Saving Shares
(Telecommunications) 12,235 20,416
----------
$ 77,687
- -------------------------------------------------------------------------------
Japan - 23.4%
Bank of Tokyo Mitsubishi (Banks and Credit Cos.) 1,000 $ 18,159
Bridgestone Corp. (Tire and Rubber) 1,000 22,139
Canon, Inc. (Special Products and Services) 2,000 55,224
DDI Corp. (Telecommunications) 3 15,672
Fuji Photo Film Co Ltd., ADR (Photographic Products) 600 22,950
Fujimi Inc. (Distribution Wholesale) 400 22,388
Hirose Electric Co. (Electronics) 100 7,007
Jusco Co. (Retail) 1,000 26,700
Keyence Corp. (Electronics) 110 16,053
Kinki Coca-Cola Bottling Co. (Beverages) 1,000 12,438
Kirin Beverage Corp. (Beverages) 2,000 32,338
Nippon Broadcasting (Broadcasting) 1,000 73,880
Nippon Telephone & Telegraph Co. (Utilities -
Telephone) 2 18,740
Osaka Sanso Kogyo Ltd. (Chemicals) 4,000 8,458
Secom Co. (Consumer Goods and Services) 1,000 71,061
Sony Corp. (Electronics) 300 26,119
Takeda Chemical Industries (Pharmaceuticals) 1,000 26,617
TDK Corp., ADR (Electronics) 680 52,955
Terumo Corp. (Computers) 1,000 18,242
----------
$ 547,140
- -------------------------------------------------------------------------------
Malaysia - 0.2%
UMW Holdings Berhad (Automobiles) 2,000 $ 5,377
- -------------------------------------------------------------------------------
Mexico - 1.0%
Companhia Cerveja Ria Brahma (Broadcasting) 1,400 $ 18,988
TV Azteca SA De CV (Television) 300 5,400
----------
$ 24,388
- -------------------------------------------------------------------------------
Netherlands - 5.1%
Ahrend Kon (Office Furnishers) 630 $ 20,557
Akzo Nobel (Chemicals) 160 24,746
Brunel International NV (Human Resources) 300 6,183
Computer Services (Computers) 2,000 19,038
Fugro NV (Engineering) 100 3,410
Philips Electronics NV (Manufacturing) 260 18,460
Royal Dutch Petroleum (Oils) 544 27,547
----------
$ 119,941
- -------------------------------------------------------------------------------
Peru - 0.9%
Telefonica del Peru SA, ADR (Telecommunications) 870 $ 20,336
- -------------------------------------------------------------------------------
Philippines - 0.2%
Alsons Cement Corp. (Building Materials)*## 41,500 $ 3,860
- -------------------------------------------------------------------------------
Poland - 0.3%
Bank Handlowy Warsza (Banks and Credit Cos.)+ 200 $ 2,525
Kghm Polska Miedz SA (Diversified - Metals)## 400 4,884
----------
$ 7,409
- -------------------------------------------------------------------------------
Portugal - 2.3%
Banco Espirito Santo e Comercial de Lisboa SA (Banks
and Credit Cos.) 500 $ 12,268
Banco Totta E Acores (Financial Institutions) 1,275 22,872
Telecel - Comunicacaoes Pessoais SA
(Telecommunication) 240 17,457
----------
$ 52,597
- -------------------------------------------------------------------------------
Singapore - 2.7%
City Developments Ltd. (Real Estate) 2,000 $ 12,637
Hong Leong Finance Ltd. (Finance)+ 3,000 5,855
Mandarin Oriental International, Ltd.
(Restaurants and Lodgings) 27,000 30,240
Singapore Land Ltd. (Conglomerates) 3,000 13,298
----------
$ 62,030
- -------------------------------------------------------------------------------
Spain - 1.0%
Abengoa SA (Construction)* 300 $ 13,260
Acerinox SA (Iron and Steel) 64 10,507
----------
$ 23,767
- -------------------------------------------------------------------------------
Sweden - 3.1%
Astra AB (Pharmaceuticals) 1,053 $ 16,726
Skandia Foersaekrings AB (Insurance) 705 27,214
Sparbanken Sverige AB (Banks and Credit Cos.) 1,271 27,508
----------
$ 71,448
- -------------------------------------------------------------------------------
Switzerland - 3.5%
Kuoni Reisen Holdings AG (Transportation) 9 $ 36,930
Novartis AG (Pharmaceuticals) 31 43,778
----------
$ 80,708
- -------------------------------------------------------------------------------
Taiwan - 1.6%
ASE Test Limited (Electronics) 500 $ 36,500
- -------------------------------------------------------------------------------
United Kingdom - 15.1%
ASDA Group PLC (Supermarkets) 9,401 $ 21,937
Bank of Scotland (Banks and Credit Cos.) 1,700 11,433
British Aerospace PLC (Aerospace and Defense) 1,486 34,772
British Petroleum PLC (Oil and Gas) 2,155 30,103
Carlton Communicatons PLC (Broadcasting) 2,660 21,165
Corporate Services Group (Business Services) 5,200 16,348
Grand Metropolitan (Food and Beverage Products) 2,910 26,714
Jarvis Hotels PLC (Restaurants and Lodging)*+ 10,900 27,378
JBA Holdings Diversified Operations) 900 12,397
Kwik-Fit Holdings PLC (Retail) 7,704 37,453
Lloyds TSB Group PLC (Banks and Credit Cos.) 2,382 27,445
PowerGen PLC (Utilities - Electric)* 2,113 26,708
Storehouse PLC (Retail)* 6,100 22,637
Tomkins PLC (Diversified Operations) 5,100 24,711
Williams Holdings (Diversified Operations) 2,200 12,424
----------
$ 353,625
- -------------------------------------------------------------------------------
Venezuela - 0.9%
Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telecommunications)* 509 $ 20,996
- -------------------------------------------------------------------------------
Total Foreign Stocks $2,209,106
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,318,693) $2,270,832
- -------------------------------------------------------------------------------
Short-Term Obligations - 2.6%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 60 $ 59,991
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,378,684) $2,330,823
Other Assets, Less Liabilities - 0.3% 5,265
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,336,088
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+Restricted security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SCIENCE AND TECHNOLOGY FUND
Stocks - 88.4%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 85.2%
Apparel and Textiles - 0.1%
Polo Ralph Lauren Corp.* 100 $ 2,625
- -------------------------------------------------------------------------------
Business Machines - 5.4%
Affiliated Computer Services, Inc., "A"* 1,880 $ 49,350
Compaq Computer Corp.* 200 13,100
Silicon Graphics, Inc.* 500 13,719
Sun Microsystems, Inc.* 1,240 59,520
----------
$ 135,689
- -------------------------------------------------------------------------------
Business Services - 6.1%
AccuStaff, Inc.* 2,180 $ 57,906
First Data Corp. 780 32,029
First USA Paymentech, Inc.* 1,320 40,095
Galieo International, Inc.* 100 2,644
Hall Kinion & Associates, Inc.* 100 2,137
Lamalie Associates, Inc.* 100 1,900
Teletech Holdings, Inc.* 1,000 16,375
----------
$ 153,086
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 14.0%
Activision, Inc.* 1,500 $ 19,500
Adobe Systems, Inc. 1,165 45,872
Autodesk, Inc.* 1,710 74,812
Electronic Arts, Inc.* 1,200 36,975
Microsoft Corp.* 1,000 132,187
Midway Games, Inc.* 960 20,280
Spectrum Holobyte, Inc.* 4,600 22,138
----------
$ 351,764
- -------------------------------------------------------------------------------
Computer Software - Services - 0.9%
Ingram Micro, Inc.* 750 $ 21,563
- -------------------------------------------------------------------------------
Computer Software - Systems - 32.5%
BMC Software, Inc.* 1,180 $ 73,897
Cadence Design Systems, Inc.* 2,831 134,649
Computer Associates International, Inc. 2,095 140,103
Compuware Corp.* 1,660 102,505
Engineering Animation, Inc.* 470 17,977
Great Plains Software, Inc.* 100 2,638
Oracle Systems Corp.* 3,480 132,675
Peoplesoft, Inc.* 660 37,125
Peritus Software Services, Inc.* 100 2,500
Rational Software Corp.* 1,010 16,665
Summit Design, Inc.* 4,400 52,800
Sybase, Inc.* 380 7,078
Synopsys, Inc.* 2,830 97,989
TSI International Software Ltd.* 100 1,225
----------
$ 819,826
- -------------------------------------------------------------------------------
Electronics - 5.1%
Atmel Corp.* 440 $ 15,565
Intel Corp. 340 31,322
Sony Corp. 250 22,031
Teradyne, Inc.* 900 50,119
Xilinx, Inc.* 200 9,500
----------
$ 128,537
- -------------------------------------------------------------------------------
Medical and Health Products - 2.0%
Bristol-Myers Squibb Co. 610 $ 46,360
Ocular Sciences, Inc.* 100 1,912
Schick Technologies, Inc.* 100 2,650
----------
$ 50,922
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.6%
Centennial Healthcare Corp.* 100 $ 2,012
HBO & Co. 1,085 77,713
Horizon CMS Healthcare Corp.* 700 14,394
Monarch Dental Corp.* 100 1,813
Oxford Health Plans, Inc.* 370 27,056
Pacificare Health Systems, Inc., "B"* 130 8,889
United Healthcare Corp. 1,240 60,295
----------
$ 192,172
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Domain Energy Corp.* 100 1,525
Hanover Compressor* 100 2,363
----------
$ 7,288
- -------------------------------------------------------------------------------
Printing and Publishing - 0.1%
CMP Media, Inc.* 100 $ 2,675
- -------------------------------------------------------------------------------
Stores - 0.2%
CVS Corp. 100 $ 5,638
- -------------------------------------------------------------------------------
Telecommunications - 9.3%
Ascend Communications, Inc.* 1,105 $ 46,893
Aspect Telecommunications Corp.* 2,770 60,940
Cabletron Systems, Inc.* 700 21,175
Cisco Systems, Inc.* 1,055 79,521
Lucent Technologies, Inc. 290 22,584
Qwest Communications International, Inc.* 100 4,075
----------
$ 235,188
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
MCI Communications Corp. 1,410 $ 40,185
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,147,158
- -------------------------------------------------------------------------------
Foreign Stocks - 3.2%
Germany - 1.7%
SAP AG, Preferred (Computer Software - Systems) 185 $ 42,217
- -------------------------------------------------------------------------------
Japan - 1.5%
Canon, Inc., ADR (Special Products and Services) 80 $ 11,130
Sony Corp. (Electronics) 300 26,120
----------
$ 37,250
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 79,467
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,850,603) $2,226,625
- -------------------------------------------------------------------------------
Short-Term Obligations - 11.5%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 290 $ 289,957
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,140,560) $2,516,582
Other Assets, Less Liabilities - 0.1% 2,168
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,518,750
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
AUGUST 31, 1997 FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost,
$2,461,282, $1,245,641 and $3,114,897,
respectively) $2,744,043 $1,405,673 $3,717,356
Cash 1,141 19,505 489
Deposit with brokers for securities sold short -- -- 95,437
Foreign currency, at value (identified cost, $0,
$0 and $4,055, respectively) -- -- 4,042
Receivable for Fund shares sold -- 50,000 --
Receivable for investments sold 37,779 6,595 262,105
Net receivable for foreign currency exchange
contracts closed or subject to master netting
agreements -- -- 175
Interest and dividends receivable 897 2,892 2,064
Receivable from investment adviser 10,414 -- 17,514
Deferred organization expenses 1,669 1,676 1,688
Other assets 1,288 -- --
---------- ---------- ----------
Total assets $2,797,231 $1,486,341 $4,100,870
---------- ---------- ----------
Liabilities:
Securities sold short, at value (proceeds
received, $0, $0 and $122,480, respectively) $ -- $ -- $ 126,887
Payable for investments purchased 29,934 10,405 5,991
Accrued expenses and other liabilities 11,177 1,883 13,181
---------- ---------- ----------
Total liabilities $ 41,111 $ 12,288 $ 146,059
---------- ---------- ----------
Net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Net assets consist of:
Paid-in capital $2,164,935 $1,179,568 $3,083,892
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 282,768 160,027 598,225
Accumulated undistributed net realized gain on
investments and foreign currency transactions 107,865 123,884 244,151
Accumulated undistributed net investment income 200,552 10,574 28,543
---------- ---------- ----------
Total $2,756,120 $1,474,053 $3,954,811
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 67,032 34,434 140,925
Class I 107,057 65,074 149,230
---------- ---------- ----------
Total shares of beneficial interest
outstanding 174,089 99,508 290,155
========== ========== ==========
Net assets:
Class A $1,060,643 $ 510,280 $1,919,478
Class I 1,695,477 963,773 2,035,333
---------- ---------- ----------
Total net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price
per share (net assets / shares of beneficial interest outstanding) $15.82 $14.82 $13.62
====== ====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $15.84 $14.81 $13.64
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $624,151,
$552,430 and $1,817,783, respectively) $ 720,092 $ 624,057 $1,996,184
Cash 6,338 3,982 33,748
Foreign currency, at value (identified cost, $0, $26
and $0, respectively) -- 26 --
Receivable for investments sold -- 9,904 --
Interest and dividends receivable 1,149 2,643 180
---------- ---------- ----------
Total assets $ 727,579 $ 640,612 $2,030,112
---------- ---------- ----------
Liabilities:
Accrued expenses and other liabilities $ 90 $ 85 $ 249
---------- ---------- ----------
Net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Net assets consist of:
Paid-in capital $ 617,975 $ 557,991 $1,579,754
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 95,941 71,627 178,401
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 12,369 (1,197) 126,577
Accumulated undistributed net investment income 1,204 12,106 145,131
---------- ---------- ----------
Total $ 727,489 $ 640,527 $2,029,863
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 41,316 50,266 41,008
Class I 20,514 5,555 114,238
---------- ---------- ----------
Total shares of beneficial interest outstanding 61,830 55,821 155,246
========== ========== ==========
Net assets:
Class A $ 486,110 $ 576,830 $ 536,157
Class I 241,379 63,697 1,493,706
---------- ---------- ----------
Total net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price per share (net assets /
shares of beneficial interest outstanding) $11.77 $11.48 $13.07
====== ====== ======
Class I shares:
Net asset value and redemption price per share (net assets / shares of
beneficial interest outstanding) $11.77 $11.47 $13.08
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
AUGUST 31, 1997 FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost, $2,378,684 and
$2,140,560, respectively) $2,330,823 $2,516,582
Cash 924 3,165
Foreign currency, at value (identified cost, $1,560 and $46,
respectively) 1,164 43
Receivable for Fund shares sold 10,000 --
Receivable for investments sold 17,901 --
Interest and dividends receivable 4,591 54
Receivable from investment adviser 6,854 8,711
Other assets -- 250
---------- ----------
Total assets $2,372,257 $2,528,805
---------- ----------
Liabilities:
Payable for investments purchased $ 26,952 $ --
Accrued expenses and other liabilities 9,217 10,055
---------- ----------
Total liabilities $ 36,169 $ 10,055
---------- ----------
Net assets $2,336,088 $2,518,750
========== ==========
Net assets consist of:
Paid-in capital $2,134,309 $2,036,119
Unrealized appreciation (depreciation) on investments and
translation of
assets and liabilities in foreign currencies (48,333) 376,018
Accumulated undistributed net realized gain (loss) on
investments and
foreign currency transactions 239,440 (69,545)
Accumulated undistributed net investment income 10,672 176,158
---------- ----------
Total $2,336,088 $2,518,750
---------- ----------
Shares of beneficial interest outstanding:
Class A 119,940 70,359
Class I 93,365 130,608
---------- ----------
Total shares of beneficial interest outstanding 213,305 200,967
========== ==========
Net assets:
Class A $1,313,579 $ 881,888
Class I 1,022,509 1,636,862
---------- ----------
Total net assets $2,336,088 $2,518,750
========== ==========
Class A shares:
Net asset value and offering and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
YEAR ENDED AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 217,465 $ 27,016 $ 21,095
Interest 7,705 2,229 22,623
---------- ---------- ----------
Total investment income $ 225,170 $ 29,245 $ 43,718
---------- ---------- ----------
Expenses -
Management fee $ 12,775 $ 6,926 $ 23,164
Shareholder servicing agent fee 2,233 1,209 4,030
Distribution and service fee - Class A 4,216 2,468 9,410
Administrative fee 27 83 --
Registration fee 2,763 2,335 --
Auditing fee 5,101 5,501 8,272
Postage 341 82 119
Printing 2,928 1,635 --
Legal fee 3,223 2,618 2,026
Custodian fee 5,695 5,166 5,902
Amortization of organization expenses 434 434 434
Miscellaneous 4,671 354 325
---------- ---------- ----------
Total expenses $ 44,407 $ 28,811 $ 53,682
Fees paid indirectly (690) (388) (1,010)
Reduction of expenses by investment adviser,
shareholder servicing
agent and distributor (19,224) (14,434) (36,604)
---------- ---------- ----------
Net expenses $ 24,493 $ 13,989 $ 16,068
---------- ---------- ----------
Net investment income $ 200,677 $ 15,256 $ 27,650
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 147,884 $ 130,162 $ 314,835
Securities sold short -- -- (6,786)
Foreign currency transactions (112) (8) (173)
---------- ---------- ----------
Net realized gain on investments and
foreign currency transactions $ 147,772 $ 130,154 $ 307,876
---------- ---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ 264,806 $ 134,063 $ 542,028
Securities sold short -- -- 14,842
Translation of assets and liabilities in foreign
currencies 12 (5) 173
---------- ---------- ----------
Net change in unrealized appreciation $ 264,818 $ 134,058 $ 557,043
---------- ---------- ----------
Net realized and unrealized gain on investments
and
foreign currency $ 412,590 $ 264,212 $ 864,919
---------- ---------- ----------
Increase in net assets from operations $ 613,267 $ 279,468 $ 892,569
========== ========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- --------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND* FUND*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 6,880 $ 12,186 $ 155,787
Interest 978 5,669 6,670
---------- ---------- ----------
Total investment income $ 7,858 $ 17,855 $ 162,457
---------- ---------- ----------
Expenses -
Management fee $ 2,849 $ 2,458 $ 8,539
Shareholder servicing agent fee 576 497 1,498
Distribution and service fee - Class A 1,480 1,738 1,286
Administrative fee 52 44 132
Registration fee 4,030 4,000 4,505
Auditing fee 5,500 5,900 6,000
Printing 2,237 1,135 2,892
Postage 42 -- 25
Legal fee 3,871 3,214 4,534
Custodian fee 392 459 720
Miscellaneous 557 213 271
---------- ---------- ----------
Total expenses $ 21,586 $ 19,658 $ 30,402
Fees paid indirectly (173) (168) (451)
Reduction of expenses by investment adviser,
shareholder servicing
agent, and distributor (14,749) (13,739) (12,625)
---------- ---------- ----------
Net expenses $ 6,664 $ 5,751 $ 17,326
---------- ---------- ----------
Net investment income $ 1,194 $ 12,104 $ 145,131
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,369 $ 5,932 $ 126,577
Securities sold short -- (7,129) --
Foreign currency transactions 10 2 --
---------- ---------- ----------
Net realized gain (loss) on investments and
foreign currency
transactions $ 12,379 $ (1,195) $ 126,577
---------- ---------- ----------
Change in unrealized appreciation on investments and
translation
of assets and liabilities in foreign currencies $ 95,941 $ 71,627 $ 178,401
---------- ---------- ----------
Net realized and unrealized gain on investments
and foreign
currency $ 108,320 $ 70,432 $ 304,978
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
========== ========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income:
Income -
Dividends $ 32,673 $ 183,332
Interest 4,208 12,047
Foreign taxes withheld (3,096)
---------- ----------
Total investment income $ 33,785 $ 195,379
---------- ----------
Expenses -
Management fee $ 14,026 $ 10,517
Shareholder servicing agent fee 1,819 1,845
Distribution and service fee - Class A 4,164 2,112
Administrative fee 168 166
Registration fee 4,500 4,010
Auditing fees 5,500 5,500
Postage 468 129
Printing 3,357 3,181
Legal fees 3,451 5,691
Custodian fee 4,387 910
Miscellaneous 1,762 327
---------- ----------
Total expenses $ 43,602 $ 34,388
Fees paid indirectly (480) (559)
Reduction of expenses by investment adviser, shareholder
servicing agent, and distributor (20,009) (14,474)
---------- ----------
Net expenses $ 23,113 $ 19,355
---------- ----------
Net investment income $ 10,672 $ 176,024
---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 241,403 $ (69,545)
Foreign currency transactions (1,963) 134
---------- ----------
Net realized gain (loss) on investments and foreign
currency
transactions $ 239,440 $ (69,411)
---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ (47,861) $ 376,022
Translation of assets and liabilities in foreign currencies (472) (4)
---------- ----------
Net change in unrealized appreciation (depreciation) $ (48,333) $ 376,018
---------- ----------
Net realized and unrealized gain on investments and
foreign currency $ 191,107 $ 306,607
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 200,677 $ (362)
Net realized gain on investments and foreign
currency transactions 147,772 66,889
Net unrealized gain on investments and foreign
currency translation 264,818 17,950
---------- ----------
Increase in net assets from operations $ 613,267 $ 84,477
---------- ----------
Distributions declared to shareholders from net
realized gain on investments - Class A $ (106,559) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,273,798 $ 605,756
Net asset value of shares issued to shareholders
in reinvestment of distributions 106,552 --
Cost of shares reacquired (817,088) (4,083)
---------- ----------
Increase in net assets from Fund share
transactions $1,563,262 $ 601,673
---------- ----------
Total increase in net assets $2,069,970 $ 686,150
Net assets:
At beginning of period 686,150 --
---------- ----------
At end of period (including accumulated
undistributed net investment income (loss) of
$200,552 and $(13), respectively) $2,756,120 $ 686,150
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 15,256 $ 4,878
Net realized gain on investments and foreign
currency transactions 130,154 7,246
Net unrealized gain on investments and foreign
currency translation 134,058 25,969
---------- ----------
Increase in net assets from operations $ 279,468 $ 38,093
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (9,552) $ --
From net realized gain on investments - Class A (13,524) --
---------- ----------
Total distributions declared to shareholders $ (23,076) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $1,191,109 $ 449,397
Net asset value of shares issued to shareholders
in reinvestment of distributions 23,074 --
Cost of shares reacquired (473,902) (10,110)
---------- ----------
Increase in net assets from Fund share
transactions $ 740,281 $ 439,287
---------- ----------
Total increase in net assets $ 996,673 $ 477,380
Net assets:
At beginning of period 477,380 --
---------- ----------
At end of period (including accumulated
undistributed net investment income
of $10,574 and $4,878, respectively) $1,474,053 $ 477,380
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,650 $ 10,016
Net realized gain on investments and foreign
currency transactions 307,876 168,487
Net unrealized gain on investments and foreign
currency translation 557,043 41,182
---------- ----------
Increase in net assets from operations $ 892,569 $ 219,685
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (8,950) $ --
From net realized gain on investments - Class A (232,385) --
---------- ----------
Total distributions declared to shareholders $ (241,335) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,798,830 $2,038,964
Net asset value of shares issued to shareholders
in reinvestment of distributions 241,330 --
Cost of shares reacquired (1,995,218) (14)
---------- ----------
Increase in net assets from Fund share
transactions $1,044,942 $2,038,950
---------- ----------
Total increase in net assets $1,696,176 $2,258,635
Net assets:
At beginning of period 2,258,635 --
---------- ----------
At end of period (including accumulated
undistributed net investment income of $28,543
and $10,016, respectively) $3,954,811 $2,258,635
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997* FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,194 $ 12,104 $ 145,131
Net realized gain (loss) on investments and
foreign currency transactions 12,379 (1,195) 126,577
Net unrealized gain on investments and foreign
currency translation 95,941 71,627 178,401
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
---------- ---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 720,959 $ 559,838 $1,935,566
Cost of shares reacquired (102,984) (1,847) (355,812)
---------- ---------- ----------
Increase in net assets from Fund share
transactions $ 617,975 $ 557,991 $1,579,754
---------- ---------- ----------
Total increase in net assets $ 727,489 $ 640,527 $2,029,863
Net assets:
At beginning of period -- -- --
---------- ---------- ----------
At end of period (including accumulated
undistributed net investment income of $1,204,
$12,106 and $145,131, respectively) $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997* FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,672 $ 176,024
Net realized gain (loss) on investments and foreign currency
transactions 239,440 (69,411)
Net unrealized gain (loss) on investments and foreign
currency translation (48,333) 376,018
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,472,688 $2,470,527
Cost of shares reacquired (338,379) (434,408)
---------- ----------
Increase in net assets from Fund share transactions $2,134,309 $2,036,119
---------- ----------
Total increase in net assets $2,336,088 $2,518,750
Net assets:
At beginning of period -- --
---------- ----------
At end of period (including accumulated undistributed net
investment income of $10,672 and $176,158, respectively) $2,336,088 $2,518,750
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 12.33 $ 10.00 $ 12.99
---------- ---------- ----------
Income from investment operations# -
Net investment income (loss)(S) $ 1.24 $ (0.01) $ 1.50
Net realized and unrealized gain on investments and
foreign currency transactions 3.93 2.34 1.35
---------- ---------- ----------
Total from investment operations $ 5.17 $ 2.33 $ 2.85
---------- ---------- ----------
Less distributions declared to shareholders from net
realized gain on investments $ (1.68) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 15.82 $ 12.33 $ 15.84
========== ========== ==========
Total return 45.22% 23.30%++ 21.94%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.45% 1.50%+ 1.48%+
Net investment income (loss) 9.12% (0.11)%+ 14.08%+
Portfolio turnover 1,043% 204% 1,043%
Average commission rate $ 0.0248 $ 0.0411 $ 0.0248
Net assets at end of period
(000 omitted) $ 1,061 $ 686 $ 1,695
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the periods
indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 1.06 $ (0.18) $ 1.40
Ratios (to average net assets):
Expenses## 2.82% 4.28%+ 2.35%
Net investment income (loss) 7.75% (2.34)%+ 13.20%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.07 $ 10.00 $ 12.20
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.13 $ 0.15
Net realized and unrealized gain on investments and
foreign currency transactions 3.91 0.94 2.46
---------- ---------- ----------
Total from investment operations $ 4.13 $ 1.07 $ 2.61
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.16) $ -- $ --
From net realized gain on investments (0.22) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (0.38) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 14.82 $ 11.07 $ 14.81
========== ========== ==========
Total return 38.05% 10.70%++ 21.39%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50% 1.50%+ 1.50%+
Net investment income 1.75% 1.83%+ 1.51%+
Portfolio turnover 118% 56% 118%
Average commission rate $ 0.0393 $ 0.0331 $ 0.0393
Net assets at end of
period (000 omitted) $ 510 $ 477 $ 964
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had been waived by the Fund and/or if actual expenses were over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.02 $ (0.06) $ 0.03
Ratios (to average net assets):
Expenses## 3.40% 4.67%+ 2.67%+
Net investment income (loss) (0.15)% (0.78)%+ 0.35%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.36 $ 10.00 $ 11.39
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.08 $ 0.06 $ 0.11
Net realized and unrealized gain on investments
and foreign currency transactions 3.35 1.30 2.14
---------- ---------- ----------
Total from investment operations $ 3.43 $ 1.36 $ 2.25
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.04) $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.13) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (1.17) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 13.62 $ 11.36 $ 13.64
========== ========== ==========
Total return 31.84% 13.60%++ 19.75%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.74% 1.50%+ 0.18%+
Net investment income 0.65% 0.78%+ 1.26%+
Portfolio turnover 161% 108% 161%
Average commission rate $ 0.0387 $ 0.0361 $ 0.0387
Net assets at end of period (000 omitted) $ 1,920 $ 2,259 $ 2,035
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. (S)The Adviser voluntarily agreed to
maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for the periods indicated. If these fees
had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the net investment income
(loss) per share and ratios would have been:
Net investment income (loss) $ (0.06) $ (0.01) $ 0.01
Ratios (to average net assets):
Expenses## 1.92% 2.97%+ 1.36%+
Net investment income (loss) (0.53)% (0.16)%+ 0.08%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
BLUE CHIP FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.02 $ 0.02
Net realized and unrealized gain on
investments 1.75 1.75
---------- ----------
Total from investment operations $ 1.77 $ 1.77
---------- ----------
Net asset value - end of period $ 11.77 $ 11.77
========== ==========
Total return 17.70%++ 17.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 0.28%+ 0.24%+
Portfolio turnover 32% 32%
Average commission rate $ 0.0427 $ 0.0427
Net assets at end of period (000 omitted) $ 486 $ 241
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The Investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income loss per share and the ratios would have been:
Net investment loss $ (0.26) $ (0.23)
Ratios (to average net assets):
Expenses## 5.04%+ 4.54%+
Net investment loss (3.25)%+ (2.80)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations -
Net investment income(S) $ 0.25 $ 0.26
Net realized and unrealized gain on
investments 1.23 1.21
---------- ----------
Total from investment operations $ 1.48 $ 1.47
---------- ----------
Net asset value - end of period $ 11.48 $ 11.47
========== ==========
Total return 14.70%++ 14.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 3.16%+ 3.19%+
Portfolio turnover 76% 76%
Average commission rate $ 0.0453 $ 0.0453
Net assets at end of period (000 omitted) $ 577 $ 64
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's daily net
assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.04) $ --
Ratios (to average net assets):
Expenses## 5.19%+ 4.69%+
Net investment income (loss) (0.53)%+ --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
NEW DISCOVERY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.98 $ 1.01
Net realized and unrealized gain on
investments 2.09 2.07
---------- ----------
Total from investment operations $ 3.07 $ 3.08
---------- ----------
Net asset value - end of period $ 13.07 $ 13.08
========== ==========
Total return 30.70%++ 30.80%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 12.41%+ 12.65%+
Portfolio turnover 887% 887%
Average commission rate $ 0.0250 $ 0.0250
Net assets at end of period (000 omitted) $ 536 $ 1,494
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.89 $ 0.92
Ratios (to average net assets):
Expenses## 3.10%+ 2.52%+
Net investment income 10.81%+ 11.63%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.06 $ 0.07
Net realized and unrealized gain on
investments 0.89 0.88
---------- ----------
Total from investment operations $ 0.95 $ 0.95
---------- ----------
Net asset value - end of period $ 10.95 $ 10.95
========== ==========
Total return 9.60%++ 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.68%+ 1.68%+
Net investment income 0.71%+ 0.85%+
Portfolio turnover 137% 137%
Average commission rate $ 0.0198 $ 0.0198
Net assets at end of period (000 omitted) $ 1,314 $ 1,022
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.75% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment loss $ (0.01) $ --
Ratios (to average net assets):
Expenses## 3.31%+ 2.81%+
Net investment loss (0.92)%+ (0.28)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.84 $ 1.05
Net realized and unrealized gain on
investments and foreign currency transactions 1.69 1.48
---------- ----------
Total from investment operations $ 2.53 $ 2.53
---------- ----------
Net asset value - end of period $ 12.53 $ 12.53
========== ==========
Total return 25.30%++ 25.30%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.40%+ 1.41%+
Net investment income 10.73%+ 13.11%+
Portfolio turnover 792% 792%
Average commission rate $ 0.0243 $ 0.0243
Net assets at end of period (000 omitted) $ 882 $ 1,637
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
period indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.73 $ 0.98
Ratios (to average net assets):
Expenses## 2.77%+ 2.28%+
Net investment income 9.36%+ 12.24%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund,
MFS Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund, MFS Science and Technology Fund are diversified
series of MFS Series Trust I (the Trust), and MFS Special Opportunities Fund is
a non-diversified series of 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 reported at market value using last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues and forward contracts and interest rate
swaps, 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. 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. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Futures contracts, options, and options on futures
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by each 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 each
Fund's operations.
Forward Foreign Currency Exchange Contracts - Each 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 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. Each Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, each Fund 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, each Fund 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 as unrealized until the contract settlement date. On contract
settlement date, the gains or losses are recorded as realized gains or losses on
foreign currency transactions.
Written Options - Each Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, each Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by each Fund. Each 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 part of an income producing strategy reflecting the view of each
Fund's management on the direction of interest rates.
Short Sales - The Special Opportunities Fund, the Convertible Securities Fund,
the New Discovery Fund, and the Science and Technology Fund may enter into short
sales. A short sale transaction involves selling a security which a Fund does
not own with the intent of purchasing it later at a lower price. A 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 a Fund must
replace the borrowed security. Losses can exceed the proceeds from short sales
and 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 a Fund may be required to pay
in connection with a short sale. Whenever a Fund engages in short sales, its
custodian segregates cash or marketable 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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. 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 and the Convertible Securities Fund may 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 Funds use the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - Each Fund's custody fee is calculated as a percentage of
each Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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 - Each 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. 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.
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 year ended August 31, 1997, the following amounts were reclassified
between accumulated undistributed net investment income and accumulated net
realized gain on investments 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>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ (10) $ (2) $ 112 $ 8
Accumulated undistributed net
investment income (loss) $ 10 $ 2 $ (112) $ (8)
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ -- $ 1,963 $ (134) $ 173
Accumulated undistributed net
investment income (loss) $ -- $ (1,963) $ 134 $ (173)
</TABLE>
At August 31, 1997, the Convertible Securities Fund, for federal income tax
purposes, had a capital loss carryforward of $1,022 which may be applied against
any net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on August 31, 2005.
Multiple Classes of Shares of Beneficial Interest - The Funds offer multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of each Fund pro
rata based on average daily net assets of each class, without distinction
between share classes. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share dividend rates
are generally due to differences in separate class expenses.
(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
0.65% of average daily net assets for the Blue Chip Fund and the Convertible
Securities Fund, at an annual rate of 0.75% of average daily net assets for the
Core Growth Fund, the Equity Income Fund, the New Discovery Fund, the Science
and Technology Fund, and the Special Opportunities Fund, and at an annual rate
of 1.00% of average daily net assets for the Research International Fund. For
the year ended August 31, 1997, the investment adviser did not impose any of its
fee, which is reflected as a reduction of expenses in the Statement of
Operations.
Each Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of each Fund's operating expenses, exclusive of
management, distribution and service fees. Each Fund in turn will pay MFS an
expense reimbursement fee not greater than 1.50% of average daily net assets,
except that the Research International Fund will pay a fee of 1.75%. 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,
1997, the aggregate unreimbursed expenses owed to MFS by each Fund amounted to:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,844 $9,046 $ -- $8,413 $1,302 $ -- $ -- $ --
</TABLE>
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 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 each Fund.
Administrator - Effective March 1, 1997, the Funds have an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Funds pay
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales on Class A shares of each Fund for the year
ended August 31, 1997.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's 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 by 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 year ended August 31, 1997,
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 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of Class A shares at an effective
annual rate of up to 0.15%. MFSC is currently waiving its fee for an indefinite
period.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments $ 801,689 $ 916,065 $ 17,817,514 $ 1,735,832
========== ========== ============= ============
Sales
- ----------
Investments $ 189,892 $ 382,668 $ 16,161,162 $ 1,069,051
========== ========== ============= ============
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments (non-U.S. government
securities) $ 14,628,778 $ 4,633,699 $ 15,372,426 $ 4,871,185
============= ============ ============= ============
Sales
- ----------
Investments (non-U.S. government
securities) $ 13,012,489 $ 2,561,525 $ 13,452,258 $ 4,574,155
============= ============ ============= ============
</TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by each Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 624,151 $ 552,605 $ 2,467,904 $1,245,767
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 99,721 $ 77,886 $ 310,563 $ 163,961
Gross unrealized depreciation (3,780) (6,434) (34,424) (4,055)
------------ ---------- ------------ ----------
Net unrealized appreciation $ 95,941 $ 71,452 $ 276,139 $ 159,906
============ ========== ============ ==========
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 1,823,392 $2,379,678 $ 2,151,232 $3,115,308
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 215,761 $ 128,745 $ 427,647 $ 687,707
Gross unrealized depreciation (42,969) (177,600) (62,297) (85,659)
------------ ---------- ------------ ----------
Net unrealized appreciation
(depreciation) $ 172,792 $ (48,855) $ 365,350 $ 602,048
============ ========== ============ ==========
</TABLE>
(5) Shares of Beneficial Interest
Each 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
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
--------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 46,967 $ 474,750 50,444 $ 504,497 59,769 $ 808,314
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- 8,292 106,552
Shares reacquired (5,651) (56,185) (178) (1,847) (56,691) (726,457)
------ ---------- ------ ---------- ------ ----------
Net increase 41,316 $ 418,565 50,266 $ 502,650 11,370 $ 188,409
====== ========== ====== ========== ====== ==========
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 28,321 $ 354,214 46,587 $ 483,036 145,874 $ 1,462,123
Shares issued to
shareholders in
reinvestment of
distributions 1,898 23,074 -- -- -- --
Shares reacquired (38,910) (473,850) (5,579) (56,315) (25,934) (255,253)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) (8,691) $ (96,562) 41,008 $ 426,721 119,940 $ 1,206,870
====== ========== ====== ========== ======= ============
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 78,193 $ 811,064 80,611 $ 941,341
Shares issued to
shareholders in
reinvestment of
distributions -- -- 21,566 241,330
Shares reacquired (7,834) (79,182) (160,079) (1,817,353)
------ ---------- ------- -----------
Net increase
(decrease) 70,359 $ 731,882 (57,902) $ (634,682)
====== ========== ======= ===========
<CAPTION>
Class A Shares
PERIOD ENDED AUGUST 31, 1996*
---------------------------------------------------------------------------------------------
CORE GROWTH FUND EQUITY INCOME FUND SPECIAL OPPORTUNITIES FUND
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 56,000 $ 605,756 44,072 $ 449,397 198,828 $ 2,038,964
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (338) (4,083) (947) (10,110) (1) (14)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) 55,662 $ 601,673 43,125 $ 439,287 198,827 $ 2,038,950
====== ========== ====== ========== ======= ============
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 24,471 $ 246,209 5,555 $ 55,341 113,207 $ 1,465,484
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (3,957) (46,799) -- -- (6,150) (90,631)
------ ---------- ----- --------- ------- ------------
Net increase 20,514 $ 199,410 5,555 $ 55,341 107,057 $ 1,374,853
====== ========== ===== ========= ======= ============
*For the period from the commencement of investment operations, January 2, 1996, through August 31, 1996.
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 65,078 $ 836,895 144,634 $ 1,452,530 100,754 $ 1,010,565
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (4) (52) (30,396) (299,497) (7,389) (83,126)
------ ---------- ------- ------------ ------ ----------
Net increase 65,074 $ 836,843 114,238 $ 1,153,033 93,365 $ 927,439
====== ========== ======= ============ ====== ==========
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 164,633 $ 1,659,463 163,990 $ 1,857,489
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- --
Shares reacquired (34,025) (355,226) (14,760) (177,865)
------- ------------ ------- ------------
Net increase 130,608 $ 1,304,237 149,230 $ 1,679,624
======= ============ ======= ============
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
(6) Line of Credit
Each Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of each
Fund's 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 Fund for the year ended August 31, 1997, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6 $3 $3 $8 $2 $8 $1 $4
</TABLE>
(7) Restricted Securities
Each 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, 1997, the
Research International Fund owned the following restricted securities
(consisting of 1.53% of its net assets) which 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 brokers or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF
FUND/DESCRIPTION ACQUISITION SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Bank Handlowy Warsza 6/18/97 200 $ 2,162 $ 2,525
Hong Leong Finance Ltd. 1/15/96 3,000 11,940 5,855
Jarvis Hotels 6/21/96 - 7/02/96 10,900 30,014 27,378
-------
$35,758
=======
</TABLE>
(8) 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 the Funds have in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts for the Special
Opportunities Fund amounted to a net receivable of $175 with Deutschebank at
August 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Growth Fund,
MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS
Convertible Securities Fund, MFS New Discovery Fund, MFS Research International
Fund and MFS Science and Technology Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund (the Funds)
(eight of the portfolios constituting MFS Series Trust I) including the
schedules of portfolio investments as of August 31, 1997, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997, by correspondence with the custodian and
brokers or by 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
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund at August 31,
1997, and the results of their operations, the changes in their net assets, and
the financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) Core Growth Fund
MFS(R) Equity Income Fund
MFS(R) Special Opportunities Fund
MFS(R) Blue Chip Fund
MFS(R) Convertible SecuritiesFund
MFS(R) New Discovery Fund
MFS(R) Research InternationalFund
MFS(R) Science and Technology Fund
500 Boylston Street
Boston, MA02116-3741
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
INC-2 10/97 970
<PAGE> 570
MFS RESEARCH INTERNATIONAL FUND
SUPPLEMENT TO THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION DATED
JANUARY 1, 1998
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ("SAI"), DATED JANUARY 1,
1998, AND CONTAINS A DESCRIPTION OF CLASS I SHARES.
CLASS I SHARES ARE AVAILABLE FOR PURCHASE ONLY BY CERTAIN INVESTORS AS
DESCRIBED UNDER THE CAPTION "ELIGIBLE PURCHASERS" BELOW.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
-------
<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............................................................. 1.00%
----
Rule 12b-1 Fees............................................................. None
Other Expenses (after expense limitation)(1)((2)............................ 0.40%
----
Total Operating Expenses (after expense limitation)(2)...................... 1.40%
</TABLE>
(1) 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."
(2) The Adviser has agreed to bear the Fund's expenses, subject to
reimbursement by the Fund, such that "Other Expenses" do not exceed 0.40%
per annum of its average daily net assets during the current fiscal year.
Otherwise, "Other Expenses" and "Total Operating Expenses" would be 1.41%
and 2.81%, respectively. See "Other Information" below.
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of the Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
PERIOD CLASS I
------ -------
<S> <C>
1 year.......................... $14
3 years......................... 44
</TABLE>
The purpose of the expense table above is to assist investors in
understanding the various costs and expenses that a shareholder of the Fund will
bear directly or indirectly. A more complete description of the Fund's
management fee is set forth under the caption "Management of the Fund" in the
Prospectus.
THE "EXAMPLE" SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OF THE FUND; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
-1-
<PAGE> 571
CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
Shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP.
FINANCIAL HIGHLIGHTS - CLASS I SHARES
<TABLE>
<CAPTION>
PERIOD ENDED
AUGUST 31, 1997*
- -----------------------------------------------------------------------------------
<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** $ 0.07
Net realized and unrealized gain on investments 0.88
-------
Total from investment operations $ 0.95
-------
Net asset value - end of period $ 10.95
-------
Total return 9.60%++
Ratios (to average net assets)/Supplemental data**:
Expenses## 1.68%+
Net investment income 0.85%+
Portfolio turnover 137%
Average commission rate $0.0198
Net assets at end of period (000 omitted) $ 1,022
</TABLE>
- --------------------------
* For the period from the inception of Class I shares of the Fund, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.75% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment income per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C>
Net investment income $ --
Ratios (to average net assets):
Expenses## 2.81%+
Net investment income (0.28)%+
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates;
-2-
<PAGE> 572
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD;
(iii) any retirement plan, endowment or foundation which (a) purchases shares
directly through MFD (rather than through a third party broker or dealer
or other financial intermediary); (b) has, at the time of purchase of
Class I shares, aggregate assets of at least $100 million; and (c) invests
at least $10 million in Class I shares of the Fund either alone or in
combination with investments in Class I shares of other MFS funds
distributed by MFD (additional investments may be made in any amount);
provided that MFD may accept purchases from smaller plans, endowments or
foundations or in smaller amounts if it believes, in its sole discretion,
that such entity's aggregate assets will equal or exceed $100 million, or
that such entity will make additional investments which will cause its
total investment to equal or exceed $10 million, within a reasonable
period of time; and
(iv) bank trust departments which initially invest, on behalf of their trust
clients, at least $100,000 in Class I shares of the Fund (additional
investments may be made in any amount); provided that MFD may accept
smaller initial purchases if it believes, in its sole discretion, that the
bank trust department will make additional investments, on behalf of its
trust clients, which will cause its total investment to equal or exceed
$100,000 within a reasonable period of time.
In no event will the Fund, MFS, MFD or any of their affiliates pay any sales
commissions or compensation to any third party in connection with the sale of
Class I shares; the payment of any such sales commission or compensation would,
under the Fund's policies, disqualify the purchaser as an eligible investor in
Class I shares.
SHARE CLASSES OFFERED BY THE FUND
Four classes of shares of the Fund currently are offered for sale, Class A
shares, Class B shares, Class C shares and Class I shares. Class I shares are
available for purchase only by Eligible Purchasers, as defined above, and are
described in this Supplement. Class A shares, Class B shares and Class C shares
are described in the Fund's Prospectus and are available for purchase by the
general public.
Class A shares are offered at net asset value plus an initial sales charge up
to a maximum of 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 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 I shares are offered
at net asset value without an initial sales charge or CDSC and are not subject
to a distribution or service fee. Class C shares and Class I shares do not
convert to any other class of shares of the Fund.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of the Fund for Class I shares
of any other MFS Fund available for purchase by such Eligible Purchasers at
their net asset value (if available for sale), and may exchange Class I shares
of the Fund for shares of the MFS Money Market Fund (if available for sale), and
may redeem Class I shares of the Fund at net asset value. Distributions paid by
the Fund with respect to Class I shares generally will be greater than those
-3-
<PAGE> 573
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 sole discretion of MFS, MFS has
agreed to bear the Fund's expenses such that the Fund's "Other Expenses," which
are defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.40% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
-4-
<PAGE> 574
<TABLE>
<S> <C>
PROSPECTUS
JANUARY 1, 1998
CLASS A SHARES OF BENEFICIAL
INTEREST
MFS(R) RESEARCH CLASS B SHARES OF BENEFICIAL
INTERNATIONAL FUND INTEREST
(A member of the MFS Family of CLASS C SHARES OF BENEFICIAL
Funds(R)) INTEREST
</TABLE>
- --------------------------------------------------------------------------------
500 Boylston Street, Boston, Massachusetts 02116 (617) 954-5000
This Prospectus pertains to MFS Research International Fund (the "Fund"), a
diversified series of MFS Series Trust I (the "Trust"). The investment objective
of the Fund is capital appreciation. The Fund invests, under normal market
conditions, at least 65% of its total assets in equity securities of companies
whose principal activities are located outside the United States, and may invest
up to 35% of its total assets in other securities offering an opportunity for
capital appreciation. The minimum initial investment generally is $1,000 per
account (see "Information Concerning Shares of the Fund -- 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.
(continued on next page)
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.
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> 575
(continued from previous page)
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, 1998, 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 37 for a further description of the
information set forth in the SAI. A copy of the SAI may be obtained without
charge by contacting the Shareholder Servicing Agent (see back cover for address
and phone number). The SEC maintains an Internet World Wide Web site at
http://www.sec.gov that contains the SAI, materials that are incorporated by
reference into the Prospectus and the SAI, and other information regarding the
Fund. This Prospectus is available on the Adviser's Internet World Wide Web site
at http://www.mfs.com.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Expense Summary............................................. 3
2. Condensed Financial Information............................. 5
3. The Fund.................................................... 6
4. Investment Objective and Policies........................... 6
5. Certain Securities and Investment Techniques................ 7
6. Additional Risk Factors..................................... 14
7. Management of the Fund...................................... 17
8. Information Concerning Shares of the Fund................... 18
Purchases................................................. 18
Exchanges................................................. 24
Redemptions and Repurchases............................... 26
Distribution Plan......................................... 29
Distributions............................................. 31
Tax Status................................................ 31
Net Asset Value........................................... 32
Expenses.................................................. 32
Description of Shares, Voting Rights and Liabilities...... 33
Performance Information................................... 34
9. Shareholder Services........................................ 35
Appendix A -- Waivers of Sales Charges...................... A-1
</TABLE>
2
<PAGE> 576
1. EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
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 See
applicable)..................... Below(1) 4.00% 1.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
Management Fees................... 1.00% 1.00% 1.00%
Rule 12b-1 Fees................... 0.35%(2) 1.00%(3) 1.00%(3)
Other Expenses (after expense
limitation)(4)(5)............... 0.40% 0.40% 0.40%
------- ------- -------
Total Operating Expenses (after
expense limitation)(5).......... 1.75% 2.40% 2.40%
</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 "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)
0.35% per annum of the average daily net assets attributable to 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 (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. 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) The Adviser has agreed to bear the Fund's expenses, subject to reimbursement
by the Fund, such that "Other Expenses" do not exceed 0.40% per annum of the
Fund's average daily net assets during the current fiscal year. Otherwise,
"Other Expenses" for Class A, Class B and
3
<PAGE> 577
Class C shares would be 1.96% per annum, respectively, and "Total Operating
Expenses" for Class A, Class B and Class C shares would be 3.31%, 3.96% and
3.96%, respectively. See "Information Concerning Shares of the
Fund -- Expenses" below.
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) (1)
1 year.................................. $ 74 $ 64 $24 $34 $24
3 years................................. 109 105 75 75 75
</TABLE>
- ---------------
(1) Assumes no redemption.
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.
4
<PAGE> 578
2. CONDENSED FINANCIAL INFORMATION
The following information has been audited and should be read in conjunction
with the financial statements included in the Fund's Annual Report to
shareholders which are incorporated by reference into the SAI in reliance upon
the report of the Fund's independent auditors, given upon their authority as
experts in accounting and auditing. The Fund's independent auditors are Ernst &
Young LLP. During the period from the commencement of investment operations,
January 2, 1997, to the fiscal year end, August 31, 1997, Class B and Class C
shares were not available for sale.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
----------------
PERIOD ENDED
AUGUST 31, 1997*
----------------
<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(sec.)..................................... $ 0.06
-------
Net realized and unrealized gain on investments................. 0.89
-------
Total from investment operations.................................... $ 0.95
-------
Net asset value -- end of period.................................... $ 10.95
=======
Total return........................................................ 9.60%++
-------
Ratios (to average net assets)/Supplemental data(sec.):
Expenses##...................................................... 1.68%+
-------
Net investment income........................................... 0.71%+
-------
Portfolio turnover.................................................. 137%
-------
Average commission rate............................................. $ 0.0198
-------
Net assets at end of period (000 omitted)........................... $ 1,314
-------
</TABLE>
- ---------------
<TABLE>
<C> <S>
* For the period from inception, January 2, 1997, through August 31, 1997.
+ Annualized
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
sec. The Adviser voluntarily agreed to maintain the expenses of the Fund at not more
than 1.75% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived and/or if actual
expenses had been over/under this limitation, the net investment income (loss)
per share and the ratios would have been:
Net investment loss............................................ $ (0.01)
Ratios (to average net assets):
Expenses##................................................... 3.31%+
Net investment loss.......................................... (0.92)%+
</TABLE>
5
<PAGE> 579
3. 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 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 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.
4. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation.
The Fund seeks to achieve its objective by investing, under normal market
conditions, at least 65% of its total assets in equity securities of companies
whose principal activities are located outside the U.S. The equity securities in
which the Fund may invest include securities of more established companies which
represent opportunities for long-term growth (see "Certain Securities and
Investment Techniques -- Foreign Growth Securities" below). The Fund may also
invest up to 25% of its 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
6
<PAGE> 580
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, the source of its revenues and the location of its
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. 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 "Certain Securities and 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
Additional information about certain of these investment techniques can be found
under the caption "Certain Securities and 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.
FIXED INCOME SECURITIES: Fixed income securities in which the 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: The Fund may purchase securities that are not registered
under the Securities Act of 1933 (the "1933 Act") ("restricted securities"),
including those that can be offered and sold to "qualified institutional buyers"
under Rule 144A under the 1933 Act ("Rule 144A securities"). A determination is
made, based upon a continuing review of the trading markets for a specific Rule
144A security, whether such security is 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, retains sufficient oversight, focusing on
factors such as valuation, liquidity and availability of
7
<PAGE> 581
information. Investing in Rule 144A securities 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 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. Government 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. Although
the Fund does not intend to make such purchases for speculative purposes,
purchases of securities on such bases may involve more risk than other types of
purchases.
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). 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 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. In general, the 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, the Fund will segregate liquid assets
sufficient to cover its commitments.
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
8
<PAGE> 582
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.
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 may be of any size, 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.
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 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, the
source of its revenues and the location of its assets. The issuer's principal
9
<PAGE> 583
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 changes in the value of one or more
specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself, and could involve the loss of
all or a portion of the principal amount of or interest on the investment.
SWAPS AND RELATED TRANSACTIONS: As one way of managing its exposure to
different types of investments, the Fund may enter into interest rate swaps,
currency swaps and other types of available swap agreements, such as caps,
collars and floors. Swaps involve the exchange by the Fund with another party of
cash payments based upon different interest rate indices, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example, in
the typical interest rate swap, the Fund might exchange a sequence of cash
payments based on a floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a notional
principal amount determined by the parties.
The Fund may also purchase and sell caps, floors and collars. In a typical cap
or floor agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the counterparty. For
example, the purchase of an interest rate cap entitles the buyer, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount from the
counterparty selling such interest rate cap. The sale of an interest rate floor
obligates the seller to make payments to the extent that a specified interest
rate falls below an agreed-upon level. A collar arrangement combines elements of
buying a cap and selling a floor.
Swap agreements could be used to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in foreign currency, in each case based on a
fixed rate, the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and interest
rates. Caps and floors have an effect similar to buying or writing options.
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 or no
investment of cash. As a result, swaps can be highly volatile and may have a
considerable impact on the Fund's performance. Swap agreements are subject to
risks related to the counterparty's ability to perform, and may decline
10
<PAGE> 584
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. However, the writing of
options constitutes only a partial hedge, up to the amount of the premium, less
any transaction costs. In contrast, 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
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
11
<PAGE> 585
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 under "Additional
Risk Factors" below 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."
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
12
<PAGE> 586
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 which require 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.
13
<PAGE> 587
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 "Certain Securities and Investment Techniques" in the SAI.
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 Fund will involve a higher degree of risk
than would established growth stocks.
FIXED INCOME SECURITIES: To the extent the Fund invests in fixed income
securities, the net asset value of the Fund may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Fund is not
subject to restrictions on the maturities of the fixed income securities they
hold. The Fund's investments in fixed income securities with longer terms to
maturity are subject to greater volatility than the Fund's shorter-term
obligations.
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
14
<PAGE> 588
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 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
15
<PAGE> 589
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. 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 Conduct Rules
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). For the fiscal year ended August 31, 1997, the Fund had a
portfolio turnover rate of 137%. Transaction costs incurred by the Fund and the
realized capital gains and losses of the Fund may be greater than a fund with a
lesser portfolio turnover rate. See "Portfolio Transactions and Brokerage
Commissions" in the SAI.
------------------------
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). Except
with respect to the Fund's policy on borrowing and investing in illiquid
securities, the Fund's investment limitations, policies and rating standards are
adhered to at the
16
<PAGE> 590
time of purchase or utilization of assets; a subsequent change in circumstances
will not be considered to result in a violation of policy.
7. MANAGEMENT OF THE FUND
INVESTMENT ADVISER -- The Adviser manages the Fund pursuant to an Investment
Advisory Agreement dated January 2, 1997. The Fund is managed by a committee of
investment research analysts. Under the Advisory Agreement, the Adviser provides
the Fund with overall investment advisory services. Subject to such policies as
the Trustees may determine, the Adviser makes investment decisions for the Fund.
For its services and facilities, the Adviser is entitled to receive a management
fee, computed and paid monthly, in an amount equal to the sum of 1.00% of the
Fund's average daily net assets. For the period from commencement of investment
operations, January 2, 1997, to January 1, 1998, 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(R) Municipal Income Trust, MFS Multimarket Income Trust, MFS Government
Markets Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust,
MFS Special Value Trust, MFS Union Standard Trust, MFS Institutional Trust, MFS
Variable Insurance Trust, MFS/Sun Life Series Trust and seven variable accounts,
each of which is a registered investment company established by Sun Life
Assurance Company of Canada (U.S.) ("Sun Life of Canada (U.S.)") in connection
with the sale of various fixed/variable annuity contracts. MFS and its wholly
owned subsidiary, MFS Institutional Advisors, Inc., provide investment advice to
substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $69.4
billion on behalf of approximately 2.7 million investor accounts as of November
30, 1997. As of such date, the MFS organization managed approximately $20.1
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $44.2 billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, 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
R. Bordewick, Jr., James O. Yost, Ellen M. Moynihan and Mark E. Bradley, all of
whom are officers of MFS, are officers of the Trust.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is
17
<PAGE> 591
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.
ADMINISTRATOR -- MFS provides the Fund with certain financial, legal,
compliance, shareholder communications and other administrative services
pursuant to a Master Administrative Services Agreement dated March 1, 1997, as
amended. Under this Agreement, the Fund pays MFS an administrative fee up to
0.015% per annum of the Fund's average daily net assets. This fee reimburses MFS
for a portion of the costs it incurs to provide such services.
DISTRIBUTOR -- MFD, a wholly owned subsidiary of MFS, is the distributor of
shares of the Fund and also serves as distributor of each of the other MFS
Funds.
SHAREHOLDER SERVICING AGENT -- MFS Service Center, Inc. (the "Shareholder
Servicing Agent"), a wholly owned subsidiary of MFS, performs transfer agency
and certain other services for the Fund.
8. INFORMATION CONCERNING SHARES OF THE FUND
PURCHASES
Class A, Class B and Class C shares of the Fund may be purchased at the public
offering price through any dealer. As used in the Prospectus and any appendices
thereto, the term "dealer" includes any broker, dealer, bank (including bank
trust departments), registered investment adviser, financial planner and any
other financial institutions having a selling agreement or other similar
agreement with MFD. Dealers may also charge their customers fees relating to
investments in the Fund.
This Prospectus offers 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.
18
<PAGE> 592
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
five circumstances, Class A shares of the Fund are also offered at net asset
value without an initial sales charge but subject to a CDSC, equal to 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares, in the event of a
share redemption within 12 months following the purchase:
(i) on investments of $1 million or more in Class A shares;
(ii) on investments in Class A shares by certain retirement plans
subject to the Employee Retirement Income Security Act of 1974, as amended,
("ERISA"), if, prior to July 1, 1996: (a) the plan had established an
account with the Shareholder Servicing Agent and (b) the sponsoring
organization had demonstrated to the satisfaction of MFD that either (i) the
employer had at least 25 employees or (ii) the aggregate purchases by the
retirement plan of Class A shares of the MFS Funds would be in an aggregate
amount of at least $250,000 within a reasonable period of time, as
determined by MFD in its sole discretion;
(iii) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the retirement plan and/or sponsoring organization
subscribes to the MFS FUNDamental 401(k) Program or any similar
recordkeeping system made available by the Shareholder Servicing Agent (the
"MFS Participant Recordkeeping System"); (b) the plan establishes an account
with the Shareholder Servicing Agent on or after July 1, 1996; and (c) the
aggregate purchases by the retirement plan of Class A shares of the MFS
Funds will be in an aggregate amount of at least $500,000 within a
reasonable period of time, as determined by MFD in its sole discretion;
(iv) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with the
Shareholder Servicing Agent on or after July 1, 1996 and (b) the plan has,
at the time of purchase, a market value of $500,000 or more invested in
shares of any class or classes of the MFS Funds; THE RETIREMENT PLAN WILL
QUALIFY UNDER THIS CATEGORY ONLY IF THE PLAN OR ITS SPONSORING ORGANIZATION
INFORMS THE SHAREHOLDER SERVICING AGENT PRIOR TO THE 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; AND
(v) on investments in Class A shares by certain retirement plans subject
to ERISA, if: (a) the plan establishes an account with the Shareholder
Servicing Agent on or after July 1, 1997; (b) such plan's records are
maintained on a pooled basis by the Shareholder
19
<PAGE> 593
Servicing Agent; and (c) the sponsoring organization demonstrates to the
satisfaction of MFD that, at the time of purchase, the employer has at least
200 eligible employees and the plan has aggregate assets of at least
$2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on new
investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
- ----------------------------------- -------------------------------------
<C> <S>
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" below 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)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 under ERISA or is liquidated or
dissolved; or (iii) is acquired by, merged into, or consolidated with any other
entity.
20
<PAGE> 594
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" below 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
21
<PAGE> 595
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
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 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.
22
<PAGE> 596
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.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING: Purchases and exchanges should
be made for investment purposes only. The Fund and MFD each reserves the right
to reject or restrict any specific purchase or exchange request. In the event
that the Fund or MFD rejects an exchange request, neither the redemption nor the
purchase side of the exchange will be processed.
The Fund is not designed for professional market timing organizations or other
entities using programmed or frequent exchanges. The Fund defines a "market
timer" as an individual, or organization acting on behalf of one or more
individuals, if (i) the individual or organization makes three or more exchange
requests out of the Fund per calendar year and (ii) any one of such exchange
requests represents shares equal in value to 1/2 of 1% or more of the Fund's net
assets at the time of the request. Accounts under common ownership or control,
including accounts administered by market timers, will be aggregated for
purposes of this definition.
As noted above, the Fund and MFD each reserves the right to reject or restrict
any specific purchase and exchange request and, in addition, may impose specific
limitations with respect to market timers, including delaying for up to seven
days the purchase side of an exchange request
23
<PAGE> 597
by market timers or specifically rejecting or otherwise restricting purchase and
exchange requests by market timers. In the event that any individual or entity
is determined either by the Fund or MFD, in its sole discretion, to be a market
timer with respect to any calendar year, the Fund and/or MFD will reject all
exchange requests into the Fund during the remainder of that year. 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 or arrange the sale of 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 and other employees,
payment for travel expenses, including lodging, incurred by registered
representatives and other employees 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 and other employees 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
24
<PAGE> 598
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 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
25
<PAGE> 599
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.
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
26
<PAGE> 600
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 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 during a calendar year, regardless of when during the year
they have occurred, will age one year at the close of business on December 31 of
that year and each subsequent year.
At the time of a redemption, the amount by which the value of a shareholder's
account for a particular class of shares represented by Direct Purchases exceeds
the sum of the six calendar year aggregations (12 months in the case of
purchases of Class C shares and of purchases of $1 million or more of Class A
shares or purchases by certain retirement plans of Class A shares)
27
<PAGE> 601
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 or exchanges, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement.
28
<PAGE> 602
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, 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 Fund -- Distributor" in the SAI. The amount of the
distribution fee paid by the Fund with respect to each class differs under the
Distribution Plan, as does the use by MFD of such distribution fees. Such
amounts and uses are described below in the discussion of the provisions of the
Distribution Plan relating to each Class of shares. While the amount of
compensation received by MFD in the form of distribution fees during any year
may be more or less than the expenses incurred by MFD under its distribution
agreement with the Fund, the Fund is not liable to MFD for any losses MFD may
incur in performing services under its distribution agreement with the Fund.
29
<PAGE> 603
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 0.10% 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 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
30
<PAGE> 604
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 0.35%,
1.00% and 1.00%, per annum, respectively. Prior to January 1, 1998, MFD waived
its right to receive the distribution and service fee for Class A shares.
DISTRIBUTIONS
The 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, the Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. If the Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. The Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options" below. Distributions
paid by the Fund with respect to Class A shares will generally be greater than
those paid with respect to Class B and Class C shares because expenses
attributable to Class B and Class C shares will generally be higher.
TAX STATUS
The Fund is treated as an entity separate from the other series of the Trust for
federal income tax purposes. In order to minimize the taxes the Fund would
otherwise be required to pay, the Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of the Code. Because the Fund
intends to distribute all of its net investment income and net realized capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is not expected that the Fund will be required to pay federal
income or excise taxes, although the Fund's foreign-source income may be subject
to foreign withholding taxes.
Shareholders of the Fund normally will have to pay federal income taxes, and any
state or local taxes, on the dividends and capital gain distributions they
receive from the Fund, whether the distribution is paid in cash or reinvested in
additional shares. 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 (as well as the rate category or categories under which such gain is
31
<PAGE> 605
taxable), the portion, if any, representing a return of capital (which is free
of current taxes but which results in a basis reduction), and the amount, if
any, of federal income tax withheld. In certain circumstances, the Fund may also
elect to "pass through" to shareholders foreign income taxes paid by the Fund.
Under those circumstances, the Fund will notify shareholders of their pro rata
portions 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% (or any
lower rate permitted under an applicable treaty) on taxable 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. 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, recording
32
<PAGE> 606
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 sole discretion of MFS, MFS has agreed
to bear the Fund's expenses such that the Fund's "Other Expenses," which are
defined to include all Fund expenses except for management fees, Rule 12b-1
fees, taxes, extraordinary expenses, brokerage and transaction costs and class
specific expenses, do not exceed 0.40% per annum of its average daily net assets
(the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of the Fund's fiscal year in which the Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of the Fund under this arrangement are subject to reimbursement by
the Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or 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-
33
<PAGE> 607
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.
As of November 28, 1997, the MFS Defined Contribution Plan, c/o Mark Leary, MFS,
500 Boylston Street, Boston, MA and MFS Fund Distributors, Inc., c/o MFS, Attn:
Thomas B. Hastings, 500 Boylston Street, Boston, MA were the owners of record of
48.19% and 32.14%, respectively, of the outstanding shares of the Fund.
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, and purchased by, the public on different dates
(the "class inception date"). The calculation of total rate of return for a
class of shares which has a later class inception date than another class of
shares of the Fund is based both on (i) the performance of the Fund's newer
class from its inception date and (ii) the performance of the Fund's oldest
class from its inception date up to the
34
<PAGE> 608
class inception date of the newer class. See the SAI for further information on
the calculation of total rate of return for share classes with different class
inception 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").
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
35
<PAGE> 609
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.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on purchases of Class A shares when his new investment, together with
the current offering price value of all holdings of Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM -- Shares of a particular class of the Fund
may be sold at net asset value (and 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).
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
36
<PAGE> 610
date, the investment will automatically occur on the first business day of the
month. Required forms are available from the Shareholder Servicing Agent or
investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a dollar
cost averaging program. The Automatic Exchange Plan provides for automatic
monthly or quarterly exchanges of funds from the shareholder's account in an MFS
Fund for investment in the same class of shares of other MFS Funds selected by
the shareholder (if available for sale). Under the Automatic Exchange Plan,
exchanges of at least $50 each may be made to up to six different funds. A
shareholder should consider the objectives and policies of a fund and review its
prospectus before electing to exchange money into such fund through the
Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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, 1998, 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.
37
<PAGE> 611
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in this Appendix, the term "dealer" includes any
broker, dealer, bank (including bank trust departments), registered investment
adviser, financial planner and any other financial institutions having a selling
agreement or other similar agreement with MFD.
I. WAIVERS OF ALL APPLICABLE SALES CHARGES
In the following circumstances, the initial sales charge imposed on purchases of
Class A shares and the CDSC imposed on certain redemptions of Class A shares and
on redemptions of Class B 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 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;
- 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.
A-1
<PAGE> 612
4. INVOLUNTARY REDEMPTIONS (CDSC WAIVER ONLY)
- Shares redeemed at an MFS Fund's direction due to the small size of a
shareholder's account. See "Redemptions and Repurchases -- General --
Involuntary Redemptions/Small Accounts" in the Prospectus.
5. RETIREMENT PLANS (CDSC WAIVER ONLY). Shares redeemed on account of
distributions made under the following circumstances:
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")
- Death or disability of the IRA owner.
SECTION 401(A) PLANS ("401(A) PLANS") AND SECTION 403(B) EMPLOYER SPONSORED
PLANS ("ESP PLANS")
- Death, disability or retirement of 401(a) or ESP Plan participant;
- Loan from 401(a) or ESP Plan;
- 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.
A-2
<PAGE> 613
6. CERTAIN TRANSFERS OF REGISTRATION (CDSC WAIVER ONLY). SHARES TRANSFERRED:
- To an IRA rollover account where any sales charges with respect to the
shares being reregistered would have been waived had they been redeemed; and
- From a single account maintained for a 401(a) Plan to multiple accounts
maintained by the Shareholder Servicing Agent on behalf of individual
participants of such Plan, provided that the Plan sponsor subscribes to the
MFS FUNDamental 401(k) Plan or another similar recordkeeping system made
available by the Shareholder Servicing Agent.
7. LOAN REPAYMENTS
- Shares acquired pursuant to repayments by retirement plan participants of
loans from 401(a) or ESP Plans with respect to which such Plan or its
sponsoring organization subscribes to the MFS FUNDamental 401(k) Program or
the MFS Recordkeeper Plus Program (but not the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the following
circumstances the initial sales charge imposed on purchases of Class A shares
and the CDSC imposed on certain redemptions of Class A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by Investments through certain dealers (including registered
investment advisers and financial planners) which have established certain
operational arrangements with MFD which include a requirement that such
shares be sold for the sole benefit of clients participating in a "wrap"
account, mutual fund supermarket account or a similar program under which
such clients pay a fee to such dealer.
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with MFD or one of its affiliates to perform certain
administrative services, subject to certain operational and minimum size
requirements specified from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in Class A shares of
Class A or Class B distributions which constitute required withdrawals from
qualified retirement plans.
A-3
<PAGE> 614
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below) if the shareholder's
investment equals or exceeds $5 million in one or more Eligible Funds (the
"Initial Purchase") (this waiver applies to the shares acquired from the
Initial Purchase and all shares of Eligible Funds subsequently acquired by
the shareholder); provided that the dealer through which the Initial
Purchase is made enters into an agreement with MFD to accept delayed payment
of commissions with respect to the Initial Purchase and all subsequent
investments by the shareholder in the Eligible Funds subject to such
requirements as may be established from time to time by MFD (for a schedule
of the amount of commissions paid by MFS to the dealer on such investments,
see "Purchases -- Class A Shares -- Purchases Subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds included in the MFS Family of
Funds, except for Massachusetts Investors Trust, Massachusetts Investors
Growth Stock Fund, MFS Municipal Bond Fund, MFS Municipal Limited Maturity
Fund, MFS Money Market Fund, MFS Government Money Market Fund and MFS Cash
Reserve Fund.
III. WAIVERS OF CLASS B AND CLASS C SALES CHARGES
- In addition to the waivers set forth in Section I above, in the following
circumstances the CDSC imposed on redemptions of Class B and Class C shares
is waived:
1. SYSTEMATIC WITHDRAWAL PLAN
- Systematic Withdrawal Plan redemptions with respect to up to 10% per year
(or 15% per year, in the case of accounts registered as IRAs where the
redemption is made pursuant to Section 72(t) of the Internal Revenue Code of
1986, as amended) of the account value at the time of establishment.
A-4
<PAGE> 615
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-5
<PAGE> 616
THE MFS FAMILY OF FUNDS(R) AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call MFS at 1-800-225-2606
any business day from 8 a.m. to 8 p.m. Eastern time. This material should be
read carefully before investing or sending money.
STOCK
- --------------------------------------------------------------------------------
Massachusetts Investors Trust
Massachusetts Investors Growth Stock Fund
MFS(R) Emerging Growth Fund
MFS(R) Equity Income Fund
MFS(R) Growth Opportunities Fund
MFS(R) Large Cap Growth Fund (1)
MFS(R) Managed Sectors Fund
MFS(R) Mid Cap Growth Fund (2)
MFS(R) New Discovery Fund
MFS(R) Research Fund
MFS(R) Research Growth and Income Fund
MFS(R) Strategic Growth Fund
MFS(R) Union Standard(R) Equity Fund
MFS(R) Value Fund
STOCK AND BOND
- --------------------------------------------------------------------------------
MFS(R) Total Return Fund
MFS(R) Utilities Fund
Bond
- --------------------------------------------------------------------------------
MFS(R) Bond Fund
MFS(R) Government Mortgage Fund
MFS(R) Government Securities Fund
MFS(R) High Income Fund
MFS(R) Intermediate Income Fund
MFS(R) Strategic Income Fund
Limited Maturity Bond
- --------------------------------------------------------------------------------
MFS(R) Government Limited Maturity Fund
MFS(R) Limited Maturity Fund
MFS(R) Municipal Limited Maturity Fund
World
- --------------------------------------------------------------------------------
MFS(R)/Foreign & Colonial Emerging
Markets Equity Fund
MFS(R) International Growth Fund (3)
MFS(R) International Growth and
Income Fund (4)
MFS(R) World Asset Allocation Fund sm
MFS(R) World Equity Fund
MFS(R) World Governments Fund
MFS(R) World Growth Fund
MFS(R) World Total Return Fund
NATIONAL TAX-FREE BOND
- --------------------------------------------------------------------------------
MFS(R) Municipal Bond Fund
MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
STATE TAX-FREE BOND
- --------------------------------------------------------------------------------
Alabama, Arkansas, California, Florida, Georgia, Maryland, Massachusetts,
Mississippi, New York, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, West Virginia
MONEY MARKET
- --------------------------------------------------------------------------------
MFS(R) Cash Reserve Fund
MFS(R) Government Money Market Fund
MFS(R) Money Market Fund
(1) Formerly MFS(R) Capital Growth Fund.
(2) Formerly MFS(R) OTC Fund.
(3) Formerly MFS(R)/Foreign & Colonial International Growth Fund.
(4) Formerly MFS(R)/Foreign & Colonial International Growth and Income Fund.
<PAGE> 617
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
<PAGE> 618
-------------------
Bulk Rate
U.S. Postage
Paid
MFS
-------------------
[MFS LOGO]
We invented the Mutual fund
MFS(R) RESEARCH INTERNATIONAL FUND
500 Boylston Street, Boston, MA 02116-3741
This is your fund's current prospectus.
Please keep it with your financial
records because it provides important facts
about your investment.
<PAGE> 619
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
MFS(R) RESEARCH STATEMENT OF
ADDITIONAL INFORMATION
INTERNATIONAL FUND
(A member of the MFS Family of Funds(R)) January 1, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
1. Definitions........................................................................... 2
2. Investment Objective, Policies and Restrictions....................................... 2
Certain Securities and Investment Techniques.......................................... 2
3. Management of the Fund................................................................ 14
Trustees.............................................................................. 14
Officers.............................................................................. 15
Trustee Compensation Table............................................................ 15
Investment Adviser.................................................................... 16
Administrator......................................................................... 16
Custodian............................................................................. 16
Shareholder Servicing Agent........................................................... 16
Distributor........................................................................... 17
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.................................. 27
10. Independent Auditors and Financial Statements......................................... 28
</TABLE>
MFS(R) RESEARCH INTERNATIONAL 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,
1998. 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> 620
1. DEFINITIONS
<TABLE>
<S> <C> <C>
"Fund" -- MFS Research International
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, 1998, 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," "Certain Securities and Investment Techniques" and "Additional Risk
Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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. Government 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 liquid assets sufficient to cover any commitments or
to limit any potential risk. Although the Fund does not intend to make such
purchases for speculative purposes and intends to adhere to the provisions of
2
<PAGE> 621
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 and could involve
the loss of all or a portion of the principal amount of the investment. 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,
3
<PAGE> 622
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 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 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 liquid assets in a segregated account with its custodian. A put
option written by the Fund is "covered" if the Fund maintains liquid assets with
a value equal to the exercise price in a segregated account with its custodian,
or else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets in a segregated account with its
custodian. Put and call options written by the Fund may also be covered in such
other manner as may be in accordance with the requirements of the exchange on
which, or the counter party with which, the option is traded, and applicable
laws and regulations. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security from
the time the option is written until exercise.
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 liquid assets. 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 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
4
<PAGE> 623
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.
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
5
<PAGE> 624
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 liquid assets in a segregated account with its
custodian. The Fund may cover put options on stock indices by maintaining liquid
assets 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 liquid assets in a segregated account
with its custodian. Put and call options on stock indices may also be covered in
such other manner as may be in accordance with the rules of 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
6
<PAGE> 625
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 liquid assets 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 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
7
<PAGE> 626
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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets, 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 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
8
<PAGE> 627
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 liquid assets in a segregated account with its custodian. The Fund may cover
the writing of put Options on Futures Contracts (a) through sales of the
underlying Futures Contract, (b) through segregation of liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
the Fund, the Fund will be required to sell the underlying Futures Contract
which, if the Fund has covered its obligation through the purchase of such
Contract, will serve to liquidate its futures position. Similarly, where a put
Option on a Futures Contract written by the Fund is exercised, the Fund will be
required to purchase the underlying Futures Contract which, if the Fund has
covered its obligation through the sale of such Contract, will close out its
futures position.
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 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
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<PAGE> 628
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, 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
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<PAGE> 629
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 liquid assets 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 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
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<PAGE> 630
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 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
12
<PAGE> 631
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.
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, 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 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;
13
<PAGE> 632
(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) and non-fundamental investment
policy (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 15% 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 10% 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; currently, the 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 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;
(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; or
(10) invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
3. MANAGEMENT OF THE FUND
The Trust's Board of Trustees provides broad supervision over the affairs of 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.)
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 and
Director (until 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
14
<PAGE> 633
THE HON. SIR J. DAVID GIBBONS, KBE (born 6/15/27)
Edmund Gibbons Limited, Chief Executive Officer; Colonial Insurance Company,
Ltd., Chairman; The Bank of N.T. Butterfield & Son Ltd., Chairman (until
November, 1997)
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 8/18/26)
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 (until June 1994); Sundstrand
Corporation (diversified mechanical manufacturer), Director
Address: 36080 Shaker Boulevard, Hunting Valley, 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
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche LLP, Senior Manager (until September 1996)
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997);
Ernst & Young, Senior Tax Manager (until September 1994)
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.
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.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
TRUSTEE RETIREMENT TOTAL
FEES BENEFIT ESTIMATED TRUSTEE
FROM ACCRUED AS CREDITED FEES
THE PART OF FUND YEARS OF FROM FUND
TRUSTEE FUND(1) EXPENSE(1) SERVICE(2) COMPLEX(3)
- ----------------------- ------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Richard B. Bailey...... $ 0 $0 5 $247,168
A. Keith Brodkin....... 0 0 N/A 0
Marshall N. Cohan...... 0 0 5 149,258
Dr. Lawrence Cohn...... 0 0 15 136,508
Sir David Gibbons...... 0 0 5 136,508
Abby M. O'Neill........ 0 0 6 123,758
Walter E. Robb, III.... 0 0 5 149,258
Arnold D. Scott........ 0 0 N/A 0
Jeffrey L. Shames...... 0 0 N/A 0
J. Dale Sherratt....... 0 0 17 149,258
Ward Smith............. 0 0 9 149,258
</TABLE>
- ---------------
(1) For the fiscal year ending August 31, 1997.
(2) Based upon normal retirement age (75).
(3) For calendar year 1996. The non-interested Trustees served as Trustees of 41
funds within the MFS fund complex (having aggregate net assets at December
31, 1996, of approximately $14.97 billion) while Mr. Bailey served as
Trustee of 81 funds within the MFS fund complex (having aggregate net
assets at December 31, 1996, of approximately $38.48 billion).
As of November 28, 1997, the Trustees and officers as a group owned less than 1%
of the Fund's shares, not including 111,824.289 Class I shares of the Fund
(which represent approximately 51.2% 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 28, 1997, Barry R. Zlotin and Patricia A. Zlotin, Sharon, MA, was
the record owner of approximately 10.51% of the outstanding Class A shares of
the Fund.
As of November 28, 1997, the John David Davenport Trust, c/o Arnold D. Scott,
MFS, 500 Boylston Street, Boston, MA, 02116-3740, were the record owners of
approximately 12.53% of the outstanding Class A shares and the Fund.
As of November 28, 1997, MFS Fund Distributors, Inc., c/o MFS, Attn: Thomas B.
Hastings, 500 Boylston Street, Boston,
15
<PAGE> 634
MA, 02116-3740, was the record owner of approximately 62.02% of the outstanding
Class A shares of the Fund.
As of November 28, 1997, 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 99.99% of the outstanding
Class I shares of the Fund.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, unless,
as to 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 an
indirect 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, 1997 (the "Advisory Agreement").
Under the Advisory Agreement, the Adviser provides the Fund with overall
investment advisory services. Subject to such policies as the Trustees may
determine, the Adviser makes investment decisions for the Fund. For these
services and facilities, the Adviser receives an annual management fee, computed
and paid monthly, as disclosed in the Prospectus under the heading "Management
of the Funds."
For the period from the commencement of investment operations on January 2, 1997
to the Fund's fiscal year end of August 31, 1997, the Adviser waived its right
to receive management fees from the Fund.
The Adviser pays the compensation of the Trust's officers and of any Trustee who
is an officer of the Adviser. The Adviser also furnishes at its own expense all
necessary administrative services, including office space, equipment, clerical
personnel, investment advisory facilities, and all executive and supervisory
personnel necessary for managing the Fund's investments, effecting its portfolio
transactions, and, in general, administering its affairs.
The Advisory Agreement will remain in effect until August 1, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee up to 0.015% per annum of the
Fund's average daily net assets. This fee reimburses MFS for a portion of the
costs it incurs to provide such services. For the period from March 1, 1997
through August 31, 1997, MFS received fees under the Administrative Services
Agreement of $168.
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 September 10, 1986 as
amended (the "Agency Agreement") with the Trust. The Shareholder Servicing
Agent's responsibilities under the Agency Agreement include administering and
performing transfer agent
16
<PAGE> 635
functions and the keeping of records in connection with the issuance, transfer
and redemption of each class of shares of the Fund. For these services, the
Shareholder Servicing Agent will receive a fee calculated as a percentage of the
average daily net assets of the Fund at an effective annual rate of 0.13%. In
addition, the Shareholder Servicing Agent will be reimbursed by the Fund for
certain expenses incurred by the Shareholder Servicing Agent on behalf of the
Fund. 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
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. 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, 1997
to the Fund's fiscal year end of August 31, 1997, 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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment 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
17
<PAGE> 636
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 Conduct Rules 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 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
Trustees (together with the Trustees of the other MFS Funds) have directed the
Adviser to allocate a total of $50,980 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 from inception on January 2, 1997 through August 31, 1997, the
Fund paid total brokerage commissions of $22,757 on total transactions of
$6,728,845.
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 sharehold-
18
<PAGE> 637
ers 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 shareholder or his dealer must inform MFD that the
Letter of Intent is in effect each time shares are purchased. The shareholder
makes no commitment to purchase additional shares, but if his purchases within
13 months (or 36 months in the case of purchases of $1 million or more) plus the
value of shares credited toward completion of the Letter of Intent do not total
the sum specified, he will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Dividends and distributions of other MFS Funds
automatically reinvested in shares of the Fund pursuant to the Distribution
Investment Program will also not apply toward completion of the Letter of
Intent.
Out of the shareholder's initial purchase (or subsequent purchases if
necessary), 5% of the dollar amount specified in the Letter of Intent
application shall be held in escrow by the Shareholder Servicing Agent in the
form of shares registered in the shareholder's name. All income dividends and
capital gain distributions on escrowed shares will be paid to the shareholder or
to his order. When the minimum investment so specified is completed (either
prior to or by the end of the 13-month period or 36-month period, as
applicable), the shareholder will be notified and the escrowed shares will be
released.
If the intended investment is not completed, the Shareholder Servicing Agent
will redeem an appropriate number of the escrowed shares in order to realize
such difference. Shares remaining after any such redemption will be released by
the Shareholder Servicing Agent. By completing and signing the Account
Application or separate Letter of Intent application, the shareholder
irrevocably appoints the Shareholder Servicing Agent his attorney to surrender
for redemption any or all escrowed shares with full power of substitution in the
premises.
RIGHT OF ACCUMULATION -- A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when his new investment, together
with the current offering price value of all holdings of Class A, Class B and
Class C 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.
SUBSEQUENT INVESTMENT BY TELEPHONE -- Each shareholder may purchase additional
shares of any MFS Fund by telephoning the Shareholder Servicing Agent toll-free
at (800) 225-2606. The minimum purchase amount is $50 and the maximum purchase
amount is $100,000. Shareholders wishing to avail themselves of this telephone
purchase privilege must so elect on their Account Application and designate
thereon a bank and account number from which purchases will be made. If a
telephone purchase request is received by the Shareholder Servicing Agent on any
business day prior to the close of regular trading on the Exchange (generally,
4:00 p.m., Eastern time), the purchase will occur at the closing net asset value
of the shares purchased on that day. The Shareholder Servicing Agent may be
liable for any losses resulting from unauthorized telephone transactions if it
does not follow reasonable procedures designed to verify the identity of the
caller. The Shareholder Servicing Agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
DISTRIBUTION INVESTMENT PROGRAM -- Distributions of dividends and capital gains
made by the Fund with respect to a particular class of shares may be
automatically invested in shares of the same class of one of the other MFS
Funds, if shares of 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
19
<PAGE> 638
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 shareholder may deposit into
the account additional shares of the Fund, change the payee or change the dollar
amount of each payment. The Shareholder Servicing Agent may charge the account
for services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares. No charge is currently assessed
against the account, but one could be instituted by the Shareholder Servicing
Agent on 60 days' notice in writing to the shareholder in the event that the
Fund ceases to assume the cost of these services. The Fund may terminate any SWP
for an account if the value of the account falls below $5,000 as a result of
share redemptions (other than as a result of a SWP) or an exchange of shares of
the Fund for shares of another MFS Fund. Any SWP may be terminated at any time
by either the shareholder or the Fund.
INVEST BY MAIL -- Additional investments of $50 or more may be made at any time
by mailing a check payable to the Fund directly to the Shareholder Servicing
Agent. The shareholder's account number and the name of his investment dealer
must be included with each investment.
GROUP PURCHASES -- A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment Adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the MFS
Funds upon the request of MFD.
AUTOMATIC EXCHANGE PLAN -- Shareholders having account balances of at least
$5,000 in any MFS Fund may participate in the Automatic Exchange Plan. The
Automatic Exchange Plan provides for automatic exchanges of funds from the
shareholder's account in an MFS Fund for investment in the same class of shares
of other MFS Funds selected by the shareholder (if 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.
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<PAGE> 639
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 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 invest-
21
<PAGE> 640
ment dealers plans and/or custody agreements for the following:
- - Individual Retirement Accounts (IRAs) (for individuals and their Non-employed
spouses who desire to make limited contributions to a Tax-deferred retirement
program and, if eligible, to receive a federal Income tax deduction for
amounts contributed);
- - Simplified Employee Pension (SEP-IRA) Plans;
- - Retirement Plans Qualified under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code");
- - 403(b) Plans (deferred compensation arrangements for employees of public
School systems and certain 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
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 of the Fund's portfolio assets. Because the Fund intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes, although the Fund's foreign-source income may be subject to
foreign withholding taxes. If the Fund should fail to qualify as a "regulated
investment company" in any year, the Fund would incur a regular corporate
federal income tax upon its taxable income and Fund distributions would
generally be taxable as ordinary dividend income to the shareholders.
Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and capital gain distributions they
receive from the Fund. Dividends from ordinary income and any distributions from
net short-term capital gains are taxable to shareholders as ordinary income for
federal income tax purposes whether the distributions are paid in cash or
reinvested in additional shares. 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 corporate shareholders is subject to certain limitations, and
deducted amounts may be subject to the alternative minimum tax or result in
certain basis adjustments. Distributions of net capital gains (i.e., the excess
of 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 shareholders have held their shares. Such capital gains may be taxable
to shareholders that are individuals, estates, or trusts at maximum rates of
20%, 25%, or 28%, depending upon the source of the gain. 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 a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise as a short-term capital gain or loss; a
long-term capital gain realized by an individual, estate or trust may be
eligible for reduced tax rates if the shares were held for more than 18 months.
However, any loss realized upon a disposition of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those shares. Any loss
realized upon a 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 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
22
<PAGE> 641
certain securities purchased at a market discount will cause the Fund to
recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Fund may be required to liquidate portfolio securities that it might otherwise
have continued to hold, potentially resulting in additional taxable gain or loss
to the Fund.
The Fund's transactions in options, Futures Contracts, Forward Contracts and
Swaps and related transactions will be subject to special tax rules that may
affect the amount, timing and character of Fund income and distributions to
shareholders. For example, certain positions held by the Fund on the last
business day of each taxable year will be marked to market (i.e., treated as if
closed out) on that day, and any gain or loss associated with the positions will
be treated as 60% long-term and 40% short-term capital gain or loss. Certain
positions held by the Fund that substantially diminish its risk of loss with
respect to other positions in its portfolio may constitute "straddles," and may
be subject to special tax rules that would cause deferral of Fund losses,
adjustments in the holding periods of Fund securities and conversion of
short-term into long-term capital losses. Certain tax elections exist for
straddles 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. The Fund may
elect to mark to market any investments in "passive foreign investment
companies" on the last day of each taxable year. This election may cause the
Fund to recognize ordinary income prior to the receipt of cash payments with
respect to those investments; in order to distribute this income and avoid a tax
on the Fund, the Fund may be required to liquidate portfolio securities that it
might otherwise have continued to hold. Investment income received by the Fund
from foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that may entitle the Fund to a reduced rate of tax or an exemption
from tax on such income; the Fund intends to qualify for treaty reduced rates
where available. It is not possible, however, to determine the Fund's effective
rate of foreign tax in advance since the amount of the Fund's assets to be
invested within various countries is not known. If the Fund holds more than 50%
of its assets in foreign stock and securities at the close of its taxable year,
the Fund may elect to "pass through" to the Fund's shareholders foreign income
taxes paid. If the Fund so elects, shareholders will be required to treat their
pro rata portions 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 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. tax withholding at a rate of 30%. The Fund intends to
withhold U.S. federal income tax payments at the rate of 30% (or any lower rate
permitted under an applicable treaty) on dividends and other payments to
Non-U.S. Persons that are subject to such withholding. 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.
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<PAGE> 642
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 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,
1997, to the fiscal year ended August 31, 1997, distribution and service fees
under the Distribution Plan were not imposed.
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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; Martin Luther King 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 stock market 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 stock
market 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
24
<PAGE> 643
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 stock market 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) 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, and purchased by, the public on different dates (the "class inception
date"). The calculation of total rate of return for a class of shares which has
a later class inception date than another class of shares of the Fund is based
both on (i) the performance of the Fund's newer class from its inception date
and (ii) the performance of the Fund's oldest class from its inception date up
to the class inception date of the newer class.
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, 1997 (commencement of investment operations) to August 31, 1997
was 4.38% (including the effect of the sales charge) and 9.60% (without the
effect of the sales charge) and for Class I shares was 9.60%. 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
25
<PAGE> 644
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.
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 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(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.
-- 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.
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<PAGE> 645
-- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
-- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional shares
or in cash.
-- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
-- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
-- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
-- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
-- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
-- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
-- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end,
multimarket high income fund listed on the New York Stock Exchange.
-- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
-- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
-- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
-- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be union-friendly by an
advisory board of senior labor officials, senior managers of companies with
significant labor contracts, academics and other national labor leaders or
experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of the Fund and twelve 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). Of the twelve other series of the Trust, all offer Class A and Class B
shares, eleven offer Class C shares and eleven offer Class I shares. Each share
of a class of the Fund represents an equal proportionate interest in the assets
of the Fund allocable to that class. Upon liquidation of the Fund, shareholders
of each class of the Fund are entitled to share pro rata in the Fund's net
assets allocable to such class available for distribution to shareholders. The
Trust reserves the right to create and issue a number of series and additional
classes of shares, in which case the shares of each class of a series would
participate equally in the earnings, dividends and assets allocable to that
class of the particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
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
27
<PAGE> 646
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, 1997, the Statement of Operations for the period from January 2, 1997
(commencement of investment operations) to August 31, 1997, the Statement of
Changes in Net Assets for the period from January 2, 1997 (commencement of
investment operations) to August 31, 1997, 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.
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<PAGE> 647
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) RESEARCH INTERNATIONAL FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND LOGO]
MEI-13-11/97/500
<PAGE> 648
<PAGE>
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
ANNUAL REPORT
AUGUST 31, 1997
o MFS(R) CORE GROWTH FUND
o MFS(R) EQUITY INCOME FUND
o MFS(R) SPECIAL OPPORTUNITIES FUND
o MFS(R) BLUE CHIP FUND
o MFS(R) CONVERTIBLE SECURITIES FUND
o MFS(R) NEW DISCOVERY FUND
o MFS(R) RESEARCH INTERNATIONAL FUND
o MFS(R) SCIENCE AND TECHNOLOGY FUND
[Graphic Omitted]
<PAGE>
<TABLE>
<S> <C>
MFS(R) CORE GROWTH FUND MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) EQUITY INCOME FUND MFS(R) NEW DISCOVERY FUND
MFS(R) SPECIAL OPPORTUNITIES FUND MFS(R) RESEARCH INTERNATIONAL FUND
MFS(R) BLUE CHIP FUND MFS(R) SCIENCE AND TECHNOLOGY FUND
Trustees
A. Keith Brodkin* - Chairman and President SECRETARY
Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
State Street Bank and Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Ernst & Young LLP
Brigham and Women's Hospital; Professor of Surgery,
Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
The Hon. Sir J. David Gibbons, KBE - Chief Executive 1-800-637-4458 anytime from a touch-tone telephone.
Officer, Edmund Gibbons Ltd.; Chairman, Bank of
N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
Abby M. O'Neill - Private Investor; Director, Rockefeller 1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Financial Services, Inc. (investment advisers) Eastern time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, Benchmark INVESTOR SERVICE
Advisors, Inc. (corporate financial consultants); President, MFSService Center, Inc.
Benchmark Consulting Group, Inc. (office services); P.O. Box 2281
Trustee, Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice President, Director For general information, call toll free: 1-800-225-2606
and Secretary, Massachusetts Financial Services Company any business day from 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call toll free:
Massachusetts Financial Services Company 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
J. Dale Sherratt - President, Insight Resources, Inc. equipped with a Telecommunications Device for the Deaf.)
(acquisition planning specialists)
For share prices, account balances, and exchanges, call toll
Ward Smith - Former Chairman (until 1994), NACCO free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
Industries; Director, Sundstrand Corporation touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO] For the fourth year in a row, MFS
Distributor earned a #1 ranking in the DALBAR, Inc.
MFS Fund Distributors, Inc. Broker/Dealer Survey, Main Office Operations
500 Boylston Street Service Quality Category. The firm achieved a
Boston, MA 02116-3741 3.42 overall score on a scale of 1 to 4 in the
1997 survey. A total of 111 firms responded,
PORTFOLIO MANAGERS* offering input on the quality of service they
Irfan Ali received from 29 mutual fund companies
John F. Brennan, Jr. nationwide. The survey contained questions
Mitchell D. Dynan about service quality in 11 categories,
Judith Noelle Lamb including "knowledge of operations contact,"
Robert J. Manning "keeping you informed," and "ease of doing
Lisa B. Nurme business" with the firm.
Kevin R. Parke
Stephen Pesek
Brian E. Stack
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*AFFILIATED WITH THE INVESTMENT ADVISER
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule
out the possibility of future monetary tightening in the second half of the
year if, as we now expect, the economy strengthens during the balance of 1997.
Therefore, our risk/reward outlook for the fixed-income markets is neutral,
and we believe that fixed-income investors should think in terms of earning
the coupon income from their investments rather than seeking possible gains
from price appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEWS
MFS Core Growth Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 45.22%, and Class I shares returned 45.31%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
Four general themes best describe the Fund's current holdings, which are built
from the bottom up based on individual stock selection. First, the Fund seeks
companies with high unit sales growth that can support above-average revenue
growth. Second, the Fund looks for companies that 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 seem able to
control their own destinies through internal changes such as 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 that, in our opinion, have the potential to benefit from a fundamental
mismatch in the balance between supply and demand.
Positions in several industry sectors have been added to the Fund or have been
increased in recent months, including drug store chains, in which we expect to
see growth as the population ages, and entertainment companies, in which
consolidations are continuing. We have also increased the Fund's holdings in the
oil service sector, which is benefiting from a mismatch in supply and demand, as
well as in package delivery companies, which are capitalizing on the strong
economy and wage pressures at United Parcel Service.
/s/ Stephen Pesek
Stephen Pesek
Portfolio Manager
MFS Equity Income Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 38.05%, and Class I shares returned 37.95%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500.
The Fund's top holdings remain in the financial services, utilities, energy, and
industrial goods and services sectors. Within financial services, the Fund
remains heavily weighted in insurance stocks, in which restructuring and
consolidation are leading to improved returns and better valuations. The Fund's
utility holdings are concentrated in gas distribution companies, high-quality,
low-cost electric utilities, and well-positioned local and long-distance
telephone companies. Essentially, the Fund is seeking to invest in companies
that we believe are well insulated from heightened competition and/ or companies
that may benefit from continuing consolidation in these industries. The energy
sector remains a key one for the Fund, especially those companies that are
dedicated to increasing production, cutting costs, and improving returns in
lagging businesses such as refining. Pollution control is a growing portion of
the Fund's holdings in industrial goods and services. This industry has
underperformed the market for several years but is now refocusing on its core
business, embracing cost cutting, and allocating capital more carefully.
The Fund continues to seek holdings in companies that we believe provide
attractive dividend yields and reasonable valuations, characteristics that we
feel could provide protection against price declines in a volatile market.
/s/ Lisa B. Nurme
Lisa B. Nurme
Portfolio Manager
MFS Special Opportunities Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 31.84%, and Class I shares returned 32.23%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500 and to a 15.55% return for
the average high-yield corporate bond fund as tracked by CDA/ Wiesenberger, an
independent firm that reports mutual fund performance.
The Fund continues to have the majority of its assets in common stocks because
we have found few attractive investments in the distressed and high-yield
markets. The Fund's investment strategy continues to incorporate both growth
and value disciplines. We have found investment opportunities in companies
that have recently emerged from bankruptcy, companies with financially
leveraged capital structures but with strong cash flow and solid earnings
prospects, and companies with attractive growth prospects but with valuations
that don't fully reflect these prospects. Our overall stock market perspective
continues to be cautious; however, we have been able to find an adequate
number of special situations for investment. The weighting of high-yield and
distressed bonds is likely to increase as more-appealing investment ideas
become available.
/s/ John F. Brennan, Jr. /s/ Robert J. Manning
John F. Brennan, Jr. Robert J. Manning
Portfolio Manager Portfolio Manager
MFS Blue Chip Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
17.70%. These returns, which include the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 22.91% return for the S&P
500 for the same period.
The Fund's investment strategy continues to be predicated on the assumption that
the global economy will grow slowly during 1998 and that U.S. interest rates
will remain fairly stable. In the United States, this assumption is supported by
the longevity of the current economic recovery and the high levels of consumer
debt. Economic growth remains moderate in a good part of Europe. Double-digit
unemployment rates in France (in addition to tax increases) and Germany should
prevent these economies from accelerating. Japan is weak, and economic growth in
other Asian countries could slow as interest rates rise.
The Fund is positioned relatively defensively, with the bulk of its investments
in companies that we believe can sustain double-digit earnings growth in a
slow-growth environment. Earnings ultimately drive stock prices, and investors
will bid up the share prices of companies that can achieve above-average
earnings growth.
The Fund's holdings are diverse and spread across many industries. However,
consistent with this defensive posture, the Fund continues to be overweighted in
the consumer staples and health care sectors. Conversely, the Fund is
significantly underweighted in basic materials and automobiles and housing. The
industrial goods sector is overweighted but aerospace and defense companies have
been emphasized. We believe this sector should perform relatively well in a
slow-growth economy. Similarly, the retail weighting is greater than the
market's, but all of this is in supermarkets and drug stores. The financial
services sector is overweighted, with an emphasis on high-quality regional banks
and insurance companies. The weightings in energy and utilities and
communications approximate those of the market, with the primary energy holdings
being large multinational oil companies. While the utility holdings offer modest
price appreciation, they are viewed as the ballast in the portfolio and
contribute to the Fund's yield. Emphasis has also been placed on companies that
have significant recurring revenue streams and/or that participate in dynamic,
high-growth markets. Examples would be First Data, DST Systems, and Service
Corporation International. For the same reasons, the bulk of the Fund's
technology investments are in the software industry.
/s/ Mitchell D. Dynan
Mitchell D. Dynan
Portfolio Manager
MFS Convertible Securities Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 14.70%, while its
Class I shares returned 14.60%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 15.98%
return for the Merrill Lynch All Convertibles Index, an unmanaged index of
convertible securities, and to a 14.48% return for the average convertible
securities fund for the same period as tracked by Lipper Analytical Services,
Inc., an independent firm that reports mutual fund performance.
The Fund is taking an extremely defensive posture due to the stock market's
current high valuation and its increased volatility in order to preserve
capital. Convertible securities comprise 80% of the portfolio, versus the
required 65% minimum. Increased demand for the convertible asset class has led
to a more expensive convertible market, as illustrated by the aggressive pricing
of new issues. In response, the portfolio is skewed toward convertibles that are
technically cheap; that is, those whose price movements correlate well with
upward price movements in the underlying common stock and that have
above-average yield.
The Fund's overall strategy is to invest in companies that we believe are
benefiting from one or more of the following trends: industry consolidation,
market dominance, and cost containment. Performance was favorably impacted by
overweightings in industrial goods and services companies, including Browning
Ferris, Corning, and U.S. Filter; leisure companies, which included American
Radio Systems and Royal Caribbean Cruises; financial services companies such as
Frontier Insurance and MGIC Investment Corp.; and technology companies,
including Baan and Data General. Conversely, companies in the basic materials
sector, such as RMI Titanium and Titanium Metals, detracted from year-to-date
performance. A value-oriented approach will continue to be used to evaluate
company fundamentals and the technical aspects of convertible securities.
/s/ Judith Noelle Lamb
Judith Noelle Lamb
Portfolio Manager
MFS New Discovery Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 30.70%, while its
Class I shares returned 30.80%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 17.97%
return for the Russell 2000 Total Return Index, an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks that are traded on
the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
The Fund invests principally in the shares of emerging companies that we believe
have the potential to grow into large enterprises. We maintain significant
weightings in the technology, health care, lodging, media, and business and
information services industries. We regard these as fundamentally attractive
sectors within which innovative and well-managed companies can be expected to
experience sustainable unit and earnings growth well above that seen in the
broader economy.
Among the factors contributing to the Fund's favorable performance were gains in
the shares of Summit Design, a provider of electronic design and automation
software, and Idexx Laboratories, a manufacturer of veterinary diagnostics
equipment and consumables. In addition, advances were recorded by broadcasters
American Radio Systems and Jacor Communications. The portfolio also benefited
from appreciation in the shares of Affiliated Computer Services and in high- end
hotel operators such as Wyndham, Renaissance, and Doubletree hotels.
Our research efforts continue to identify many attractively valued, emerging
growth companies that we believe can deliver exceptional long-term returns.
This, coupled with a market backdrop that suggests the potential for renewed
interest in smaller-company shares, makes us optimistic about performance
prospects for the year ahead.
/s/ Brian E. Stack
Brian E. Stack
Portfolio Manager
MFS Research International Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
9.60%. These returns, which assume the reinvestment of distributions but exclude
the effects of any sales charges, compare to a 4.39% return for the Morgan
Stanley Capital International EAFE (Europe, Australia, Far East) Index, an
unmanaged index of international stocks.
The top five sectors in the Fund are financial services (at 14.8% of assets),
technology (12.1%), utilities and communications (11.8%), leisure (11.0%), and
industrial goods and services (9.3%). The three top holdings are Nippon
Broadcasting, Secom, and Canon. Nippon Broadcasting is the world's largest radio
network operating company and has held the top audience ratings in Japan for the
past 22 years. We believe the company can continue to increase earnings by 10%
to 15% per year over the next several years. Secom holds a dominant 60% market
share of the electronic security market in Japan and holds over a 70% market
share through subsidiaries in Korea, Taiwan, Thailand, Malaysia, and Singapore.
We expect Canon's underlying operating growth to be at 12% in the coming year.
The company's valuation is currently cheap for a quality growth company.
In the technology sector, Sony's new digital product launches and strong product
pipeline continue to offer the company significant opportunity, while its new
management's compensation is directly tied to the company's performance. Through
major distributors in Europe and Japan, Sony Pictures will soon exploit the
3,400 movie titles it has in its motion picture bank. As a result, we expect
operating profits to grow at an average of over 20% over the next couple of
years.
Within the financial services sector, several banks and insurance companies in
Hong Kong, Great Britain, France, and Japan continue to demonstrate good
earnings growth that, coupled with substantial cost savings, should yield
excellent results.
The Fund is based upon the international research analysts' best ideas within
their industries. Stocks are selected after careful, in-depth, fundamental
analysis of companes' earnings outlooks. Although each analyst incorporates
general economic forecasts into his or her decision-making process, ultimately,
stocks selected for the Fund represent companies that the analysts believe offer
the best possibilities for capital appreciation regardless of the economic
outlook. These companies typically demonstrate dominant and/or growing market
share, quality new and existing products, superior management teams, and strong
financial statements. Sector and industry weightings are a result of the "best
ideas" stock-selection process. However, the analysts revisit weightings
regularly to assure agreement within the changing economic landscape. We will
continue to use a bottom-up, fundamental approach to investing in companies for
the Fund.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The committee of MFS equity research analysts is responsible for the day-to-
day management of the Fund under the general supervision of Mr. Parke.
MFS Science and Technology Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
25.30%. These returns, which assume the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 23.44% return for the
NASDAQ Composite Index, an unmanaged index of common stocks traded on NASDAQ,
and to a 19.78% return for the average technology fund as tracked by CDA/
Wiesenberger, an independent firm that reports mutual fund performance.
The Fund continues to seek companies that we believe are fast growing, have
market share leadership, and have a defensible strategic position. Holdings
remain focused in the computer software, networking, business services, and
semiconductor areas. To date, the Fund has not made significant investments in
the health care sector.
The Fund's performance has been favorably impacted by stock selection and by a
generally strong technology market. The volatility of the technology sector has
also provided attractive buying opportunities during times of price weakness.
Top holdings include Oracle Systems, Microsoft, and Computer Associates
International. All three of these stocks have seen outstanding price
appreciation driven by a healthy industry environment and by each management's
ability to deliver superior financial results. We believe the outlook for the
technology sector remains highly attractive, while the outlook for the health
care sector should start to improve.
/s/ Irfan Ali
Irfan Ali
Portfolio Manager
<PAGE>
PORTFOLIO MANAGERS' PROFILES
Each portfolio manager has acted in that capacity since the commencement of
investment operations of each Fund.
MFS CORE GROWTH FUND
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.
MFS EQUITY INCOME FUND
Lisa B. 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.
MFS SPECIAL OPPORTUNITIES FUND
John F. Brennan, Jr., has been a member of the MFS investment staff since 1985.
A graduate of the University of Rhode Island and the Stanford University
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 in 1995.
Robert J. 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 the
Boston College Graduate School of Management, he was named Vice President
Investments in 1988 and Senior Vice President in 1993.
MFS BLUE CHIP FUND
Mitchell D. Dynan joined the MFS Research Department in 1986. A graduate of
Tufts University, he was named Assistant Vice President - Investments in 1987
and Vice President - Investments in 1988.
MFS CONVERTIBLE SECURITIES FUND
Judith Noelle Lamb joined MFS in 1992 as Vice President and analyst
specializing in convertible securities. She is a graduate of New York
University and the New York University Graduate School
of Business.
MFS NEW DISCOVERY FUND
Brian E. Stack joined the MFS Research Department as Vice President Investments
in 1993. A graduate of Boston College and the Darden School of Business at the
University of Virginia, he has worked as an equity analyst since 1987.
MFS RESEARCH INTERNATIONAL FUND
The committee of MFS equity research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Kevin R. Parke. A
graduate of Lehigh University and the Harvard University Graduate School of
Business Administration, Mr. Parke joined the MFS Research Department in 1985 as
an industry specialist and was named Assistant Vice President - Investments in
1987, Vice President - Investments in 1988, Senior Vice President in 1993,
Director of Equity Research in 1995, and Executive Vice President in 1997.
MFS SCIENCE AND TECHNOLOGY FUND
Irfan Ali joined MFS in 1993 as an industry specialist. A graduate of Harvard
College and the Harvard University Graduate School of Business Administration,
he was named Assistant Vice President in 1996 and Vice President in 1997.
<PAGE>
INVESTMENT OBJECTIVES
MFS CORE GROWTH FUND
The objective of the Fund 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 that 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).
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS EQUITY INCOME FUND
The primary objective of the Fund is reasonable income and the secondary
objective is 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.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
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 that represent uncommon value by having the potential
for significant capital appreciation over a period of 12 months or longer.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS BLUE CHIP FUND
The objective of the 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 that the Fund's investment
adviser believes have above-average capital appreciation potential. The Fund may
invest up to 35% of its total assets in other securities (including emerging
growth companies) offering an opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS CONVERTIBLE SECURITIES FUND
The objective of the 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 nonconvertible corporate and U.S.
government fixed-income securities, equity securities, and money market
instruments. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS NEW DISCOVERY FUND
The objective of the 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 that the Fund's manager believes offer superior
prospects for growth. The Fund 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.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS RESEARCH INTERNATIONAL FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies whose principal activities are located outside the United States
and may invest up to 35% of its total assets in other securities offering an
opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS SCIENCE AND TECHNOLOGY FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies that the Fund's manager 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). The Fund may also invest up to 35%
of its total assets in other securities offering an opportunity for capital
appreciation. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
PERFORMANCE SUMMARY
Currently, each Fund offers only Class A and Class I shares, 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.
The information below and on the following page illustrates the historical
performance of the Funds' Class A shares in comparison to various market
indicators. Class A share performance results reflect no sales charge; benchmark
comparisons are unmanaged and do not reflect any fees or expenses. The
performance of other share classes will be greater than or less than the line
shown, based on differences in charges and fees paid by shareholders investing
in different classes. It is not possible to invest directly in an index.
MFS CORE GROWTH FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2,
1996, through August 31, 1997)
MFS Core S&P 500 Consumer
Growth Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 12,330 $ 10,745 $ 10,253
2/97 $ 15,303 $ 13,166 $ 10,405
8/97 $ 17,905 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class A) at net asset value +45.22% +41.95%
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class I) at net asset value +45.31% +42.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS EQUITY INCOME FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Equity S&P 500 Consumer
Income Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,070 $ 10,745 $ 10,253
2/97 $ 13,312 $ 13,166 $ 10,405
8/97 $ 15,282 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class A) at net asset value +38.05% +29.05%
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class I) at net asset value +37.95% +29.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS SPECIAL OPPORTUNITIES FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Special S&P 500 Consumer
Opportunities Fund Composite Price Index
- Class A Index - U.S.
------------------ --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,360 $ 10,745 $ 10,253
2/97 $ 12,789 $ 13,166 $ 10,405
8/97 $ 14,976 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MFS Special Opportunities Fund (Class A) at net asset value +31.84% +27.49%
- ------------------------------------------------------------------------------------
MFS Special Opportunities Fund (Class I) at net asset value +32.23% +27.72%
- ------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------------
Average high-yield corporate bond fund* +15.55% +13.22%
- ------------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class I shares, which became available on January 2, 1997, have no sales charge
or Rule 12b-1 fees and are only available to certain institutional investors.
Class I share results include the performance and the operating expenses of
Class A shares for periods prior to the commencement of offering of Class I
shares. Because operating expenses attributable to Class A shares are greater
than those of Class I shares, Class I share performance generally would have
been higher than Class A share performance. The Class A share performance
included within the Class I share performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
DIVIDENDS-RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE PERCENTAGE OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR THE FUNDS
WAS:
FUND DIVIDENDS-RECEIVED DEDUCTION
----------------------------------------------
MFS CORE GROWTH FUND 2.64%
MFS EQUITY INCOME FUND 21.37%
MFS SPECIAL OPPORTUNITIES FUND 4.84%
MFS BLUE CHIP FUND 48.57%
MFS CONVERTIBLE SECURITIES FUND 91.49%
MFS NEW DISCOVERY FUND 0.36%
MFS RESEARCH INTERNATIONAL FUND 0.04%
MFS SCIENCE AND TECHNOLOGY FUND 4.16%
FOREIGN TAX CREDIT
THE RESEARCH INTERNATIONAL FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY
11.8% OF ITS ORDINARY INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO
HAVE PAID FOREIGN TAXES EQUIVALENT TO APPROXIMATELY 1.1% OF ITS ORDINARY
INCOME.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CORE GROWTH FUND
Stocks - 96.2%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 90.9%
Aerospace - 0.6%
Thiokol Corp. 200 $ 15,925
- -------------------------------------------------------------------------------
Airlines - 0.5%
Continental Airlines Holdings, Inc.* 400 $ 14,650
- -------------------------------------------------------------------------------
Automotive - 0.5%
Hayes Wheels International, Inc.* 400 $ 13,000
- -------------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Comerica, Inc. 200 $ 14,163
Northern Trust Corp. 400 21,250
----------
$ 35,413
- -------------------------------------------------------------------------------
Business Machines - 2.1%
Affiliated Computer Services, Inc., "A"* 500 $ 13,125
Sun Microsystems, Inc.* 300 14,400
Texas Instruments, Inc. 275 31,247
----------
$ 58,772
- -------------------------------------------------------------------------------
Business Services - 3.1%
At Home Corp.* 100 $ 1,913
Computer Sciences Corp.* 350 26,031
Corporate Family Solutions, Inc.* 100 1,500
CUC International, Inc.* 1,200 28,200
Ikon Office Solutions, Inc. 800 20,800
Innova Corp.* 100 2,200
Lamalie Associates, Inc.* 100 1,900
Pierce Leahy Corp.* 100 2,725
----------
$ 85,269
- -------------------------------------------------------------------------------
Chemicals - 1.6%
Air Products & Chemicals, Inc. 300 $ 24,469
Ferro Corp. 500 18,813
----------
$ 43,282
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.7%
Microsoft Corp.* 150 $ 19,828
- -------------------------------------------------------------------------------
Computer Software - Systems - 8.0%
Aehr Test Systems* 100 $ 1,750
Aris Corp.* 100 2,450
BMC Software, Inc.* 300 18,788
Cadence Design Systems, Inc.* 600 28,538
Compaq Computer Corp.* 650 42,575
Computer Associates International, Inc. 500 33,438
Compuware Corp.* 550 33,963
Lear Corp.* 100 4,581
Oracle Systems Corp.* 900 34,313
Peritus Software Services, Inc.* 100 2,500
Synopsys, Inc.* 450 15,581
TSI International Software Ltd.* 100 1,225
----------
$ 219,702
- -------------------------------------------------------------------------------
Consumer Goods and Services - 7.5%
Colgate-Palmolive Co. 200 $ 12,550
Meyer Fred, Inc.* 400 20,800
Philip Morris Cos., Inc. 950 41,444
RJR Nabisco Holdings Corp. 550 19,147
Tyco International Ltd.* 1,440 112,950
----------
$ 206,891
- -------------------------------------------------------------------------------
Containers - 3.1%
AptarGroup, Inc. 350 $ 19,688
Corning, Inc. 550 29,081
Jefferson Smurfit Corp.* 700 13,606
Stone Container Corp. 1,300 22,425
----------
$ 84,800
- -------------------------------------------------------------------------------
Electrical Equipment - 0.5%
Westinghouse Electric Corp. 500 $ 12,875
- -------------------------------------------------------------------------------
Electronics - 7.7%
Altera Corp.* 350 $ 18,638
Analog Devices, Inc.* 500 16,563
Atmel Corp.* 700 24,762
Intel Corp. 600 55,275
International Rectifier Corp.* 600 13,688
KLA-Tencor Corp.* 200 14,175
Kulicke & Soffa Industries, Inc.* 600 27,563
Teradyne, Inc.* 750 41,766
----------
$ 212,430
- -------------------------------------------------------------------------------
Entertainment - 5.5%
American Radio Systems Corp., "A"* 650 $ 32,013
Clear Channel Communications, Inc.* 500 33,969
Gemstar Group Ltd.* 800 16,400
ITT Corp.* 250 15,703
LIN Television Corp.* 500 23,719
Univision Communications, Inc., "A"* 600 30,750
----------
$ 152,554
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
American Express Co. 325 $ 25,269
Associates First Capital Corp., "A" 200 11,613
Federal National Mortgage Assn. 500 22,000
Morgan Stanley, Dean Witter, Discover and Co. 300 14,438
----------
$ 73,320
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Archer-Daniels-Midland Co. 525 $ 11,353
Wrigley (Wm) Junior Co. 300 21,750
----------
$ 33,103
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Champion International Corp. 400 $ 23,675
- -------------------------------------------------------------------------------
Insurance - 5.5%
Chubb Corp. 225 $ 15,047
CIGNA Corp. 150 27,506
Conseco, Inc. 775 33,325
Frontier Insurance Group, Inc. 100 3,500
Hartford Life, Inc., "A" 100 3,731
Lincoln National Corp. 350 23,428
Nationwide Financial Services, Inc., "A" 100 2,775
Progressive Corp. 150 14,850
Reliastar Financial Corp. 250 18,688
Travelers Group, Inc. 150 9,525
----------
$ 152,375
- -------------------------------------------------------------------------------
Machinery - 0.1%
JLK Direct Distribution, Inc., "A"* 100 $ 2,413
- -------------------------------------------------------------------------------
Medical and Health Products - 6.8%
Arterial Vascular Engineering, Inc.* 600 $ 22,200
Boston Scientific Corp.* 400 28,200
Bristol-Myers Squibb Co. 400 30,400
McKesson Corp. 275 25,764
Mentor Corp. 1,000 30,750
Ocular Sciences, Inc.* 100 1,913
Schering Plough Corp. 960 46,080
Schick Technologies, Inc.* 100 2,650
----------
$ 187,957
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 5.0%
AmeriSource Health Corp. "A"* 600 $ 30,037
HEALTHSOUTH Corp.* 800 19,950
Mariner Health Group, Inc.* 300 4,350
Medtronic, Inc. 50 4,519
Orthalliance, Inc.* 100 1,388
St. Jude Medical, Inc.* 650 24,741
United Healthcare Corp. 840 40,845
Vencor, Inc.* 300 12,038
----------
$ 137,868
- -------------------------------------------------------------------------------
Office Equipment - 1.1%
Office Depot, Inc.* 1,600 $ 29,500
- -------------------------------------------------------------------------------
Oil Services - 4.0%
Trico Marine Services, Inc.* 400 $ 12,400
Baker Hughes, Inc. 200 8,475
Cal Dive International, Inc.* 100 3,400
Camco International, Inc. 250 17,219
Cooper Cameron Corp.* 300 19,463
Friede Goldman International, Inc.* 100 4,025
Noble Drilling Corp.* 800 22,750
Weatherford Enterra, Inc.* 500 23,031
----------
$ 110,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pollution Control - 0.9%
Republic Industries, Inc.* 500 $ 12,281
Waste Management, Inc. 400 12,800
----------
$ 25,081
- -------------------------------------------------------------------------------
Printing and Publishing - 0.7%
CMP Media, Inc.* 100 $ 2,675
Quipp, Inc.* 1,200 18,000
----------
$ 20,675
- -------------------------------------------------------------------------------
Railroads - 2.3%
Burlington Northern Santa Fe Railway Co. 225 $ 20,630
Kansas City Southern Industries, Inc. 200 14,975
Wisconsin Central Transportation Corp.* 900 27,900
----------
$ 63,505
- -------------------------------------------------------------------------------
Real Estate - 0.2%
Equity Office Properties Trust* 200 $ 5,838
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
Hilton Hotels Corp. 950 $ 29,153
Prime Hospitality Corp.* 500 9,500
Trendwest Resorts, Inc.* 100 1,825
----------
$ 40,478
- -------------------------------------------------------------------------------
Special Products and Services - 0.8%
Keystone International, Inc. 600 $ 22,613
- -------------------------------------------------------------------------------
Stores - 7.6%
CVS Corp. 800 $ 45,100
Dollar General Corp. 450 18,647
Linens 'N Things, Inc.* 450 13,050
Penney (J.C.), Inc. 400 24,000
Rite Aid Corp. 1,900 95,119
Viking Office Products, Inc.* 700 14,788
----------
$ 210,704
- -------------------------------------------------------------------------------
Telecommunications - 4.8%
3Com Corp.* 400 $ 19,975
Ascend Communications, Inc.* 250 10,609
Aspect Telecommunications Corp.* 1,200 26,400
Bay Networks, Inc.* 550 19,456
Cable Design Technologies Corp.* 500 16,719
Cisco Systems, Inc.* 250 18,844
Intermedia Communications, Inc.* 350 12,513
Qwest Communications International, Inc.* 200 8,150
----------
$ 132,666
- -------------------------------------------------------------------------------
Transportation - 1.3%
Caliber Systems, Inc. 500 $ 20,875
CNF Transportation, Inc. 400 14,450
----------
$ 35,325
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.7%
Sprint Corp. 400 $ 18,787
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,506,512
- -------------------------------------------------------------------------------
Foreign Stocks - 5.3%
Canada - 1.3%
Canadian National Railway Co. (Railroads) 500 $ 24,844
Coca-Cola Beverages Ltd. (Beverages)* 700 11,074
----------
$ 35,918
- -------------------------------------------------------------------------------
Ireland - 0.7%
Elan Corp. PLC, ADR (Health Products)* 450 $ 20,475
- -------------------------------------------------------------------------------
Netherlands - 0.6%
Akzo Nobel (Chemicals) 100 $ 15,466
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Kuoni Reisen Holdings AG (Transportation) 6 $ 24,620
- -------------------------------------------------------------------------------
United Kingdom - 1.8%
Danka Business Systems PLC, ADR (Business Services) 475 $ 22,206
British Petroleum PLC, ADR (Oil and Gas) 200 16,925
Grand Metropolitan PLC (Food and Beverage Products) 1,300 11,934
----------
$ 51,065
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 147,544
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,371,295) $2,654,056
- -------------------------------------------------------------------------------
Short-Term Obligation - 3.3%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 90 $ 89,987
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,461,282) $2,744,043
Other Assets, Less Liabilities - 0.5% 12,077
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,756,120
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS EQUITY INCOME FUND
Stocks - 89.3%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 78.1%
Aerospace - 3.9%
Allied Signal, Inc. 210 $ 17,338
General Dynamics Corp. 210 16,721
United Technologies Corp. 300 23,419
----------
$ 57,478
- -------------------------------------------------------------------------------
Agricultural Products - 1.1%
Case Corp. 240 $ 16,095
- -------------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Unifi, Inc. 390 $ 14,966
- -------------------------------------------------------------------------------
Automotive - 1.4%
Ford Motor Co. 200 $ 8,600
TRW, Inc. 240 12,510
----------
$ 21,110
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.6%
Bank of New York, Inc. 280 $ 12,495
CCB Financial Corp. 190 15,366
Comerica, Inc. 200 14,163
First Commerce Corp. 300 16,013
First Hawaiian, Inc. 350 12,906
National City Corp. 240 13,560
Northern Trust Corp. 250 13,281
PNC Bank Corp. 320 13,840
----------
$ 111,624
- -------------------------------------------------------------------------------
Business Machines - 1.1%
International Business Machines Corp. 160 $ 16,140
- -------------------------------------------------------------------------------
Cellular Telephones - 1.3%
Century Telephone Enterprises, Inc. 520 $ 18,883
- -------------------------------------------------------------------------------
Chemicals - 4.9%
Air Products & Chemicals, Inc. 260 $ 21,206
Dexter Corp. 200 7,600
Du Pont (E.I.) de Nemours & Co., Inc. 240 14,955
Ferro Corp. 380 14,298
Nalco Chemical Co. 370 14,800
----------
$ 72,859
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.5%
Meyer Fred, Inc.* 240 $ 12,480
Philip Morris Cos., Inc. 550 23,994
RJR Nabisco Holdings Corp. 240 8,355
Rubbermaid, Inc. 200 5,000
Tyco International Ltd. 200 15,687
----------
$ 65,516
- -------------------------------------------------------------------------------
Electrical Equipment - 3.3%
Cooper Industries, Inc. 320 $ 17,060
General Electric Co. 240 15,000
Hubbell, Inc. 350 16,056
----------
$ 48,116
- -------------------------------------------------------------------------------
Energy - 2.3%
Dresser Industries, Inc. 360 $ 15,030
Unocal Corp. 500 19,531
----------
$ 34,561
- -------------------------------------------------------------------------------
Financial Institutions - 1.7%
American Express Co. 150 $ 11,662
Union Planters Corp. 260 13,325
----------
$ 24,987
- -------------------------------------------------------------------------------
Food and Beverage Products - 3.2%
Archer-Daniels-Midland Co. 646 $ 13,970
General Mills, Inc. 80 5,130
Hormel Foods Corp. 480 14,280
Quaker Oats Co. 300 14,100
----------
$ 47,480
- -------------------------------------------------------------------------------
Food Products - 1.1%
Smucker (J.M.) Co. 650 $ 15,966
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.9%
Champion International Corp. 260 $ 15,389
Weyerhaeuser Co. 240 13,860
----------
$ 29,249
- -------------------------------------------------------------------------------
Insurance - 7.2%
Allstate Corp. 170 $ 12,421
Chubb Corp. 260 17,387
CIGNA Corp. 80 14,670
Conseco, Inc. 360 15,480
Hartford Financial Services Group, Inc. 150 11,963
Lincoln National Corp. 300 20,081
Torchmark Corp. 360 13,567
----------
$ 105,569
- -------------------------------------------------------------------------------
Medical and Health Products - 1.2%
Bristol-Myers Squibb Co. 240 $ 18,240
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
United Healthcare Corp. 140 $ 6,808
- -------------------------------------------------------------------------------
Oils - 5.2%
Atlantic Richfield Co. 180 $ 13,500
Chevron Corp. 220 17,036
Exxon Corp. 250 15,297
Texaco, Inc. 150 17,288
USX-Marathon Group 420 13,676
----------
$ 76,797
- -------------------------------------------------------------------------------
Pollution Control - 2.5%
Browning Ferris Industries, Inc. 490 $ 17,119
Waste Management, Inc. 600 19,200
----------
$ 36,319
- -------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.6%
Arden Realty, Inc. 240 $ 6,930
Boston Properties, Inc. 500 14,906
Kilroy Realty Corp. 300 7,669
Mid-America Apartment Communities, Inc. 480 13,170
Sovran Self Storage, Inc. 380 11,543
TriNet Corporate Realty Trust, Inc. 360 12,802
----------
$ 67,020
- -------------------------------------------------------------------------------
Stores - 3.1%
Longs Drug Stores Corp. 530 $ 13,415
Penney (J.C.), Inc. 340 20,400
Rite Aid Corp. 270 13,517
----------
$ 47,332
- -------------------------------------------------------------------------------
Supermarkets - 1.0%
Kroger Co.* 480 $ 14,460
- -------------------------------------------------------------------------------
Utilities - Electric - 4.7%
Cinergy Corp. 440 $ 14,547
FPL Group, Inc. 170 7,905
New Century Energies, Inc. 320 12,920
Pacificorp 420 8,715
Pinnacle West Capital Corp. 460 14,864
Sierra Pacific Resources 330 10,313
----------
$ 69,264
- -------------------------------------------------------------------------------
Utilities - Gas - 5.6%
Brooklyn Union Gas Co. 490 $ 14,792
Columbia Gas System, Inc. 200 13,200
Energen Corp. 300 10,819
National Fuel Gas Co. 300 13,331
Oneok, Inc. 420 13,597
UGI Corp. 630 16,459
----------
$ 82,198
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.2%
GTE Corp. 290 $ 12,923
Sprint Corp. 400 18,800
----------
$ 31,723
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,150,760
- -------------------------------------------------------------------------------
Foreign Stocks - 11.2%
Argentina - 0.5%
YPF Sociedad Anonima, ADR (Oils) 240 $ 7,815
- -------------------------------------------------------------------------------
Canada - 1.3%
Canadian National Railway Co. (Railroads) 390 $ 19,378
- -------------------------------------------------------------------------------
France - 2.1%
Alcatel Alsthom, ADR (Telecommunications) 560 $ 13,790
Elf Aquitaine, ADR (Oils) 320 17,840
----------
$ 31,630
- -------------------------------------------------------------------------------
Germany - 0.8%
Henkel Kgaa (Consumer Goods and Services) 250 $ 12,584
- -------------------------------------------------------------------------------
Italy - 0.4%
Eni S.p.A, ADR (Oils) 120 $ 6,660
- -------------------------------------------------------------------------------
Netherlands - 1.3%
Akzo Nobel (Chemicals) 120 $ 18,560
- -------------------------------------------------------------------------------
Switzerland - 1.0%
Novartis AG (Pharmaceuticals) 10 $ 14,122
- -------------------------------------------------------------------------------
United Kingdom - 3.8%
British Petroleum PLC, ADR (Oil and Gas) 333 $ 28,180
Grand Metropolitan (Food and Beverage Products) 1,550 14,229
SmithKline-Beecham PLC, ADR (Medical and Health
Products) 300 12,994
----------
$ 55,403
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 166,152
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,186,622) $1,316,912
- -------------------------------------------------------------------------------
Bonds - 0.8%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
U.S. Bonds - 0.8%
Automotive - 0.8%
Tower Automotive, Inc., 5s, 2004##
(Identified Cost, $10,000) $ 10 $ 10,800
- -------------------------------------------------------------------------------
Convertible Preferred Stocks - 5.3%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Aerospace - 0.6%
Loral Space & Communications Corp., 6s## 150 $ 8,025
- -------------------------------------------------------------------------------
Entertainment - 0.3%
Houston Industries, Inc., 7s 100 $ 5,075
- -------------------------------------------------------------------------------
Food Products - 0.7%
Ralston Purina Co., 7s, 2000 160 $ 9,530
- -------------------------------------------------------------------------------
Insurance - 0.8%
St. Paul Capital, 6s, 2025 180 $ 12,150
- -------------------------------------------------------------------------------
Medical and Health Technology Services- 0.8%
McKesson Financing Trust, 5s## 180 $ 12,375
- -------------------------------------------------------------------------------
Oils - 0.8%
Tosco Financing Trust, 5.75s## 190 $ 11,400
- -------------------------------------------------------------------------------
Utilities - Gas - 0.4%
Williams Cos., Inc., $3.50 Pref., 2049## 50 $ 5,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.9%
Salomon, Inc., 6.25s 250 $ 13,906
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $49,019) $ 77,961
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,245,641) $1,405,673
Other Assets, Less Liabilities - 4.6% 68,380
- -------------------------------------------------------------------------------
Net Assets - 100.0% $1,474,053
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SPECIAL OPPORTUNITIES FUND
Stocks - 86.2%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 76.5%
Aerospace - 5.6%
Allied Signal, Inc. 160 $ 13,210
B.E. Aerospace, Inc.* 3,500 124,250
Moog, Inc.* 1,600 58,200
Thiokol Corp. 300 23,887
----------
$ 219,547
- -------------------------------------------------------------------------------
Agricultural Products - 0.2%
AGCO Corp. 200 $ 6,500
----------
Apparel and Textiles - 0.2%
Reebok International Ltd. 200 $ 8,788
- -------------------------------------------------------------------------------
Automotive - 1.3%
Exide Corp. 2,500 $ 52,188
- -------------------------------------------------------------------------------
Banks and Credit Companies - 0.8%
Banc One Corp. 200 $ 10,725
Wells Fargo & Co. 76 19,323
----------
$ 30,048
- -------------------------------------------------------------------------------
Building - 4.4%
Newport News Shipbuilding, Inc. 300 $ 5,813
Nortek, Inc.* 3,000 75,375
Walter Industries, Inc.* 5,000 90,937
----------
$ 172,125
- -------------------------------------------------------------------------------
Business Machines - 1.4%
Compaq Computer Corp.* 875 $ 57,313
- -------------------------------------------------------------------------------
Business Services - 0.6%
Temple-Inland, Inc. 340 $ 21,930
- -------------------------------------------------------------------------------
Chemicals - 2.9%
Ferro Corp. 740 $ 27,842
NL Industries, Inc. 6,500 86,125
----------
$ 113,967
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.5%
Adobe Systems, Inc. 475 $ 18,703
- -------------------------------------------------------------------------------
Computer Software - Systems - 2.0%
Computer Associates International, Inc. 510 $ 34,106
Sybase, Inc.* 400 7,450
Synopsys, Inc.* 1,100 38,088
----------
$ 79,644
- -------------------------------------------------------------------------------
Conglomerates - 1.8%
MAXXAM, Inc.* 1,300 $ 71,500
- -------------------------------------------------------------------------------
Consumer Goods and Services - 13.0%
Darling International, Inc.* 2,300 $ 64,400
Meyer Fred, Inc.* 770 40,040
Philip Morris Cos., Inc. 870 37,954
Thermadyne Industries Holdings Corp.* 4,000 124,000
Tyco International Ltd.* 2,598 203,780
Westpoint Stevens, Inc.* 1,100 44,000
----------
$ 514,174
- -------------------------------------------------------------------------------
Containers - 4.3%
Atlantis Plastics, Inc.* 5,500 $ 32,312
Gaylord Container Corp.* 10,000 94,375
Jefferson Smurfit Corp.* 920 17,883
Stone Container Corp. 1,400 24,150
----------
$ 168,720
- -------------------------------------------------------------------------------
Electrical Equipment - 0.2%
Belden, Inc. 200 $ 7,750
- -------------------------------------------------------------------------------
Electronics - 1.0%
Atmel Corp.* 200 $ 7,075
Intel Corp. 65 5,988
Sony Corp. 50 4,406
Teradyne, Inc.* 370 20,605
----------
$ 38,074
- -------------------------------------------------------------------------------
Entertainment - 3.0%
American Radio Systems Corp., "A"* 802 $ 39,498
Casino America, Inc.* 1,100 3,025
Harrah's Entertainment, Inc.* 1,600 35,900
LIN Television Corp.* 350 16,603
Sodak Gaming, Inc.* 1,700 23,163
----------
$ 118,189
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Donaldson Lufkin & Jenrette, Inc. 320 $ 19,000
Federal Home Loan Mortgage Corp. 460 14,979
Union Planters Corp. 200 10,250
----------
$ 44,229
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.5%
Smith's Food & Drug Centers, Inc., "B"* 1,120 $ 61,320
- -------------------------------------------------------------------------------
Insurance - 3.5%
Chubb Corp. 400 $ 26,750
CIGNA Corp. 120 22,005
Conseco, Inc. 650 27,950
Hartford Financial Services Group, Inc. 250 19,938
Lincoln National Corp. 300 20,081
Reliastar Financial Corp. 310 23,172
----------
$ 139,896
- -------------------------------------------------------------------------------
Machinery - 0.3%
Greenfield Industries, Inc. 400 $ 10,550
- -------------------------------------------------------------------------------
Medical and Health Products - 0.6%
Bristol-Myers Squibb Co. 300 $ 22,800
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Integrated Health Services, Inc. 560 $ 18,480
St. Jude Medical, Inc.* 490 18,651
Tenet Healthcare Corp.* 700 19,075
United Healthcare Corp. 530 25,771
----------
$ 81,977
- -------------------------------------------------------------------------------
Metals and Minerals - 1.4%
Commonwealth Industries, Inc. 3,000 $ 57,375
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Dawson Production Services, Inc.* 2,100 $ 39,375
- -------------------------------------------------------------------------------
Oils - 1.3%
Enron Oil & Gas Co. 1,000 $ 24,125
Texaco, Inc. 220 25,355
----------
$ 49,480
- -------------------------------------------------------------------------------
Photographic Products - 1.4%
Anacomp, Inc.* 3,725 $ 56,806
- -------------------------------------------------------------------------------
Pollution Control - 0.7%
Waste Management, Inc. 900 $ 28,800
- -------------------------------------------------------------------------------
Railroads - 0.9%
Wisconsin Central Transportation Corp.* 1,140 $ 35,340
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.2%
Hilton Hotels Corp. 640 $ 19,640
Promus Hotel Corp.* 2,800 108,675
----------
$ 128,315
- -------------------------------------------------------------------------------
Special Products and Services - 1.0%
Keystone International, Inc. 1,100 $ 41,456
- -------------------------------------------------------------------------------
Stores - 6.0%
Arbor Drugs, Inc. 300 $ 7,163
Carson Pirie Scott & Co.* 1,800 63,900
CVS Corp. 700 39,462
Gantos, Inc.* 15,000 35,625
Gymboree Corp.* 220 5,390
Phar Mor, Inc.* 5,700 42,394
Rite Aid Corp. 850 42,553
----------
$ 236,487
- -------------------------------------------------------------------------------
Supermarkets - 2.0%
Ingles Markets, Inc. 3,900 $ 52,162
Safeway, Inc.* 512 26,080
----------
$ 78,242
- -------------------------------------------------------------------------------
Telecommunications - 3.8%
Cellular Communications International* 2,600 $ 93,600
HSN, Inc.* 1,775 58,575
----------
$ 152,175
- -------------------------------------------------------------------------------
Utilities - Electric - 1.1%
El Paso Electric Co.* 6,800 $ 42,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.4%
Sprint Corp. 370 $ 17,390
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 3,023,673
- -------------------------------------------------------------------------------
Foreign Stocks - 9.7%
Canada - 2.4%
Canadian National Railway Co. (Railroads) 810 $ 40,247
Gulf Canada Resources Ltd. (Oil Services)* 7,000 56,438
----------
$ 96,685
- -------------------------------------------------------------------------------
Hong Kong - 0.8%
Semi-Tech (Global) Ltd. (Electronics)* 21,000 $ 31,436
- -------------------------------------------------------------------------------
Japan - 0.7%
Canon, Inc., ADR (Special Products and Services) 145 $ 20,173
Sony Corp. (Electronics) 100 8,707
----------
$ 28,880
- -------------------------------------------------------------------------------
Netherlands - 0.3%
Akzo Nobel (Chemicals) 70 $ 10,826
- -------------------------------------------------------------------------------
Portugal - 0.4%
Banco Totta E Acores (Financial Institutions) 800 $ 14,351
- -------------------------------------------------------------------------------
South Korea - 0.2%
SK Telecom Ltd, ADR (Telecommunications)* 800 $ 7,200
- -------------------------------------------------------------------------------
Sweden - 0.3%
Sparbanken Sverige AB (Banks and Credit Cos.) 500 $ 10,821
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Novartis AG (Pharmaceuticals) 25 $ 35,305
- -------------------------------------------------------------------------------
United Kingdom - 3.7%
British Petroleum PLC, ADR (Oil and Gas) 422 $ 35,712
Central Transport Rental Group PLC, ADR (Special
Products and Services)* 48,187 33,129
Gallaher Group PLC, ADR
(Consumer Goods and Services)* 1,100 19,731
News Corp. Ltd., ADR (Entertainment) 2,900 43,863
Storehouse PLC (Retail)* 2,200 8,164
Tomkins PLC (Diversified Operations) 1,600 7,752
----------
$ 148,351
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 383,855
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,790,956) $3,407,528
- -------------------------------------------------------------------------------
Preferred Stock - 1.0%
- -------------------------------------------------------------------------------
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)* 22 $ 18,040
Supermarkets General Holdings Corp. (Supermarkets)* 1,100 22,275
- -------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $47,819) $ 40,315
- -------------------------------------------------------------------------------
Warrants - 0.6%
- -------------------------------------------------------------------------------
Gothic Energy Corp.* 30,000 $ 21,563
Peoples Choice TV Corp.* 45 0
Renaissance Cosmetics, Inc.* 20 2,000
Semi Tech Global* 2,100 509
- -------------------------------------------------------------------------------
Total Warrants (Identified Cost, $21,666) $ 24,072
- -------------------------------------------------------------------------------
Bonds - 1.7%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Automotive - 0.5%
Harvard Industries, Inc., 11.125s, 2005 $ 45 $ 18,900
- -------------------------------------------------------------------------------
Entertainment - 0.1%
Marvel Holdings, Inc., 0s, 1998 $ 30 $ 4,200
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.7%
Santa Fe Hotel, Inc., 11s, 2000 $ 35 $ 28,525
- -------------------------------------------------------------------------------
Telecommunications - 0.4%
Peoples Choice TV Corp., 13.125s, 2004 $ 45 $ 15,188
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $65,666) $ 66,813
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.8%
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $150 $ 149,978
- -------------------------------------------------------------------------------
Put Options Purchased - 0.7%
- -------------------------------------------------------------------------------
NUMBER OF CONTRACTS
- -------------------------------------------------------------------------------
Standard & Poor Index 500 Put (Identified Cost, $38,812) 4 $ 28,650
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $3,114,897) $3,717,356
- -------------------------------------------------------------------------------
Securities Sold Short - (3.2)%
- --------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Advanced Micro Devices, Inc.* (500) $ (18,719)
Arcadia Financial Ltd.* (1,800) (17,775)
Jayhawk Acceptance Corp.* (2,800) (3,325)
LCI International, Inc. (1,700) (40,800)
Station Casinos, Inc.* (2,300) (17,393)
Western Digital Corp.* (600) (28,875)
- -------------------------------------------------------------------------------
Total Securities Sold Short (Proceeds Received, $122,480) $ (126,887)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 9.2% 364,342
- -------------------------------------------------------------------------------
Net Assets - 100.0% $3,954,811
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS BLUE CHIP FUND
Stocks - 99.0%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 97.5%
Aerospace - 4.1%
General Dynamics Corp. 100 $ 7,963
Lockheed-Martin Corp. 150 15,553
United Technologies Corp. 80 6,245
----------
$ 29,761
- -------------------------------------------------------------------------------
Automotive - 1.0%
Goodrich (B.F.) Co. 170 $ 7,161
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.5%
Chase Manhattan Corp. 110 $ 12,231
Comerica, Inc. 145 10,268
Corestates Financial Corp. 140 8,610
National City Corp. 120 6,780
Norwest Corp. 120 6,892
U.S. Bancorp 110 9,632
----------
$ 54,413
- -------------------------------------------------------------------------------
Business Machines - 1.9%
International Business Machines Corp. 140 $ 14,122
- -------------------------------------------------------------------------------
Business Services - 3.3%
DST Systems, Inc.* 380 $ 13,751
First Data Corp. 250 10,266
----------
$ 24,017
- -------------------------------------------------------------------------------
Cellular Telephones - 1.0%
AirTouch Communications, Inc.* 220 $ 7,439
- -------------------------------------------------------------------------------
Chemicals - 3.3%
Air Products & Chemicals, Inc. 100 $ 8,156
Du Pont (E.I.) de Nemours & Co., Inc. 140 8,724
Praxair, Inc. 130 6,947
----------
$ 23,827
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.6%
Microsoft Corp.* 90 $ 11,897
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.7%
BMC Software, Inc.* 150 $ 9,393
Computer Associates International, Inc. 130 8,694
Oracle Systems Corp.* 240 9,150
----------
$ 27,237
- -------------------------------------------------------------------------------
Consumer Goods and Services - 11.0%
Avon Products, Inc. 100 $ 6,406
Colgate-Palmolive Co. 80 5,020
Gillette Co. 100 8,281
Philip Morris Cos., Inc. 330 14,396
Procter & Gamble Co. 70 9,315
Service Corp. International 300 9,600
Sherwin Williams Co. 200 5,488
Tyco International Ltd.* 275 21,570
----------
$ 80,076
- -------------------------------------------------------------------------------
Electrical Equipment - 3.2%
General Electric Co. 260 $ 16,250
Honeywell, Inc. 100 6,912
----------
$ 23,162
- -------------------------------------------------------------------------------
Electronics - 1.3%
Intel Corp. 100 $ 9,213
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Federal Home Loan Mortgage Corp. 235 $ 7,652
- -------------------------------------------------------------------------------
Food and Beverage Products - 8.3%
Coca-Cola Co. 140 $ 8,024
CPC International, Inc. 80 7,130
Hershey Foods Corp. 130 6,939
Interstate Bakeries Corp. 125 7,328
McCormick & Co., Inc. 330 7,796
Nabisco Holdings Corp. 170 7,055
PepsiCo, Inc. 190 6,840
Ralston-Ralston Purina Co. 100 9,000
----------
$ 60,112
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Kimberly-Clark Corp. 120 $ 5,693
- -------------------------------------------------------------------------------
Insurance - 8.0%
Allstate Corp. 140 $ 10,229
CIGNA Corp. 60 11,002
Hartford Financial Services Group, Inc. 120 9,570
MBIA, Inc. 100 11,325
Progressive Corp. 80 7,920
Torchmark Corp. 220 8,291
----------
$ 58,337
- -------------------------------------------------------------------------------
Medical and Health Products - 9.0%
American Home Products Corp. 120 $ 8,640
Bristol-Myers Squibb Co. 140 10,640
Johnson & Johnson 200 11,338
Lilly (Eli) & Co. 80 8,370
Merck & Co., Inc. 100 9,181
Pfizer, Inc. 310 17,166
----------
$ 65,335
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Cardinal Health, Inc. 100 $ 6,625
HEALTHSOUTH Corp.* 300 7,481
United Healthcare Corp. 160 7,780
----------
$ 21,886
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Schlumberger Ltd. 100 $ 7,619
- -------------------------------------------------------------------------------
Oils - 6.1%
Chevron Corp. 100 $ 7,744
Exxon Corp. 320 19,580
Mobil Corp. 140 10,185
Texaco, Inc. 60 6,915
----------
$ 44,424
- -------------------------------------------------------------------------------
Railroads - 1.3%
Burlington Northern Santa Fe 100 $ 9,169
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
HFS, Inc.* 200 $ 11,138
- -------------------------------------------------------------------------------
Stores - 2.4%
CVS Corp. 100 $ 5,637
Rite Aid Corp. 240 12,015
----------
$ 17,652
- -------------------------------------------------------------------------------
Supermarkets - 3.4%
Kroger Co.* 480 $ 14,460
Safeway, Inc.* 200 10,187
----------
$ 24,647
- -------------------------------------------------------------------------------
Utilities - Electric - 3.3%
Cinergy Corp. 210 $ 6,943
CMS Energy Corp. 160 5,750
Pinnacle West Capital Corp. 170 5,493
Public Service Co. of New Mexico 300 5,475
----------
$ 23,661
- -------------------------------------------------------------------------------
Utilities - Gas - 2.6%
Columbia Gas System, Inc. 110 $ 7,260
Pacific Enterprises 180 5,929
Union Pacific Resources Group, Inc. 220 5,500
----------
$ 18,689
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.8%
BellSouth Corp. 155 $ 6,820
SBC Communications, Inc. 125 6,797
Sprint Corp. 150 7,050
----------
$ 20,667
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 709,006
- -------------------------------------------------------------------------------
Foreign Stocks - 1.5%
United Kingdom - 1.5%
British Petroleum PLC, ADR (Oil and Gas)
(Identified Cost, $9,035) 131 $ 11,086
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $624,151) $ 720,092
Other Assets, Less Liabilities - 1.0% 7,397
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 727,489
- -------------------------------------------------------------------------------
* Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CONVERTIBLE SECURITIES FUND
Convertible Preferred Stocks - 50.8%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
Aerospace - 0.8%
Loral Space & Communications Corp., 6s## 100 $ 5,350
- -------------------------------------------------------------------------------
Airlines - 0.6%
Continental Airlines Finance Trust, 8.5s 50 $ 4,100
- -------------------------------------------------------------------------------
Chemicals - 0.4%
Atlantic Richfield Co., 9.01s 120 $ 2,850
- -------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
Wang Labs, Inc., 6.5s*## 50 $ 2,494
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.6%
Corning Delaware L.P., 6s 200 $ 16,600
- -------------------------------------------------------------------------------
Entertainment - 6.3%
American Radio Systems Corp., 7s*## 225 $ 14,681
Golden Books Financing Trust, 8.75s*## 200 10,500
Houston Industries, Inc./Time Warner, 7s* 100 5,075
Royal Caribbean Cruises Ltd., 7.25s 150 10,238
----------
$ 40,494
- -------------------------------------------------------------------------------
Financial Institutions - 8.6%
Finova Finance Trust, 5.5s, 2016 250 $ 15,500
Jefferson Pilot Corp., 7.25s, 2000 100 10,513
Merrill Lynch/MGIC Investment Corp., 6.5s 150 12,975
Merrill Lynch/IMC Global, 6.25s 150 5,606
Salomon/Financial Security Insurance, 7.625s 300 10,575
----------
$ 55,169
- -------------------------------------------------------------------------------
Food - 0.9%
Ralston Purina Interstate Bakeries, 7s* 100 $ 5,956
- -------------------------------------------------------------------------------
Food and Beverage Products - 2.5%
Dole Food, 7s 425 $ 16,150
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.4%
International Paper Capital Trust, 5.25s 150 $ 8,775
- -------------------------------------------------------------------------------
Insurance - 5.9%
American Heritage Life Investment, 8.5s* 100 $ 5,950
Conseco, Inc., 7s 100 14,556
Frontier Financing Trust, 6.25s*## 100 8,025
SunAmerica, Inc., $3.188 150 6,647
SunAmerica, Inc., $3.10 25 2,875
----------
$ 38,053
- -------------------------------------------------------------------------------
Machinery & Tools - 1.8%
Greenfield Capital Trust, 6s, 2016* 250 $ 11,812
- -------------------------------------------------------------------------------
Medical Equipment - 1.1%
McKesson Financing Trust, 5s## 100 $ 6,875
- -------------------------------------------------------------------------------
Metals and Minerals - 1.7%
Timet Capital Trust, 6.625s*## 100 $ 5,913
USX Marathon/RMI Titanium, 6.75s* 200 5,050
----------
$ 10,963
- -------------------------------------------------------------------------------
Oil & Gas - 1.9%
Tosco Financing Trust, 5.75s## 200 $ 12,000
- -------------------------------------------------------------------------------
Pollution Control - 2.6%
Browning Ferris Industries, Inc., 7.25s 500 $ 16,531
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.3%
Hilton Hotels Corp., 8s 100 $ 2,800
Host Marriott Financial Trust, 6.75s*## 300 18,450
----------
$ 21,250
- -------------------------------------------------------------------------------
Steel - 0.5%
AK Steel Holding Corp., 7s 75 $ 2,962
- -------------------------------------------------------------------------------
Stores - 1.6%
AnnTaylor Finance Trust, 8.5s*# 75 $ 4,406
K-Mart Financing I, 7.75s 100 5,894
----------
$ 10,300
- -------------------------------------------------------------------------------
Telecommunications - 1.0%
Intermedia Communication, Inc., 7s*## 100 $ 2,700
IXC Communications Inc., 7.25s*## 20 2,570
Qualcomm Financial Trust, 5.75s*## 25 1,116
----------
$ 6,386
- -------------------------------------------------------------------------------
Transportation - 0.6%
Hvide Capital Trust, 6.5s *## 60 $ 3,803
- -------------------------------------------------------------------------------
Utilities - Electric - 1.8%
Calenergy Capital Trust III, 6.5s*## 250 $ 11,750
- -------------------------------------------------------------------------------
Utilities - Gas - 0.9%
Enron Corp., 6.25s 250 $ 5,734
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
Salomon/Cincinnati Bell, 6.25s 175 $ 9,734
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $292,959) $ 326,091
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 Omitted)
- -------------------------------------------------------------------------------
Convertible Bonds - 27.5%
- --------------------------------------------------------------------------------
Aerospace - 1.4%
Hexcel Corp., 7s, 2003 $ 5 $ 9,287
- -------------------------------------------------------------------------------
Building - 0.3%
Continental Homes Holding Corp., 6.875s, 2002 $ 2 $ 2,248
- -------------------------------------------------------------------------------
Business Services - 1.6%
Protection One Alarm Monitoring, 6.75s, 2003 $ 9 $ 10,114
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.9%
Adaptec, Inc., 4.75s, 2004## $ 8 $ 9,240
Data General Corp., 6s, 2004## 6 9,413
Read Rite Corp., 6.5s, 2004 3 3,135
Wind River Systems Inc., 5s, 2002## 3 3,386
----------
$ 25,174
- -------------------------------------------------------------------------------
Electronics - 3.9%
Cymer, Inc., 3.5s (7.25s, 8/1/00), 2004## $ 6 $ 7,162
Photronics, Inc., 6s, 2004 2 2,545
Solectron Corp., 6s, 2006## 3 4,196
Xilinx, Inc., 5.25s, 2002## 10 11,225
----------
$ 25,128
- -------------------------------------------------------------------------------
Medical and Health Products - 0.3%
North American Vaccine, Inc., 6.5s, 2003## $ 2 $ 1,843
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.4%
FPA Medical Management, Inc., 6.5s, 2001## $ 5 $ 6,675
Healthsource, Inc., 5s, 2003 2 2,010
----------
$ 8,685
- -------------------------------------------------------------------------------
Oil Services - 3.9%
Diamond Offshore Drilling, Inc., 3.75s, 2007 $ 5 $ 6,525
Nabors Industries, Inc., 5s, 2006 3 6,015
Parker Drilling Co., 5.5s, 2004 6 6,540
Pogo Producing Co., 5.5s, 2006 5 5,906
----------
$ 24,986
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.5%
Dura Pharmaceuticals Inc., 3.5s, 2002 $ 3 $ 2,921
- -------------------------------------------------------------------------------
Pollution Control - 3.7%
Sanifill, Inc., 5s, 2006 $ 5 $ 7,856
U.S. Filter Corp., 6s, 2005 5 10,075
USA Waste Services, Inc., 4s, 2002 5 5,700
----------
$ 23,631
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.9%
Hilton Hotels Corp., 5s, 2006 $ 5 $ 5,675
- -------------------------------------------------------------------------------
Special Products and Services - 3.6%
Corporate Express, Inc., 4.5s, 2000 $ 10 $ 9,150
Personnel Group Of America Inc., 5.75s, 2004## 6 7,088
Sunrise Assisted Living Inc., 5.5s, 2002## 3 3,210
United States Office Products Company, 5.5s, 2001 3 3,697
----------
$ 23,145
- -------------------------------------------------------------------------------
Stores - 2.1%
Home Depot, Inc., 3.25s, 2001 $ 5 $ 5,800
Office Depot, Inc., 0s, 2008 5 2,988
Saks Holdings, Inc., 5.5s, 2006 5 4,337
----------
$ 13,125
- -------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $152,930) $ 175,962
- -------------------------------------------------------------------------------
Stocks - 14.4%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
U.S. Stocks - 12.8%
Aerospace - 0.6%
United Technologies Corp. 50 $ 3,903
- -------------------------------------------------------------------------------
Building - 0.7%
Newport News Shipbuilding, Inc. 220 $ 4,263
- -------------------------------------------------------------------------------
Chemicals - 0.2%
Du Pont (E.I.) de Nemours & Co., Inc. 25 $ 1,558
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
Colgate-Palmolive Co. 60 $ 3,765
Gillette Co. 60 4,969
Procter & Gamble Co. 25 3,326
Tyco International Ltd.* 48 3,765
----------
$ 15,825
- -------------------------------------------------------------------------------
Electrical Equipment - 0.4%
General Electric Co. 40 $ 2,500
- -------------------------------------------------------------------------------
Electronics - 1.1%
Intel Corp. 20 $ 1,843
Solectron Corporation* 50 2,094
Sony Corp. 35 3,084
----------
$ 7,021
- -------------------------------------------------------------------------------
Insurance - 0.6%
Hartford Life, Inc., "A"* 100 $ 3,731
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Bristol-Myers Squibb Co. 75 $ 5,700
Johnson & Johnson 50 2,835
McKesson Corp. 25 2,342
----------
$ 10,877
- -------------------------------------------------------------------------------
Oils - 0.7%
Devon Energy Corp. 100 $ 4,269
- -------------------------------------------------------------------------------
Pollution Control - 0.8%
Browning Ferris Industries, Inc. 100 $ 3,494
U.S. Filter Corp.* 50 1,800
----------
$ 5,294
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.2%
Hilton Hotels Corp. 50 $ 1,534
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
Stanley Works 100 $ 4,256
- -------------------------------------------------------------------------------
Stores - 0.6%
Rite Aid Corp. 75 $ 3,755
- -------------------------------------------------------------------------------
Telecommunications - 2.0%
IXC Communications Inc.* 50 $ 1,350
Lucent Technologies, Inc. 100 7,787
Qwest Communications International, Inc.* 100 4,075
----------
$ 13,212
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 81,998
- -------------------------------------------------------------------------------
Foreign Stocks - 1.6%
Sweden - 0.2%
Skandia Foersaekrings AB (Insurance) 40 $ 1,544
- -------------------------------------------------------------------------------
Switzerland - 0.7%
Novartis AG (Pharmaceuticals) 3 $ 4,237
- -------------------------------------------------------------------------------
United Kingdom - 0.7%
British Petroleum PLC, ADR (Oil and Gas) 50 $ 4,231
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 10,012
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $77,794) $ 92,010
- -------------------------------------------------------------------------------
Foreign Preferred Stocks - 1.6%
- -------------------------------------------------------------------------------
Australia - 1.6%
National Australia Bank Ltd., 7.875s Capital Unit
Exchangeable 350 $ 9,997
- -------------------------------------------------------------------------------
Total Foreign Preferred Stocks (Identified Cost, $8,750) $ 9,997
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -------------------------------------------------------------------------------
<PAGE>
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost$ 20 $ 19,997
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $552,430) $ 624,057
Other Assets, Less Liabilities - 2.6% 16,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 640,527
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS NEW DISCOVERY FUND
Stocks - 94.6%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 93.8%
Aerospace - 1.0%
Fairchild Corp.* 1,000 $ 21,063
- -------------------------------------------------------------------------------
Airlines - 0.5%
Atlas Air, Inc.* 400 $ 11,100
- -------------------------------------------------------------------------------
Business Machines - 2.3%
Affiliated Computer Services, Inc., "A"* 1,750 $ 45,937
- -------------------------------------------------------------------------------
Business Services - 17.8%
AccuStaff, Inc.* 1,500 $ 39,844
BDM International, Inc.* 500 12,625
BISYS Group, Inc.* 500 16,875
Claremont Technology Group, Inc.* 400 7,100
Comdisco, Inc. 450 12,234
Corporate Family Solutions, Inc.* 100 1,500
Dendrite International, Inc.* 600 11,325
Diamond Offshore Drilling, Inc. 300 16,388
Diamond Technology Partner, Inc.* 600 9,225
DST Systems, Inc.* 100 3,619
Fine Host Corp.* 200 6,950
First USA Paymentech, Inc.* 700 21,262
Interim Services, Inc.* 700 34,562
Learning Tree International, Inc.* 750 20,625
May and Speh, Inc.* 1,300 16,575
Mecon, Inc.* 3,000 15,000
NOVA Corp.* 1,000 25,375
Personnel Group of America, Inc.* 300 10,050
PMT Services, Inc.* 1,100 18,563
Robert Half International, Inc.* 200 11,675
Staff Leasing, Inc.* 100 1,975
Technology Solutions Co.* 525 12,206
TeleSpectrum Worldwide, Inc.* 2,100 9,581
Teletech Holdings, Inc.* 900 14,737
Transaction System Architects, Inc.* 300 10,388
----------
$ 360,259
- -------------------------------------------------------------------------------
Computer Software - Systems - 16.1%
Aehr Test Systems* 100 $ 1,750
American Business Information, Inc.* 500 13,687
Aspen Technology, Inc.* 300 10,238
Black Box Corp.* 220 8,003
Cadence Design Systems, Inc.* 685 32,580
Compuware Corp.* 450 27,787
Daou Systems, Inc.* 400 9,500
Data Systems Network Corp.* 2,500 39,062
Fair, Isaac & Co., Inc. 200 8,438
IKOS Systems, Inc.* 1,300 19,256
Intelligroup, Inc.* 100 1,488
Metromail Corp.* 700 15,225
Peerless Systems Corp.* 900 13,163
RWD Technologies, Inc.* 100 1,925
Simulation Sciences, Inc.* 2,100 29,662
Smart Modular Technologies, Inc.* 500 29,500
Summit Design, Inc.* 2,700 32,400
Synopsys, Inc.* 200 6,925
USCS International, Inc.* 650 11,619
Vantive Corp.* 200 6,100
Xionics Document Technologies, Inc.* 650 8,775
----------
$ 327,083
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.9%
Alternative Resources Corp.* 1,000 $ 22,375
Ballantyne of Omaha, Inc.* 800 15,600
Blyth Industries, Inc.* 100 3,694
Cole National Corp.* 100 4,456
Meta Group, Inc.* 400 8,350
Schweitzer-Mauduit International, Inc. 450 18,000
Silgan Holdings, Inc.* 650 26,650
----------
$ 99,125
- -------------------------------------------------------------------------------
Containers - 2.4%
AptarGroup, Inc. 200 $ 11,250
Gaylord Container Corp.* 1,900 17,931
Stone Container Corp. 1,100 18,975
----------
$ 48,156
- -------------------------------------------------------------------------------
Electrical Equipment - 1.3%
AFC Cable Systems, Inc.* 600 $ 18,000
QLogic Corp.* 200 7,850
----------
$ 25,850
- -------------------------------------------------------------------------------
Electronics - 5.5%
Actel Corp.* 600 $ 12,188
Burr Brown* 550 19,525
DuPont Photomasks, Inc.* 200 13,100
International Rectifier Corp.* 600 13,687
Microchip Technology, Inc.* 300 12,131
Photronic, Inc.* 100 5,900
PMC Sierra, Inc.* 700 20,081
SDL, Inc.* 900 15,975
----------
$ 112,587
- -------------------------------------------------------------------------------
Entertainment - 5.7%
American Radio Systems Corp., "A"* 300 $ 14,775
Cox Radio, Inc.* 900 24,075
Gemstar Group Ltd.* 1,100 22,550
Heftel Broadcasting Corp.* 200 12,400
Jacor Communications, Inc., "A"* 500 22,000
LIN Television Corp.* 400 18,975
----------
$ 114,775
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
BA Merchants Services, Inc.* 500 $ 9,156
Financial Federal Corp.* 900 14,119
Franklin Resources, Inc. 350 27,081
TCF Financial Corp. 100 5,331
----------
$ 55,687
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Smith's Food & Drug Centers, Inc., "B"* 150 $ 8,212
Suiza Foods Corp.* 400 16,500
----------
$ 24,712
- -------------------------------------------------------------------------------
Insurance - 2.7%
CapMAC Holdings, Inc. 300 $ 8,325
Compdent Corp.* 500 12,125
Equitable of Iowa Cos. 150 9,769
Hartford Life, Inc.,"A" 100 3,731
Life Re Corp. 400 20,525
----------
$ 54,475
- -------------------------------------------------------------------------------
Machinery - 1.4%
Greenfield Industries, Inc. 200 $ 5,275
Hirsch International Group* 900 22,950
----------
$ 28,225
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Phycor, Inc.* 150 $ 4,416
Rexall Sundown, Inc.* 500 17,375
Steris Corp.* 350 13,125
----------
$ 34,916
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 9.1%
AmeriSource Health Corp., "A"* 200 $ 10,013
CRA Managed Care, Inc.* 200 11,100
HCIA, Inc.* 700 10,850
Hologic, Inc.* 650 15,762
IDEXX Labs, Inc.* 1,300 24,456
IDX Systems Corp.* 300 10,163
NCS Healthcare, Inc.* 200 4,925
Orthalliance, Inc.* 100 1,388
Orthodontic Centers America, Inc.* 200 3,425
Physician Sales and Service, Inc.* 200 3,400
Physician Support Systems, Inc.* 1,200 20,250
Quorum Health Group, Inc.* 250 8,516
Renal Treatment Centers, Inc.* 500 16,937
Total Renal Care Holdings, Inc.* 300 13,725
United Dental Care, Inc.* 1,300 22,912
United Payors & United Providers, Inc.* 400 5,900
----------
$ 183,722
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Hanover Compressor* 100 2,363
----------
$ 5,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.3%
Kos Pharmaceuticals, Inc.* 200 $ 6,900
- -------------------------------------------------------------------------------
Printing and Publishing - 1.0%
Applied Graphics Technologies* 500 $ 20,625
- -------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Capstar Hotel Co.* 300 $ 9,825
Doubletree Corp.* 250 12,500
HFS, Inc.* 500 27,844
Interstate Hotels Co.* 750 21,469
Prime Hospitality Corp.* 850 16,150
Promus Hotel Corp.* 200 7,762
Roadhouse Grill, Inc.* 1,400 7,525
Trendwest Resorts, Inc.* 100 1,825
----------
$ 104,900
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
CHS Electronics, Inc.* 100 $ 3,863
Equity Corp. International* 450 10,378
----------
$ 14,241
- -------------------------------------------------------------------------------
Stores - 4.7%
AnnTaylor Stores Corp.* 500 $ 8,563
Corporate Express, Inc.* 600 10,237
CVS Corp. 400 22,550
Gymboree Corp.* 450 11,025
Mazel Stores, Inc.* 300 6,375
Petco Animal Supplies, Inc.* 400 11,850
PETsMART, Inc.* 600 5,138
U.S. Office Products Co.* 300 9,825
Viking Office Products, Inc.* 500 10,562
----------
$ 96,125
- -------------------------------------------------------------------------------
Telecommunications - 4.4%
APAC Teleservices, Inc.* 600 $ 9,900
Aspect Telecommunications Corp.* 1,800 39,600
Cable Design Technologies Corp.* 400 13,375
Intermedia Communications, Inc.* 400 14,300
Transaction Network Services, Inc.* 600 8,625
VDI Media* 300 4,275
----------
$ 90,075
- -------------------------------------------------------------------------------
Transportation - 0.1%
Carey International, Inc.* 100 $ 1,388
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.6%
Brooks Fiber Properties, Inc.* 350 $ 11,769
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,903,933
- -------------------------------------------------------------------------------
Foreign Stocks - 0.8%
Ireland - 0.1%
Warner Chilcott Laboratories* 100 $ 1,850
- -------------------------------------------------------------------------------
Mexico - 0.1%
TV Azteca, S.A. de C V (Broadcasting)* 100 $ 1,800
- -------------------------------------------------------------------------------
United Kingdom - 0.6%
News Corp. Ltd., ADR (Entertainment) 900 $ 13,612
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 17,262
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,742,794) $1,921,195
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.7%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97,
at Amortized Cost $ 75 $ 74,989
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,817,783) $1,996,184
Other Assets, Less Liabilities - 1.7% 33,679
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,029,863
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS RESEARCH INTERNATIONAL FUND
Stocks - 97.1%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 2.6%
Agricultural Products - 1.1%
AGCO Corp. 760 $ 24,700
- -------------------------------------------------------------------------------
Insurance - 0.5%
Equitable of Iowa Cos. 190 $ 12,374
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.0%
MCI Communications Corp. 865 $ 24,652
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 61,726
- -------------------------------------------------------------------------------
Foreign Stocks - 94.5%
Australia - 1.3%
Q.B.E. Insurance Group Ltd. (Insurance) 5,805 $ 31,338
- -------------------------------------------------------------------------------
Brazil - 0.8%
Telecomunicacoes Brasileiras SA, ADR
(Telecommunications) 152 $ 17,936
- -------------------------------------------------------------------------------
Canada - 1.6%
Canadian National Railway Co. (Railroads) 773 $ 38,408
- -------------------------------------------------------------------------------
Chile - 1.0%
Chilectra SA, ADR (Utilities - Electric) 785 $ 24,224
- -------------------------------------------------------------------------------
China - 0.4%
China Southern Airlines Ltd. (Airlines) 300 $ 9,431
- -------------------------------------------------------------------------------
Czech Republic - 1.1%
Tabak (Tobacco) 100 $ 25,187
- -------------------------------------------------------------------------------
Finland - 0.9%
Huhtamaki Oy Group (Food Company) 230 $ 9,081
TT Tieto Oy (Computer Software - Systems) 135 12,122
----------
$ 21,203
- -------------------------------------------------------------------------------
France - 5.2%
Chargeurs SA (Apparels and Textiles) 250 $ 14,779
Rhone-Poulenc SA (Pharmaceuticals)* 786 28,756
Societe Nationale Elf Aquitaine (Oils) 330 36,577
Televison Francaise (Broadcasting) 270 21,946
Union des Assurances Federales SA (Insurance) 190 19,655
----------
$ 121,713
- -------------------------------------------------------------------------------
Germany - 3.7%
Adidas AG (Apparel and Textiles) 96 $ 11,537
Henkel Kgaa (Consumer Goods and Services) 538 27,081
Phoenix AG (Auto Parts) 1,225 21,322
Prosieben Media AG (Broadcasting) 200 9,029
SAP AG, Preferred (Computer Software - Systems) 79 18,028
----------
$ 86,997
- -------------------------------------------------------------------------------
Greece - 2.1%
Athens Medical Care SA (Medical and Health Technology
and Services) 1,800 $ 17,260
Hellenic Telecommunication Organization SA
(Telecommunications) 880 19,520
Papastratos Cigarettes SA (Consumer Goods and
Services) 660 11,232
----------
$ 48,012
- -------------------------------------------------------------------------------
Hong Kong - 8.9%
Asia Satellite Telecommunications Holdings Ltd.
(Telecommunications)* 9,000 $ 25,087
Citic Pacific Ltd. (Conglomerates) 5,000 26,649
Dah Sing Financial Group (Banks and Credit Cos.) 2,600 $ 10,871
Hong Kong Electric Holdings Ltd. (Utilities -
Electric) 8,000 27,978
Hutchison Whampoa (Real Estate) 1,000 8,324
Ka Wah Bank (Bank and Credit Cos.) 1,000 2,446
Li & Fung Ltd. (Wholesale) 36,000 36,701
Liu Chong Hing Bank (Banks and Credit Cos.) 3,000 7,994
Vanda Systems & Communication Holdings Ltd.
(Computers Software - Systems) 44,000 24,984
Wharf Holdings Ltd. (Real Estate) 6,000 21,719
Wing Hang Bank Ltd. (Banks and Credit Cos.) 3,600 15,331
----------
$ 208,084
- -------------------------------------------------------------------------------
Indonesia - 0.5%
PT Indosat (Telecommunications) 500 $ 1,031
PT Indosat, ADR (Telecommunications) 270 5,856
PT Semen Gresik (Building Materials) 4,500 4,639
----------
$ 11,526
- -------------------------------------------------------------------------------
Ireland - 2.4%
Allied Irish Banks (Banks and Credit Cos.) 2,486 $ 20,989
Anglo Irish Bank Corp. (Banks and Credit Cos.) 16,800 23,957
Smurfit Jefferson (Paper/Plastic) 3,700 12,292
----------
$ 57,238
- -------------------------------------------------------------------------------
Italy - 3.3%
Gucci Group Designs NV (Apparel and Textiles) 304 $ 18,506
INA - Instituto Nazionale delle Assicurazioni
(Insurance) 8,225 11,980
Industrie Natuzzi S.P.A., ADR (Consumer Goods and
Services) 974 26,785
Telecom Italia S.P.A., Saving Shares
(Telecommunications) 12,235 20,416
----------
$ 77,687
- -------------------------------------------------------------------------------
Japan - 23.4%
Bank of Tokyo Mitsubishi (Banks and Credit Cos.) 1,000 $ 18,159
Bridgestone Corp. (Tire and Rubber) 1,000 22,139
Canon, Inc. (Special Products and Services) 2,000 55,224
DDI Corp. (Telecommunications) 3 15,672
Fuji Photo Film Co Ltd., ADR (Photographic Products) 600 22,950
Fujimi Inc. (Distribution Wholesale) 400 22,388
Hirose Electric Co. (Electronics) 100 7,007
Jusco Co. (Retail) 1,000 26,700
Keyence Corp. (Electronics) 110 16,053
Kinki Coca-Cola Bottling Co. (Beverages) 1,000 12,438
Kirin Beverage Corp. (Beverages) 2,000 32,338
Nippon Broadcasting (Broadcasting) 1,000 73,880
Nippon Telephone & Telegraph Co. (Utilities -
Telephone) 2 18,740
Osaka Sanso Kogyo Ltd. (Chemicals) 4,000 8,458
Secom Co. (Consumer Goods and Services) 1,000 71,061
Sony Corp. (Electronics) 300 26,119
Takeda Chemical Industries (Pharmaceuticals) 1,000 26,617
TDK Corp., ADR (Electronics) 680 52,955
Terumo Corp. (Computers) 1,000 18,242
----------
$ 547,140
- -------------------------------------------------------------------------------
Malaysia - 0.2%
UMW Holdings Berhad (Automobiles) 2,000 $ 5,377
- -------------------------------------------------------------------------------
Mexico - 1.0%
Companhia Cerveja Ria Brahma (Broadcasting) 1,400 $ 18,988
TV Azteca SA De CV (Television) 300 5,400
----------
$ 24,388
- -------------------------------------------------------------------------------
Netherlands - 5.1%
Ahrend Kon (Office Furnishers) 630 $ 20,557
Akzo Nobel (Chemicals) 160 24,746
Brunel International NV (Human Resources) 300 6,183
Computer Services (Computers) 2,000 19,038
Fugro NV (Engineering) 100 3,410
Philips Electronics NV (Manufacturing) 260 18,460
Royal Dutch Petroleum (Oils) 544 27,547
----------
$ 119,941
- -------------------------------------------------------------------------------
Peru - 0.9%
Telefonica del Peru SA, ADR (Telecommunications) 870 $ 20,336
- -------------------------------------------------------------------------------
Philippines - 0.2%
Alsons Cement Corp. (Building Materials)*## 41,500 $ 3,860
- -------------------------------------------------------------------------------
Poland - 0.3%
Bank Handlowy Warsza (Banks and Credit Cos.)+ 200 $ 2,525
Kghm Polska Miedz SA (Diversified - Metals)## 400 4,884
----------
$ 7,409
- -------------------------------------------------------------------------------
Portugal - 2.3%
Banco Espirito Santo e Comercial de Lisboa SA (Banks
and Credit Cos.) 500 $ 12,268
Banco Totta E Acores (Financial Institutions) 1,275 22,872
Telecel - Comunicacaoes Pessoais SA
(Telecommunication) 240 17,457
----------
$ 52,597
- -------------------------------------------------------------------------------
Singapore - 2.7%
City Developments Ltd. (Real Estate) 2,000 $ 12,637
Hong Leong Finance Ltd. (Finance)+ 3,000 5,855
Mandarin Oriental International, Ltd.
(Restaurants and Lodgings) 27,000 30,240
Singapore Land Ltd. (Conglomerates) 3,000 13,298
----------
$ 62,030
- -------------------------------------------------------------------------------
Spain - 1.0%
Abengoa SA (Construction)* 300 $ 13,260
Acerinox SA (Iron and Steel) 64 10,507
----------
$ 23,767
- -------------------------------------------------------------------------------
Sweden - 3.1%
Astra AB (Pharmaceuticals) 1,053 $ 16,726
Skandia Foersaekrings AB (Insurance) 705 27,214
Sparbanken Sverige AB (Banks and Credit Cos.) 1,271 27,508
----------
$ 71,448
- -------------------------------------------------------------------------------
Switzerland - 3.5%
Kuoni Reisen Holdings AG (Transportation) 9 $ 36,930
Novartis AG (Pharmaceuticals) 31 43,778
----------
$ 80,708
- -------------------------------------------------------------------------------
Taiwan - 1.6%
ASE Test Limited (Electronics) 500 $ 36,500
- -------------------------------------------------------------------------------
United Kingdom - 15.1%
ASDA Group PLC (Supermarkets) 9,401 $ 21,937
Bank of Scotland (Banks and Credit Cos.) 1,700 11,433
British Aerospace PLC (Aerospace and Defense) 1,486 34,772
British Petroleum PLC (Oil and Gas) 2,155 30,103
Carlton Communicatons PLC (Broadcasting) 2,660 21,165
Corporate Services Group (Business Services) 5,200 16,348
Grand Metropolitan (Food and Beverage Products) 2,910 26,714
Jarvis Hotels PLC (Restaurants and Lodging)*+ 10,900 27,378
JBA Holdings Diversified Operations) 900 12,397
Kwik-Fit Holdings PLC (Retail) 7,704 37,453
Lloyds TSB Group PLC (Banks and Credit Cos.) 2,382 27,445
PowerGen PLC (Utilities - Electric)* 2,113 26,708
Storehouse PLC (Retail)* 6,100 22,637
Tomkins PLC (Diversified Operations) 5,100 24,711
Williams Holdings (Diversified Operations) 2,200 12,424
----------
$ 353,625
- -------------------------------------------------------------------------------
Venezuela - 0.9%
Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telecommunications)* 509 $ 20,996
- -------------------------------------------------------------------------------
Total Foreign Stocks $2,209,106
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,318,693) $2,270,832
- -------------------------------------------------------------------------------
Short-Term Obligations - 2.6%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 60 $ 59,991
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,378,684) $2,330,823
Other Assets, Less Liabilities - 0.3% 5,265
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,336,088
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+Restricted security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SCIENCE AND TECHNOLOGY FUND
Stocks - 88.4%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 85.2%
Apparel and Textiles - 0.1%
Polo Ralph Lauren Corp.* 100 $ 2,625
- -------------------------------------------------------------------------------
Business Machines - 5.4%
Affiliated Computer Services, Inc., "A"* 1,880 $ 49,350
Compaq Computer Corp.* 200 13,100
Silicon Graphics, Inc.* 500 13,719
Sun Microsystems, Inc.* 1,240 59,520
----------
$ 135,689
- -------------------------------------------------------------------------------
Business Services - 6.1%
AccuStaff, Inc.* 2,180 $ 57,906
First Data Corp. 780 32,029
First USA Paymentech, Inc.* 1,320 40,095
Galieo International, Inc.* 100 2,644
Hall Kinion & Associates, Inc.* 100 2,137
Lamalie Associates, Inc.* 100 1,900
Teletech Holdings, Inc.* 1,000 16,375
----------
$ 153,086
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 14.0%
Activision, Inc.* 1,500 $ 19,500
Adobe Systems, Inc. 1,165 45,872
Autodesk, Inc.* 1,710 74,812
Electronic Arts, Inc.* 1,200 36,975
Microsoft Corp.* 1,000 132,187
Midway Games, Inc.* 960 20,280
Spectrum Holobyte, Inc.* 4,600 22,138
----------
$ 351,764
- -------------------------------------------------------------------------------
Computer Software - Services - 0.9%
Ingram Micro, Inc.* 750 $ 21,563
- -------------------------------------------------------------------------------
Computer Software - Systems - 32.5%
BMC Software, Inc.* 1,180 $ 73,897
Cadence Design Systems, Inc.* 2,831 134,649
Computer Associates International, Inc. 2,095 140,103
Compuware Corp.* 1,660 102,505
Engineering Animation, Inc.* 470 17,977
Great Plains Software, Inc.* 100 2,638
Oracle Systems Corp.* 3,480 132,675
Peoplesoft, Inc.* 660 37,125
Peritus Software Services, Inc.* 100 2,500
Rational Software Corp.* 1,010 16,665
Summit Design, Inc.* 4,400 52,800
Sybase, Inc.* 380 7,078
Synopsys, Inc.* 2,830 97,989
TSI International Software Ltd.* 100 1,225
----------
$ 819,826
- -------------------------------------------------------------------------------
Electronics - 5.1%
Atmel Corp.* 440 $ 15,565
Intel Corp. 340 31,322
Sony Corp. 250 22,031
Teradyne, Inc.* 900 50,119
Xilinx, Inc.* 200 9,500
----------
$ 128,537
- -------------------------------------------------------------------------------
Medical and Health Products - 2.0%
Bristol-Myers Squibb Co. 610 $ 46,360
Ocular Sciences, Inc.* 100 1,912
Schick Technologies, Inc.* 100 2,650
----------
$ 50,922
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.6%
Centennial Healthcare Corp.* 100 $ 2,012
HBO & Co. 1,085 77,713
Horizon CMS Healthcare Corp.* 700 14,394
Monarch Dental Corp.* 100 1,813
Oxford Health Plans, Inc.* 370 27,056
Pacificare Health Systems, Inc., "B"* 130 8,889
United Healthcare Corp. 1,240 60,295
----------
$ 192,172
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Domain Energy Corp.* 100 1,525
Hanover Compressor* 100 2,363
----------
$ 7,288
- -------------------------------------------------------------------------------
Printing and Publishing - 0.1%
CMP Media, Inc.* 100 $ 2,675
- -------------------------------------------------------------------------------
Stores - 0.2%
CVS Corp. 100 $ 5,638
- -------------------------------------------------------------------------------
Telecommunications - 9.3%
Ascend Communications, Inc.* 1,105 $ 46,893
Aspect Telecommunications Corp.* 2,770 60,940
Cabletron Systems, Inc.* 700 21,175
Cisco Systems, Inc.* 1,055 79,521
Lucent Technologies, Inc. 290 22,584
Qwest Communications International, Inc.* 100 4,075
----------
$ 235,188
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
MCI Communications Corp. 1,410 $ 40,185
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,147,158
- -------------------------------------------------------------------------------
Foreign Stocks - 3.2%
Germany - 1.7%
SAP AG, Preferred (Computer Software - Systems) 185 $ 42,217
- -------------------------------------------------------------------------------
Japan - 1.5%
Canon, Inc., ADR (Special Products and Services) 80 $ 11,130
Sony Corp. (Electronics) 300 26,120
----------
$ 37,250
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 79,467
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,850,603) $2,226,625
- -------------------------------------------------------------------------------
Short-Term Obligations - 11.5%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 290 $ 289,957
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,140,560) $2,516,582
Other Assets, Less Liabilities - 0.1% 2,168
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,518,750
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
AUGUST 31, 1997 FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost,
$2,461,282, $1,245,641 and $3,114,897,
respectively) $2,744,043 $1,405,673 $3,717,356
Cash 1,141 19,505 489
Deposit with brokers for securities sold short -- -- 95,437
Foreign currency, at value (identified cost, $0,
$0 and $4,055, respectively) -- -- 4,042
Receivable for Fund shares sold -- 50,000 --
Receivable for investments sold 37,779 6,595 262,105
Net receivable for foreign currency exchange
contracts closed or subject to master netting
agreements -- -- 175
Interest and dividends receivable 897 2,892 2,064
Receivable from investment adviser 10,414 -- 17,514
Deferred organization expenses 1,669 1,676 1,688
Other assets 1,288 -- --
---------- ---------- ----------
Total assets $2,797,231 $1,486,341 $4,100,870
---------- ---------- ----------
Liabilities:
Securities sold short, at value (proceeds
received, $0, $0 and $122,480, respectively) $ -- $ -- $ 126,887
Payable for investments purchased 29,934 10,405 5,991
Accrued expenses and other liabilities 11,177 1,883 13,181
---------- ---------- ----------
Total liabilities $ 41,111 $ 12,288 $ 146,059
---------- ---------- ----------
Net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Net assets consist of:
Paid-in capital $2,164,935 $1,179,568 $3,083,892
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 282,768 160,027 598,225
Accumulated undistributed net realized gain on
investments and foreign currency transactions 107,865 123,884 244,151
Accumulated undistributed net investment income 200,552 10,574 28,543
---------- ---------- ----------
Total $2,756,120 $1,474,053 $3,954,811
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 67,032 34,434 140,925
Class I 107,057 65,074 149,230
---------- ---------- ----------
Total shares of beneficial interest
outstanding 174,089 99,508 290,155
========== ========== ==========
Net assets:
Class A $1,060,643 $ 510,280 $1,919,478
Class I 1,695,477 963,773 2,035,333
---------- ---------- ----------
Total net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price
per share (net assets / shares of beneficial interest outstanding) $15.82 $14.82 $13.62
====== ====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $15.84 $14.81 $13.64
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $624,151,
$552,430 and $1,817,783, respectively) $ 720,092 $ 624,057 $1,996,184
Cash 6,338 3,982 33,748
Foreign currency, at value (identified cost, $0, $26
and $0, respectively) -- 26 --
Receivable for investments sold -- 9,904 --
Interest and dividends receivable 1,149 2,643 180
---------- ---------- ----------
Total assets $ 727,579 $ 640,612 $2,030,112
---------- ---------- ----------
Liabilities:
Accrued expenses and other liabilities $ 90 $ 85 $ 249
---------- ---------- ----------
Net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Net assets consist of:
Paid-in capital $ 617,975 $ 557,991 $1,579,754
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 95,941 71,627 178,401
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 12,369 (1,197) 126,577
Accumulated undistributed net investment income 1,204 12,106 145,131
---------- ---------- ----------
Total $ 727,489 $ 640,527 $2,029,863
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 41,316 50,266 41,008
Class I 20,514 5,555 114,238
---------- ---------- ----------
Total shares of beneficial interest outstanding 61,830 55,821 155,246
========== ========== ==========
Net assets:
Class A $ 486,110 $ 576,830 $ 536,157
Class I 241,379 63,697 1,493,706
---------- ---------- ----------
Total net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price per share (net assets /
shares of beneficial interest outstanding) $11.77 $11.48 $13.07
====== ====== ======
Class I shares:
Net asset value and redemption price per share (net assets / shares of
beneficial interest outstanding) $11.77 $11.47 $13.08
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
AUGUST 31, 1997 FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost, $2,378,684 and
$2,140,560, respectively) $2,330,823 $2,516,582
Cash 924 3,165
Foreign currency, at value (identified cost, $1,560 and $46,
respectively) 1,164 43
Receivable for Fund shares sold 10,000 --
Receivable for investments sold 17,901 --
Interest and dividends receivable 4,591 54
Receivable from investment adviser 6,854 8,711
Other assets -- 250
---------- ----------
Total assets $2,372,257 $2,528,805
---------- ----------
Liabilities:
Payable for investments purchased $ 26,952 $ --
Accrued expenses and other liabilities 9,217 10,055
---------- ----------
Total liabilities $ 36,169 $ 10,055
---------- ----------
Net assets $2,336,088 $2,518,750
========== ==========
Net assets consist of:
Paid-in capital $2,134,309 $2,036,119
Unrealized appreciation (depreciation) on investments and
translation of
assets and liabilities in foreign currencies (48,333) 376,018
Accumulated undistributed net realized gain (loss) on
investments and
foreign currency transactions 239,440 (69,545)
Accumulated undistributed net investment income 10,672 176,158
---------- ----------
Total $2,336,088 $2,518,750
---------- ----------
Shares of beneficial interest outstanding:
Class A 119,940 70,359
Class I 93,365 130,608
---------- ----------
Total shares of beneficial interest outstanding 213,305 200,967
========== ==========
Net assets:
Class A $1,313,579 $ 881,888
Class I 1,022,509 1,636,862
---------- ----------
Total net assets $2,336,088 $2,518,750
========== ==========
Class A shares:
Net asset value and offering and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
YEAR ENDED AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 217,465 $ 27,016 $ 21,095
Interest 7,705 2,229 22,623
---------- ---------- ----------
Total investment income $ 225,170 $ 29,245 $ 43,718
---------- ---------- ----------
Expenses -
Management fee $ 12,775 $ 6,926 $ 23,164
Shareholder servicing agent fee 2,233 1,209 4,030
Distribution and service fee - Class A 4,216 2,468 9,410
Administrative fee 27 83 --
Registration fee 2,763 2,335 --
Auditing fee 5,101 5,501 8,272
Postage 341 82 119
Printing 2,928 1,635 --
Legal fee 3,223 2,618 2,026
Custodian fee 5,695 5,166 5,902
Amortization of organization expenses 434 434 434
Miscellaneous 4,671 354 325
---------- ---------- ----------
Total expenses $ 44,407 $ 28,811 $ 53,682
Fees paid indirectly (690) (388) (1,010)
Reduction of expenses by investment adviser,
shareholder servicing
agent and distributor (19,224) (14,434) (36,604)
---------- ---------- ----------
Net expenses $ 24,493 $ 13,989 $ 16,068
---------- ---------- ----------
Net investment income $ 200,677 $ 15,256 $ 27,650
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 147,884 $ 130,162 $ 314,835
Securities sold short -- -- (6,786)
Foreign currency transactions (112) (8) (173)
---------- ---------- ----------
Net realized gain on investments and
foreign currency transactions $ 147,772 $ 130,154 $ 307,876
---------- ---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ 264,806 $ 134,063 $ 542,028
Securities sold short -- -- 14,842
Translation of assets and liabilities in foreign
currencies 12 (5) 173
---------- ---------- ----------
Net change in unrealized appreciation $ 264,818 $ 134,058 $ 557,043
---------- ---------- ----------
Net realized and unrealized gain on investments
and
foreign currency $ 412,590 $ 264,212 $ 864,919
---------- ---------- ----------
Increase in net assets from operations $ 613,267 $ 279,468 $ 892,569
========== ========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- --------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND* FUND*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 6,880 $ 12,186 $ 155,787
Interest 978 5,669 6,670
---------- ---------- ----------
Total investment income $ 7,858 $ 17,855 $ 162,457
---------- ---------- ----------
Expenses -
Management fee $ 2,849 $ 2,458 $ 8,539
Shareholder servicing agent fee 576 497 1,498
Distribution and service fee - Class A 1,480 1,738 1,286
Administrative fee 52 44 132
Registration fee 4,030 4,000 4,505
Auditing fee 5,500 5,900 6,000
Printing 2,237 1,135 2,892
Postage 42 -- 25
Legal fee 3,871 3,214 4,534
Custodian fee 392 459 720
Miscellaneous 557 213 271
---------- ---------- ----------
Total expenses $ 21,586 $ 19,658 $ 30,402
Fees paid indirectly (173) (168) (451)
Reduction of expenses by investment adviser,
shareholder servicing
agent, and distributor (14,749) (13,739) (12,625)
---------- ---------- ----------
Net expenses $ 6,664 $ 5,751 $ 17,326
---------- ---------- ----------
Net investment income $ 1,194 $ 12,104 $ 145,131
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,369 $ 5,932 $ 126,577
Securities sold short -- (7,129) --
Foreign currency transactions 10 2 --
---------- ---------- ----------
Net realized gain (loss) on investments and
foreign currency
transactions $ 12,379 $ (1,195) $ 126,577
---------- ---------- ----------
Change in unrealized appreciation on investments and
translation
of assets and liabilities in foreign currencies $ 95,941 $ 71,627 $ 178,401
---------- ---------- ----------
Net realized and unrealized gain on investments
and foreign
currency $ 108,320 $ 70,432 $ 304,978
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
========== ========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income:
Income -
Dividends $ 32,673 $ 183,332
Interest 4,208 12,047
Foreign taxes withheld (3,096)
---------- ----------
Total investment income $ 33,785 $ 195,379
---------- ----------
Expenses -
Management fee $ 14,026 $ 10,517
Shareholder servicing agent fee 1,819 1,845
Distribution and service fee - Class A 4,164 2,112
Administrative fee 168 166
Registration fee 4,500 4,010
Auditing fees 5,500 5,500
Postage 468 129
Printing 3,357 3,181
Legal fees 3,451 5,691
Custodian fee 4,387 910
Miscellaneous 1,762 327
---------- ----------
Total expenses $ 43,602 $ 34,388
Fees paid indirectly (480) (559)
Reduction of expenses by investment adviser, shareholder
servicing agent, and distributor (20,009) (14,474)
---------- ----------
Net expenses $ 23,113 $ 19,355
---------- ----------
Net investment income $ 10,672 $ 176,024
---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 241,403 $ (69,545)
Foreign currency transactions (1,963) 134
---------- ----------
Net realized gain (loss) on investments and foreign
currency
transactions $ 239,440 $ (69,411)
---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ (47,861) $ 376,022
Translation of assets and liabilities in foreign currencies (472) (4)
---------- ----------
Net change in unrealized appreciation (depreciation) $ (48,333) $ 376,018
---------- ----------
Net realized and unrealized gain on investments and
foreign currency $ 191,107 $ 306,607
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 200,677 $ (362)
Net realized gain on investments and foreign
currency transactions 147,772 66,889
Net unrealized gain on investments and foreign
currency translation 264,818 17,950
---------- ----------
Increase in net assets from operations $ 613,267 $ 84,477
---------- ----------
Distributions declared to shareholders from net
realized gain on investments - Class A $ (106,559) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,273,798 $ 605,756
Net asset value of shares issued to shareholders
in reinvestment of distributions 106,552 --
Cost of shares reacquired (817,088) (4,083)
---------- ----------
Increase in net assets from Fund share
transactions $1,563,262 $ 601,673
---------- ----------
Total increase in net assets $2,069,970 $ 686,150
Net assets:
At beginning of period 686,150 --
---------- ----------
At end of period (including accumulated
undistributed net investment income (loss) of
$200,552 and $(13), respectively) $2,756,120 $ 686,150
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 15,256 $ 4,878
Net realized gain on investments and foreign
currency transactions 130,154 7,246
Net unrealized gain on investments and foreign
currency translation 134,058 25,969
---------- ----------
Increase in net assets from operations $ 279,468 $ 38,093
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (9,552) $ --
From net realized gain on investments - Class A (13,524) --
---------- ----------
Total distributions declared to shareholders $ (23,076) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $1,191,109 $ 449,397
Net asset value of shares issued to shareholders
in reinvestment of distributions 23,074 --
Cost of shares reacquired (473,902) (10,110)
---------- ----------
Increase in net assets from Fund share
transactions $ 740,281 $ 439,287
---------- ----------
Total increase in net assets $ 996,673 $ 477,380
Net assets:
At beginning of period 477,380 --
---------- ----------
At end of period (including accumulated
undistributed net investment income
of $10,574 and $4,878, respectively) $1,474,053 $ 477,380
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,650 $ 10,016
Net realized gain on investments and foreign
currency transactions 307,876 168,487
Net unrealized gain on investments and foreign
currency translation 557,043 41,182
---------- ----------
Increase in net assets from operations $ 892,569 $ 219,685
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (8,950) $ --
From net realized gain on investments - Class A (232,385) --
---------- ----------
Total distributions declared to shareholders $ (241,335) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,798,830 $2,038,964
Net asset value of shares issued to shareholders
in reinvestment of distributions 241,330 --
Cost of shares reacquired (1,995,218) (14)
---------- ----------
Increase in net assets from Fund share
transactions $1,044,942 $2,038,950
---------- ----------
Total increase in net assets $1,696,176 $2,258,635
Net assets:
At beginning of period 2,258,635 --
---------- ----------
At end of period (including accumulated
undistributed net investment income of $28,543
and $10,016, respectively) $3,954,811 $2,258,635
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997* FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,194 $ 12,104 $ 145,131
Net realized gain (loss) on investments and
foreign currency transactions 12,379 (1,195) 126,577
Net unrealized gain on investments and foreign
currency translation 95,941 71,627 178,401
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
---------- ---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 720,959 $ 559,838 $1,935,566
Cost of shares reacquired (102,984) (1,847) (355,812)
---------- ---------- ----------
Increase in net assets from Fund share
transactions $ 617,975 $ 557,991 $1,579,754
---------- ---------- ----------
Total increase in net assets $ 727,489 $ 640,527 $2,029,863
Net assets:
At beginning of period -- -- --
---------- ---------- ----------
At end of period (including accumulated
undistributed net investment income of $1,204,
$12,106 and $145,131, respectively) $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997* FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,672 $ 176,024
Net realized gain (loss) on investments and foreign currency
transactions 239,440 (69,411)
Net unrealized gain (loss) on investments and foreign
currency translation (48,333) 376,018
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,472,688 $2,470,527
Cost of shares reacquired (338,379) (434,408)
---------- ----------
Increase in net assets from Fund share transactions $2,134,309 $2,036,119
---------- ----------
Total increase in net assets $2,336,088 $2,518,750
Net assets:
At beginning of period -- --
---------- ----------
At end of period (including accumulated undistributed net
investment income of $10,672 and $176,158, respectively) $2,336,088 $2,518,750
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 12.33 $ 10.00 $ 12.99
---------- ---------- ----------
Income from investment operations# -
Net investment income (loss)(S) $ 1.24 $ (0.01) $ 1.50
Net realized and unrealized gain on investments and
foreign currency transactions 3.93 2.34 1.35
---------- ---------- ----------
Total from investment operations $ 5.17 $ 2.33 $ 2.85
---------- ---------- ----------
Less distributions declared to shareholders from net
realized gain on investments $ (1.68) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 15.82 $ 12.33 $ 15.84
========== ========== ==========
Total return 45.22% 23.30%++ 21.94%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.45% 1.50%+ 1.48%+
Net investment income (loss) 9.12% (0.11)%+ 14.08%+
Portfolio turnover 1,043% 204% 1,043%
Average commission rate $ 0.0248 $ 0.0411 $ 0.0248
Net assets at end of period
(000 omitted) $ 1,061 $ 686 $ 1,695
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the periods
indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 1.06 $ (0.18) $ 1.40
Ratios (to average net assets):
Expenses## 2.82% 4.28%+ 2.35%
Net investment income (loss) 7.75% (2.34)%+ 13.20%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.07 $ 10.00 $ 12.20
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.13 $ 0.15
Net realized and unrealized gain on investments and
foreign currency transactions 3.91 0.94 2.46
---------- ---------- ----------
Total from investment operations $ 4.13 $ 1.07 $ 2.61
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.16) $ -- $ --
From net realized gain on investments (0.22) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (0.38) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 14.82 $ 11.07 $ 14.81
========== ========== ==========
Total return 38.05% 10.70%++ 21.39%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50% 1.50%+ 1.50%+
Net investment income 1.75% 1.83%+ 1.51%+
Portfolio turnover 118% 56% 118%
Average commission rate $ 0.0393 $ 0.0331 $ 0.0393
Net assets at end of
period (000 omitted) $ 510 $ 477 $ 964
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had been waived by the Fund and/or if actual expenses were over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.02 $ (0.06) $ 0.03
Ratios (to average net assets):
Expenses## 3.40% 4.67%+ 2.67%+
Net investment income (loss) (0.15)% (0.78)%+ 0.35%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.36 $ 10.00 $ 11.39
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.08 $ 0.06 $ 0.11
Net realized and unrealized gain on investments
and foreign currency transactions 3.35 1.30 2.14
---------- ---------- ----------
Total from investment operations $ 3.43 $ 1.36 $ 2.25
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.04) $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.13) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (1.17) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 13.62 $ 11.36 $ 13.64
========== ========== ==========
Total return 31.84% 13.60%++ 19.75%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.74% 1.50%+ 0.18%+
Net investment income 0.65% 0.78%+ 1.26%+
Portfolio turnover 161% 108% 161%
Average commission rate $ 0.0387 $ 0.0361 $ 0.0387
Net assets at end of period (000 omitted) $ 1,920 $ 2,259 $ 2,035
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. (S)The Adviser voluntarily agreed to
maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for the periods indicated. If these fees
had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the net investment income
(loss) per share and ratios would have been:
Net investment income (loss) $ (0.06) $ (0.01) $ 0.01
Ratios (to average net assets):
Expenses## 1.92% 2.97%+ 1.36%+
Net investment income (loss) (0.53)% (0.16)%+ 0.08%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
BLUE CHIP FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.02 $ 0.02
Net realized and unrealized gain on
investments 1.75 1.75
---------- ----------
Total from investment operations $ 1.77 $ 1.77
---------- ----------
Net asset value - end of period $ 11.77 $ 11.77
========== ==========
Total return 17.70%++ 17.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 0.28%+ 0.24%+
Portfolio turnover 32% 32%
Average commission rate $ 0.0427 $ 0.0427
Net assets at end of period (000 omitted) $ 486 $ 241
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The Investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income loss per share and the ratios would have been:
Net investment loss $ (0.26) $ (0.23)
Ratios (to average net assets):
Expenses## 5.04%+ 4.54%+
Net investment loss (3.25)%+ (2.80)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations -
Net investment income(S) $ 0.25 $ 0.26
Net realized and unrealized gain on
investments 1.23 1.21
---------- ----------
Total from investment operations $ 1.48 $ 1.47
---------- ----------
Net asset value - end of period $ 11.48 $ 11.47
========== ==========
Total return 14.70%++ 14.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 3.16%+ 3.19%+
Portfolio turnover 76% 76%
Average commission rate $ 0.0453 $ 0.0453
Net assets at end of period (000 omitted) $ 577 $ 64
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's daily net
assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.04) $ --
Ratios (to average net assets):
Expenses## 5.19%+ 4.69%+
Net investment income (loss) (0.53)%+ --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
NEW DISCOVERY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.98 $ 1.01
Net realized and unrealized gain on
investments 2.09 2.07
---------- ----------
Total from investment operations $ 3.07 $ 3.08
---------- ----------
Net asset value - end of period $ 13.07 $ 13.08
========== ==========
Total return 30.70%++ 30.80%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 12.41%+ 12.65%+
Portfolio turnover 887% 887%
Average commission rate $ 0.0250 $ 0.0250
Net assets at end of period (000 omitted) $ 536 $ 1,494
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.89 $ 0.92
Ratios (to average net assets):
Expenses## 3.10%+ 2.52%+
Net investment income 10.81%+ 11.63%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.06 $ 0.07
Net realized and unrealized gain on
investments 0.89 0.88
---------- ----------
Total from investment operations $ 0.95 $ 0.95
---------- ----------
Net asset value - end of period $ 10.95 $ 10.95
========== ==========
Total return 9.60%++ 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.68%+ 1.68%+
Net investment income 0.71%+ 0.85%+
Portfolio turnover 137% 137%
Average commission rate $ 0.0198 $ 0.0198
Net assets at end of period (000 omitted) $ 1,314 $ 1,022
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.75% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment loss $ (0.01) $ --
Ratios (to average net assets):
Expenses## 3.31%+ 2.81%+
Net investment loss (0.92)%+ (0.28)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.84 $ 1.05
Net realized and unrealized gain on
investments and foreign currency transactions 1.69 1.48
---------- ----------
Total from investment operations $ 2.53 $ 2.53
---------- ----------
Net asset value - end of period $ 12.53 $ 12.53
========== ==========
Total return 25.30%++ 25.30%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.40%+ 1.41%+
Net investment income 10.73%+ 13.11%+
Portfolio turnover 792% 792%
Average commission rate $ 0.0243 $ 0.0243
Net assets at end of period (000 omitted) $ 882 $ 1,637
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
period indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.73 $ 0.98
Ratios (to average net assets):
Expenses## 2.77%+ 2.28%+
Net investment income 9.36%+ 12.24%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund,
MFS Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund, MFS Science and Technology Fund are diversified
series of MFS Series Trust I (the Trust), and MFS Special Opportunities Fund is
a non-diversified series of 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 reported at market value using last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues and forward contracts and interest rate
swaps, 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. 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. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Futures contracts, options, and options on futures
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by each 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 each
Fund's operations.
Forward Foreign Currency Exchange Contracts - Each 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 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. Each Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, each Fund 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, each Fund 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 as unrealized until the contract settlement date. On contract
settlement date, the gains or losses are recorded as realized gains or losses on
foreign currency transactions.
Written Options - Each Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, each Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by each Fund. Each 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 part of an income producing strategy reflecting the view of each
Fund's management on the direction of interest rates.
Short Sales - The Special Opportunities Fund, the Convertible Securities Fund,
the New Discovery Fund, and the Science and Technology Fund may enter into short
sales. A short sale transaction involves selling a security which a Fund does
not own with the intent of purchasing it later at a lower price. A 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 a Fund must
replace the borrowed security. Losses can exceed the proceeds from short sales
and 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 a Fund may be required to pay
in connection with a short sale. Whenever a Fund engages in short sales, its
custodian segregates cash or marketable 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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. 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 and the Convertible Securities Fund may 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 Funds use the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - Each Fund's custody fee is calculated as a percentage of
each Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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 - Each 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. 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.
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 year ended August 31, 1997, the following amounts were reclassified
between accumulated undistributed net investment income and accumulated net
realized gain on investments 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>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ (10) $ (2) $ 112 $ 8
Accumulated undistributed net
investment income (loss) $ 10 $ 2 $ (112) $ (8)
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ -- $ 1,963 $ (134) $ 173
Accumulated undistributed net
investment income (loss) $ -- $ (1,963) $ 134 $ (173)
</TABLE>
At August 31, 1997, the Convertible Securities Fund, for federal income tax
purposes, had a capital loss carryforward of $1,022 which may be applied against
any net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on August 31, 2005.
Multiple Classes of Shares of Beneficial Interest - The Funds offer multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of each Fund pro
rata based on average daily net assets of each class, without distinction
between share classes. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share dividend rates
are generally due to differences in separate class expenses.
(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
0.65% of average daily net assets for the Blue Chip Fund and the Convertible
Securities Fund, at an annual rate of 0.75% of average daily net assets for the
Core Growth Fund, the Equity Income Fund, the New Discovery Fund, the Science
and Technology Fund, and the Special Opportunities Fund, and at an annual rate
of 1.00% of average daily net assets for the Research International Fund. For
the year ended August 31, 1997, the investment adviser did not impose any of its
fee, which is reflected as a reduction of expenses in the Statement of
Operations.
Each Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of each Fund's operating expenses, exclusive of
management, distribution and service fees. Each Fund in turn will pay MFS an
expense reimbursement fee not greater than 1.50% of average daily net assets,
except that the Research International Fund will pay a fee of 1.75%. 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,
1997, the aggregate unreimbursed expenses owed to MFS by each Fund amounted to:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,844 $9,046 $ -- $8,413 $1,302 $ -- $ -- $ --
</TABLE>
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 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 each Fund.
Administrator - Effective March 1, 1997, the Funds have an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Funds pay
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales on Class A shares of each Fund for the year
ended August 31, 1997.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's 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 by 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 year ended August 31, 1997,
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 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of Class A shares at an effective
annual rate of up to 0.15%. MFSC is currently waiving its fee for an indefinite
period.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments $ 801,689 $ 916,065 $ 17,817,514 $ 1,735,832
========== ========== ============= ============
Sales
- ----------
Investments $ 189,892 $ 382,668 $ 16,161,162 $ 1,069,051
========== ========== ============= ============
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments (non-U.S. government
securities) $ 14,628,778 $ 4,633,699 $ 15,372,426 $ 4,871,185
============= ============ ============= ============
Sales
- ----------
Investments (non-U.S. government
securities) $ 13,012,489 $ 2,561,525 $ 13,452,258 $ 4,574,155
============= ============ ============= ============
</TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by each Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 624,151 $ 552,605 $ 2,467,904 $1,245,767
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 99,721 $ 77,886 $ 310,563 $ 163,961
Gross unrealized depreciation (3,780) (6,434) (34,424) (4,055)
------------ ---------- ------------ ----------
Net unrealized appreciation $ 95,941 $ 71,452 $ 276,139 $ 159,906
============ ========== ============ ==========
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 1,823,392 $2,379,678 $ 2,151,232 $3,115,308
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 215,761 $ 128,745 $ 427,647 $ 687,707
Gross unrealized depreciation (42,969) (177,600) (62,297) (85,659)
------------ ---------- ------------ ----------
Net unrealized appreciation
(depreciation) $ 172,792 $ (48,855) $ 365,350 $ 602,048
============ ========== ============ ==========
</TABLE>
(5) Shares of Beneficial Interest
Each 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
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
--------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 46,967 $ 474,750 50,444 $ 504,497 59,769 $ 808,314
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- 8,292 106,552
Shares reacquired (5,651) (56,185) (178) (1,847) (56,691) (726,457)
------ ---------- ------ ---------- ------ ----------
Net increase 41,316 $ 418,565 50,266 $ 502,650 11,370 $ 188,409
====== ========== ====== ========== ====== ==========
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 28,321 $ 354,214 46,587 $ 483,036 145,874 $ 1,462,123
Shares issued to
shareholders in
reinvestment of
distributions 1,898 23,074 -- -- -- --
Shares reacquired (38,910) (473,850) (5,579) (56,315) (25,934) (255,253)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) (8,691) $ (96,562) 41,008 $ 426,721 119,940 $ 1,206,870
====== ========== ====== ========== ======= ============
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 78,193 $ 811,064 80,611 $ 941,341
Shares issued to
shareholders in
reinvestment of
distributions -- -- 21,566 241,330
Shares reacquired (7,834) (79,182) (160,079) (1,817,353)
------ ---------- ------- -----------
Net increase
(decrease) 70,359 $ 731,882 (57,902) $ (634,682)
====== ========== ======= ===========
<CAPTION>
Class A Shares
PERIOD ENDED AUGUST 31, 1996*
---------------------------------------------------------------------------------------------
CORE GROWTH FUND EQUITY INCOME FUND SPECIAL OPPORTUNITIES FUND
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 56,000 $ 605,756 44,072 $ 449,397 198,828 $ 2,038,964
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (338) (4,083) (947) (10,110) (1) (14)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) 55,662 $ 601,673 43,125 $ 439,287 198,827 $ 2,038,950
====== ========== ====== ========== ======= ============
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 24,471 $ 246,209 5,555 $ 55,341 113,207 $ 1,465,484
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (3,957) (46,799) -- -- (6,150) (90,631)
------ ---------- ----- --------- ------- ------------
Net increase 20,514 $ 199,410 5,555 $ 55,341 107,057 $ 1,374,853
====== ========== ===== ========= ======= ============
*For the period from the commencement of investment operations, January 2, 1996, through August 31, 1996.
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 65,078 $ 836,895 144,634 $ 1,452,530 100,754 $ 1,010,565
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (4) (52) (30,396) (299,497) (7,389) (83,126)
------ ---------- ------- ------------ ------ ----------
Net increase 65,074 $ 836,843 114,238 $ 1,153,033 93,365 $ 927,439
====== ========== ======= ============ ====== ==========
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 164,633 $ 1,659,463 163,990 $ 1,857,489
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- --
Shares reacquired (34,025) (355,226) (14,760) (177,865)
------- ------------ ------- ------------
Net increase 130,608 $ 1,304,237 149,230 $ 1,679,624
======= ============ ======= ============
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
(6) Line of Credit
Each Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of each
Fund's 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 Fund for the year ended August 31, 1997, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6 $3 $3 $8 $2 $8 $1 $4
</TABLE>
(7) Restricted Securities
Each 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, 1997, the
Research International Fund owned the following restricted securities
(consisting of 1.53% of its net assets) which 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 brokers or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF
FUND/DESCRIPTION ACQUISITION SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Bank Handlowy Warsza 6/18/97 200 $ 2,162 $ 2,525
Hong Leong Finance Ltd. 1/15/96 3,000 11,940 5,855
Jarvis Hotels 6/21/96 - 7/02/96 10,900 30,014 27,378
-------
$35,758
=======
</TABLE>
(8) 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 the Funds have in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts for the Special
Opportunities Fund amounted to a net receivable of $175 with Deutschebank at
August 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Growth Fund,
MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS
Convertible Securities Fund, MFS New Discovery Fund, MFS Research International
Fund and MFS Science and Technology Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund (the Funds)
(eight of the portfolios constituting MFS Series Trust I) including the
schedules of portfolio investments as of August 31, 1997, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997, by correspondence with the custodian and
brokers or by 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
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund at August 31,
1997, and the results of their operations, the changes in their net assets, and
the financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) Core Growth Fund
MFS(R) Equity Income Fund
MFS(R) Special Opportunities Fund
MFS(R) Blue Chip Fund
MFS(R) Convertible SecuritiesFund
MFS(R) New Discovery Fund
MFS(R) Research InternationalFund
MFS(R) Science and Technology Fund
500 Boylston Street
Boston, MA02116-3741
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
INC-2 10/97 970
<PAGE> 649
MFS(R) CORE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
SUPPLEMENT TO THE JANUARY 1, 1998 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,
1998, as supplemented, and contains a description of Class I shares.
Class I shares are available for purchase only by certain investors as
described under the caption "Eligible Purchasers" below.
EXPENSE SUMMARY
<TABLE>
<CAPTION>
CLASS I
-----------------------------------------------------------------
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
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>
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
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................ 0.00% 0.00% 0.00% 0.00% 0.00%
reduction)(1)
Rule 12b-1 Fees........................... None None None None None
Other Expenses (after fee
reduction)(2)........................... 1.45% 0.74% 1.50%(3) 1.50%(3) 1.40%
---- ---- ---- ---- ----
Total Operating Expenses (after
fee reduction)(3)....................... 1.45% 0.74% 1.50% 1.50% 1.40%
</TABLE>
(1) The Adviser is currently waiving its right to receive management fees from
each Fund. Absent this waiver, "Management Fees" would be as follows:
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
------ ------------- ----------- ---- -----------
<S> <C> <C> <C> <C>
0.75% 0.75% 0.65% 0.65% 0.75%
</TABLE>
-1-
<PAGE> 650
(2) 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."
(3) The Adviser has agreed to bear the Convertible Securities Fund and the
Blue Chip Fund's expenses, subject to reimbursement by such Fund, such
that "Other Expenses" do not exceed 1.50% per annum of each such Fund's
average daily net assets during the current fiscal year. See "Information
Concerning Shares of the Fund - Expenses" in the Prospectus. Otherwise,
"Other Expenses" would be as follows:
<TABLE>
<CAPTION>
CONVERTIBLE BLUE
SECURITIES CHIP
FUND FUND
----------- ----
<S> <C>
4.04% 3.89%
</TABLE>
Absent any fee waivers and expense reductions, "Total Operating Expenses" for
each Fund would be as follows:
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
------ ------------- ----------- ---- ----------
<S> <C> <C> <C> <C>
2.32% 1.42% 4.69% 4.54% 2.27%
</TABLE>
EXAMPLE OF EXPENSES
An investor would pay the following dollar amounts of expenses on a $1,000
investment in Class I shares of each Fund, assuming (a) a 5% annual return and
(b) redemption at the end of each of the time periods indicated:
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
PERIOD FUND FUND FUND FUND FUND
------ ------ ------------- ----------- ---- -----------
<S> <C> <C> <C> <C> <C>
1 year...................... $ 15 $ 8 $ 15 $ 15 $ 14
3 years..................... 46 24 47 47 44
5 years..................... 79 41 82 82 77
10 years.................... 174 92 179 179 168
</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.
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.
-2-
<PAGE> 651
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31, 1997*
CORE GROWTH FUND CLASS I
- ------------------------------------------------------------------------------------
<S> <C>
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 12.99
===========
Income from investment operations# -
Net investment income** $ 1.50
Net realized and unrealized gain on investments and
foreign currency transactions 1.35
-----------
Total from investment operations $ 2.85
===========
Less distributions declared to shareholders from net realized
gain on investments $ --
-----------
Net asset value - end of period $ 15.84
===========
Total return 21.94%++
Ratios (to average net assets)/Supplemental data**:
Expenses## 1.48%+
Net investment income 14.08%+
Portfolio turnover 1,043%
Average commission rate $ 0.0248
Net assets at end of period (000 omitted) $ 1,695
</TABLE>
* For the period from the inception of Class I shares of the Fund January 2,
1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $ 1.40
Ratios (to average net assets):
Expenses## 2.35%+
Net investment income 13.20%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PERIOD ENDED
AUGUST 31, 1997*
SPECIAL OPPORTUNITIES FUND CLASS I
- ------------------------------------------------------------------------------------
<S> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.39
=========
Income from investment operations# -
Net investment income** $ 0.11
Net realized and unrealized gain on investments and
foreign currency transactions 2.14
---------
Total from investment operations $ 2.25
=========
Less distributions declared to shareholders -
From net investment income $ --
---------
From net realized gain on investments and foreign
currency transactions --
---------
Total distributions declared to shareholders $ --
---------
Net asset value - end of period $ 13.64
=========
Total return 19.75%++
</TABLE>
-3-
<PAGE> 652
<TABLE>
<S> <C>
Ratios (to average net assets)/Supplemental data**:
Expenses## 0.18%+
Net investment income 1.26%+
Portfolio turnover 161%
Average commission rate $ 0.0387
Net assets at end of period (000 omitted) $ 2,035
</TABLE>
* For the period from the inception of Class I shares of the Fund, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment income (loss) per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income (loss) $0.01
Ratios (to average net assets):
Expenses## 1.36%+
Net investment income (loss) 0.08%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1997*
CONVERTIBLE SECURITIES FUND CLASS I
- ------------------------------------------------------------------------------------------------
<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** $ 0.26
Net realized and unrealized gain on investments 1.21
-------
Total from investment operations $ 1.47
=======
Net asset value - end of period $ 11.47
=======
Total return 14.60%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.50%+
Net investment income 3.19%+
Portfolio turnover 76%
Average commission rate $0.0453
Net assets at end of period (000 omitted) $ 64
</TABLE>
* For the period from the inception of Class I shares of the Fund, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $ --
Ratios (to average net assets):
Expenses## 4.69%+
Net investment income --
</TABLE>
-4-
<PAGE> 653
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1997*
BLUE CHIP FUND CLASS I
- ------------------------------------------------------------------------------------------------
<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** $ 0.02
Net realized and unrealized gain on investments 1.75
-------
Total from investment operations $ 1.77
=======
Net asset value - end of period $ 11.77
=======
Total return 17.70%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.50%+
Net investment income 0.24%+
Portfolio turnover 32%
Average commission rate $0.0427
Net assets at end of period (000 omitted) $ 241
</TABLE>
* For the period from the inception of Class I shares of the Fund, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment loss per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment loss $ (0.23)
Ratios (to average net assets):
Expenses## 4.54%+
Net investment loss (2.80)%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERIOD ENDED AUGUST 31, 1997*
SCIENCE AND TECHNOLOGY FUND CLASS I
- ------------------------------------------------------------------------------------------------
<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** $ 1.05
Net realized and unrealized gain on investments
and foreign currency transactions 1.48
-------
Total from investment operations $ 2.53
=======
Net asset value - end of period $ 12.53
=======
Total return 25.30%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.41%+
Net investment income 13.11%+
Portfolio turnover 792%
Average commission rate $0.0243
Net assets at end of period (000 omitted) $ 1,637
</TABLE>
* For the period from the inception of Class I shares of the Fund, January
2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
-5-
<PAGE> 654
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at not
more than 1.50% of the Fund's average daily net assets. The investment
adviser, distributor and shareholder servicing agent did not impose any of
their fees for the period indicated. If these fees had not been waived
and/or if actual expenses had been over/under this limitation, the net
investment income per share and the ratios would have been:
<TABLE>
<S> <C>
Net investment income $ 0.98
Ratios (to average net assets):
Expenses## 2.28%+
Net investment income 12.24%+
</TABLE>
ELIGIBLE PURCHASERS
Class I shares are available for purchase only by the following purchasers
("Eligible Purchasers"):
(i) certain retirement plans established for the benefit of employees of
Massachusetts Financial Services Company ("MFS"), the Fund's investment
adviser, and employees of MFS' affiliates; and
(ii) any fund distributed by MFS Fund Distributors, Inc. ("MFD"), the Fund's
distributor, if the fund seeks to achieve its investment objective by
investing primarily in shares of the Fund and other funds distributed by
MFD.
In no event will the Fund, MFS, MFD or any of their affiliates pay any
sales commissions or compensation to any third party in connection with the sale
of Class I shares; the payment of any such sales commission or compensation
would, under the Fund's policies, disqualify the purchaser as an eligible
investor of Class I shares.
SHARE CLASSES OFFERED BY THE FUNDS
While each Fund has four classes of shares (Class A, Class B, Class C and
Class I shares), Class A and Class I shares are the only classes presently
available for sale. Class I shares are available for purchase only by Eligible
Purchasers, as defined above, and are described in this Supplement. Class A
shares, Class B shares and Class C shares are described in the Funds'
Prospectus. 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") 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
0.50% per annum. Class B shares are offered at net asset value without an
initial sales charge but are subject to a CDSC upon redemption (declining from
4.00% during the first year to 0% after six years) and an annual distribution
fee and service fee up to a maximum of 1.00% per annum; Class B shares convert
to Class A shares approximately eight years after purchase. Class C shares are
offered at net asset value without an initial sales charge but are subject to a
CDSC 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 I shares are
offered at net asset value without an initial sales charge or CDSC and are not
subject to a distribution or service fee. Class C and Class I shares do not
convert to any other class of shares of the Funds.
OTHER INFORMATION
Eligible Purchasers may purchase Class I shares only directly through MFD.
Eligible Purchasers may exchange Class I shares of a Fund for Class I shares of
any other MFS Fund available for purchase by such Eligible Purchasers at their
net asset value (if available for sale), and may exchange Class I shares of a
Fund for shares of the MFS Money Market Fund (if available for sale), and may
redeem Class I shares of a Fund at net asset value. Distributions paid by a Fund
with respect to Class I shares generally will be greater than those paid with
respect to Class A shares, Class B shares and Class C shares because expenses
attributable to Class A shares, Class B shares and Class C shares generally will
be higher.
Subject to termination or revision at the sole discretion of MFS, MFS has
agreed to bear each Fund's expenses such that each such Fund's "Other Expenses,"
which are defined to include all Fund expenses except for management fees, Rule
12b-1 fees, taxes, extraordinary expenses, brokerage and transaction costs and
class specific expenses, do not exceed
-6-
<PAGE> 655
1.50% per annum of its average daily net assets (the "Maximum Percentage"). The
obligation of MFS to bear these expenses terminates on the last day of a Fund's
fiscal year in which such Fund's "Other Expenses" are less than or equal to the
Maximum Percentage. The payments made by MFS on behalf of these Funds under this
arrangement are subject to reimbursement by such Fund to MFS, which will be
accomplished by the payment of an expense reimbursement fee by the Fund to MFS
computed and paid monthly at a percentage of its average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment such Fund's "Other Expenses" will not exceed the Maximum Percentage.,
This expense reimbursement by the Fund to MFS terminates on the earlier of the
date on which payments made by the Fund equal the prior payment of such
reimbursable expenses by MFS or August 31, 2006.
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998
-7-
<PAGE> 656
[MFS LOGO]
PROSPECTUS
JANUARY 1, 1998
MFS(R) CORE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
Class A Shares of Beneficial Interest
(Members of the MFS Family of Funds(R)) Class B Shares of Beneficial Interest
Each a series of MFS Series Trust I Class C Shares of Beneficial Interest
MFS 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 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 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.
(CONTINUED ON THE NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE.
-1-
<PAGE> 657
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, dated January 1, 1998, as
amended or supplemented from time to time (the "SAI"), which contains more
detailed information about the Trust and each Fund. See page 41 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 SAI is incorporated by reference into
this Prospectus. The SEC maintains an Internet World Wide Web site (http: //
www.sec.gov) that contains the SAI, materials that are incorporated by reference
into this Prospectus and SAI, and other information regarding the Funds.
-2-
<PAGE> 658
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C> <C>
1. Expense Summary................................................... 4
2. Condensed Financial Information................................... 8
3. The Funds......................................................... 11
4. Investment Objectives and Policies................................ 12
Core Growth Fund.................................................. 12
Special Opportunities Fund........................................ 12
Convertible Securities Fund....................................... 13
Blue Chip Fund.................................................... 14
Science and Technology Fund....................................... 14
5. Certain Securities and Investment Techniques...................... 15
6. Additional Risk Factors........................................... 22
7. Management of the Funds........................................... 25
8. Information Concerning Shares of the Funds........................ 27
Purchases.................................................. 27
Exchanges.................................................. 32
Redemptions and Repurchases................................ 33
Distribution Plan.......................................... 34
Distributions.............................................. 36
Tax Status................................................. 36
Net Asset Value............................................ 37
Expenses .................................................. 37
Description of Shares, Voting Rights and Liabilities....... 38
Performance Information.................................... 39
9. Shareholder Services.............................................. 39
Appendix A - Waivers of Sales Charges............................. A-1
Appendix B - Description of Bond Ratings.......................... B-1
</TABLE>
-3-
<PAGE> 659
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>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
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)(7)........................ 1.45% 0.74% 1.50%(5) 1.50%(5) 1.40%
---- ---- ---- ---- ----
Total Operating Expenses
(after fee reduction)(6)............. 1.45% 0.74% 1.50% 1.50% 1.40%
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
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)(7)........................ 1.45% 0.74% 1.50%(5) 1.50%(5) 1.40%
---- ---- ---- ---- ----
Total Operating Expenses
(after fee reduction)(6)............. 2.45% 1.74% 2.50% 2.50% 2.40%
</TABLE>
-4-
<PAGE> 660
CLASS C SHARES
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
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)(7)........................ 1.45% 0.74% 1.50%(5) 1.50%(5) 1.40%
---- ---- ---- ---- ----
Total Operating Expenses
(after fee reduction)(6)............. 2.45% 1.74% 2.50% 2.50% 2.40%
</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 "Information Concerning Shares of the
Funds - Purchases").
(2) The Adviser is currently waiving its right to receive management fees
from each Fund. Absent this waiver, "Management Fees" would be as
follows:
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
0.75% 0.75% 0.65% 0.65% 0.75%
</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 "Information Concerning Shares
of the Funds - 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 Plan 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 "Information Concerning Shares
of the Funds - Distribution Plan" below.
(5) The Adviser has agreed to bear the expenses of the Convertible
Securities Fund and the Blue Chip Fund, subject to reimbursement by
each Fund, such that "Other Expenses" do not exceed 1.50% per annum of
each such Fund's average daily net assets during the current fiscal
year. See "Information Concerning Shares of the Fund Expenses."
Otherwise, "Other Expenses" would be as follows:
<TABLE>
<CAPTION>
CONVERTIBLE BLUE
SECURITIES CHIP
FUND FUND
<S> <C> <C>
Class A 4.04% 3.89%
Class B 4.04% 3.89%
Class C 4.04% 3.89%
</TABLE>
-5-
<PAGE> 661
(6) 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>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
Class A 2.82% 1.92% 5.19% 5.04% 2.77%
Class B 3.32% 2.42% 5.69% 5.54% 3.27%
Class C 3.32% 2.42% 5.69% 5.54% 3.27%
</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."
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>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 year.................. $ 62 $ 55 $ 62 $ 62 $ 61
3 years................. 91 70 93 93 90
5 years................. 123 87 125 125 120
10 years................ 213 135 218 218 207
</TABLE>
CLASS B SHARES
(ASSUMES REDEMPTION)(1)
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 year.................. $ 65 $ 58 $ 65 $ 65 $ 64
3 years................. 106 85 108 108 105
5 years................. 151 114 153 153 148
10 years................ 254 178 259 259 248
</TABLE>
CLASS B SHARES
(ASSUMES NO REDEMPTION)(1)
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 year.................. $ 25 $ 18 $ 25 $ 25 $ 24
3 years................. 76 55 78 78 75
5 years................. 131 94 133 133 128
10 years................ 254 178 259 259 248
</TABLE>
- --------------
(1) Class B shares convert to Class A shares approximately eight years
after purchase; therefore, years nine and ten reflect Class A expenses.
-6-
<PAGE> 662
CLASS C SHARES
(ASSUMES REDEMPTION)
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 year.................. $ 35 $ 28 $ 35 $ 35 $ 35
3 years................. 76 55 78 78 75
5 years................. 131 94 133 133 128
10 years................ 279 205 284 284 274
</TABLE>
CLASS C SHARES
(ASSUMES NO REDEMPTION)
<TABLE>
<CAPTION>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 year.................. $ 25 $ 18 $ 25 $ 25 $ 24
3 years................. 76 55 78 78 75
5 years................. 131 94 133 133 128
10 years................ 279 205 284 284 274
</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.
-7-
<PAGE> 663
2. 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.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
CORE GROWTH FUND CLASS A CLASS A
----------- ---------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 12.33 $ 10.00
----------- ---------
Income from investment operations# -
Net investment income (loss)** $ 1.24 $ (0.01)
Net realized and unrealized gain on investments and
foreign currency transactions 3.93 2.34
----------- ---------
Total from investment operations $ 5.17 $ 2.33
----------- ---------
Less distributions declared to shareholders from net realized
gain on investments $ (1.68) $ --
----------- ---------
Net asset value - end of period $ 15.82 $ 12.33
----------- ---------
Total return 45.22% 23.30%++
Ratios (to average net assets)/Supplemental data**:
Expenses## 1.45% 1.50%+
Net investment income (loss) 9.12% (0.11)%+
Portfolio turnover 1,043% 204%
Average commission rate $ 0.0248 $ 0.0411
Net assets at end of period (000 omitted) $ 1,061 $ 686
</TABLE>
* For the period from the inception of Class A shares of the Fund,
January 2, 1996, through August 31, 1996.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 1.50% of the Fund's average daily net assets. The
investment adviser, distributor and shareholder servicing agent did not
impose any of their fees for the periods indicated. If these fees had
not been waived and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios
would have been:
<TABLE>
<S> <C> <C>
Net investment income (loss) $ 1.06 $ (0.18)
Ratios (to average net assets):
Expenses## 2.82% 4.28%+
Net investment income (loss) 7.75% (2.34)%+
</TABLE>
-8-
<PAGE> 664
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
AUGUST 31, 1997 AUGUST 31, 1996*
SPECIAL OPPORTUNITIES FUND CLASS A CLASS A
----------- -----------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 11.36 $ 10.00
----------- -----------
Income from investment operations# -
Net investment income** $ 0.08 $ 0.06
Net realized and unrealized gain on investments and
foreign currency transactions 3.35 1.30
----------- -----------
Total from investment operations $ 3.43 $ 1.36
----------- -----------
Less distributions declared to shareholders -
From net investment income (loss) $ (0.04) $ --
From net realized gain on investments and foreign
currency transactions (1.13) --
----------- -----------
Total distributions declared to shareholders $ (1.17) $ --
----------- -----------
Net asset value - end of period $ 13.62 $ 11.36
----------- -----------
Total return 31.84% 13.60%++
Ratios (to average net assets)/Supplemental data**:
Expenses## 0.74% 1.50%+
Net investment income 0.65% 0.78%+
Portfolio turnover 161% 108%
Average commission rate $ 0.0387 $ 0.0361
Net assets at end of period (000 omitted) $ 1,920 $ 2,259
</TABLE>
* For the period from the inception of Class A shares of the Fund,
January 2, 1996, through August 31, 1996.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 1.50% of the Fund's average daily net assets. The
investment adviser, distributor and shareholder servicing agent did not
impose any of their fees for the periods indicated. If these fees had
not been waived and/or if actual expenses had been over/under this
limitation, the net investment loss per share and the ratios would have
been:
<TABLE>
<S> <C> <C>
Net investment loss $ (0.06) $ (0.01)
Ratios (to average net assets):
Expenses## 1.92% 2.97%+
Net investment loss (0.53)% (0.16)%+
</TABLE>
-9-
<PAGE> 665
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1997*
CONVERTIBLE SECURITIES FUND 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** $ 0.25
Net realized and unrealized gain on investments 1.23
---------
Total from investment operations $ 1.48
---------
Net asset value - end of period $ 11.48
---------
Total return 14.70%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.50%+
Net investment income 3.16%+
Portfolio turnover 76%
Average commission rate $ 0.0453
Net assets at end of period (000 omitted) $ 577
</TABLE>
* For the period from the inception of Class A shares of the Fund,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 1.50% of the Fund's average daily net assets. The
investment adviser, distributor and shareholder servicing agent did not
impose any of their fees for the period indicated. If these fees had
not been waived and/or if actual expenses had been over/under this
limitation, the net investment loss per share and the ratios would have
been:
<TABLE>
<S> <C>
Net investment loss $ (0.04)
Ratios (to average net assets):
Expenses## 5.19%+
Net investment loss (0.53)%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1997*
BLUE CHIP FUND 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** $ 0.02
Net realized and unrealized gain on investments 1.75
---------
Total from investment operations $ 1.77
---------
Net asset value - end of period $ 11.77
---------
Total return 17.70%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.50%+
Net investment income 0.28%+
Portfolio turnover 32%
Average commission rate $ 0.0427
Net assets at end of period (000 omitted) $ 486
</TABLE>
* For the period from the inception of Class A shares of the Fund,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
-10-
<PAGE> 666
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 1.50% of the Fund's average daily net assets. The
investment adviser, distributor and shareholder servicing agent did not
impose any of their fees for the period indicated. If these fees had
not been waived and/or if actual expenses had been over/under this
limitation, the net investment loss per share and the ratios would have
been:
<TABLE>
<S> <C>
Net investment loss $ (0.26)
Ratios (to average net assets):
Expenses## 5.04%+
Net investment loss (3.25)%+
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1997*
SCIENCE AND TECHNOLOGY FUND 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** $ 0.84
Net realized and unrealized gain on investments
and foreign currency transactions 1.69
---------
Total from investment operations $ 2.53
---------
Net asset value - end of period $ 12.53
---------
Total return 25.30%++
Ratios (to average net assets)/Supplemental data**:
Expenses 1.40%+
Net investment income 10.73%+
Portfolio turnover 792%
Average commission rate $ 0.0243
Net assets at end of period (000 omitted) $ 882
</TABLE>
* For the period from the inception of Class A shares of the Fund,
January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not Annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
** The Adviser voluntarily agreed to maintain the expenses of the Fund at
not more than 1.50% of the Fund's average daily net assets. The
investment adviser, distributor and shareholder servicing agent did not
impose any of their fees for the period indicated. If these fees had
not been waived and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would
have been:
<TABLE>
<S> <C>
Net investment income $ 0.73
Ratios (to average net assets):
Expenses## 2.77%+
Net investment income 9.36%+
</TABLE>
3. THE FUNDS
Each Fund is a series of the Trust, an open-end management investment company
which was organized as a business trust under the laws of The Commonwealth of
Massachusetts on July 30, 1986. Each Fund is a diversified fund except for the
Special Opportunities Fund, which is non-diversified. The Trust presently
consists of thirteen series, eight 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 of 1.00% upon
redemption during the first year in the
-11-
<PAGE> 667
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 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 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.
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.
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 "Certain Securities
and 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 "Certain Securities and 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 "Certain Securities and 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-
-12-
<PAGE> 668
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 "Certain Securities and 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 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. 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 "Certain Securities and 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 "Certain Securities and 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 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).
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The Fund may engage in short sales of securities which the Adviser
expects to decline in price (see "Certain Securities and 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 "Certain Securities and 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 "Certain Securities and 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 "Certain Securities and 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).
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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 "Certain Securities and 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. CERTAIN SECURITIES AND INVESTMENT TECHNIQUES
The securities and investment techniques described below are applicable to all
or certain of the Funds, as specified. Additional information about certain of
these securities and investment techniques can be found under the caption
"Certain Securities and Investment Techniques" in the SAI.
CERTAIN SECURITIES AND INVESTMENT TECHNIQUES APPLICABLE TO EACH FUND. The
following securities and 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"). A determination is made 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, retains
sufficient oversight focusing on factors such as valuation, liquidity and
availability of information. Investing in Rule 144A securities could have the
effect of decreasing the level of liquidity in 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.
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"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 segregate liquid assets
sufficient to cover its commitments. Although the Fund does not intend to make
such purchases for speculative purposes, purchases of securities on such bases
may involve more risk than other types of purchases.
U.S. GOVERNMENT SECURITIES: 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.
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 may be of any size, 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".
FOREIGN GROWTH SECURITIES: Each Fund may invest in securities of
foreign growth companies, including established foreign companies, whose rates
of earnings growth are expected to accelerate because of special factors, such
as rejuvenated management, new products, changes in consumer demand, or basic
changes in the economic environment or which otherwise represent opportunities
for long-term growth. See "Additional Risk Factors - Foreign Securities" below.
It is anticipated that these companies will primarily be in nations with more
developed securities markets, such as Japan, Australia, Canada, New Zealand,
Hong Kong and most Western European countries, including Great Britain.
EMERGING MARKETS SECURITIES: Consistent with each Fund's respective
objectives and policies, each Fund may invest in securities of issuers whose
principal activities are located in emerging market countries (which may include
foreign governments and their subdivisions, agencies or instrumentalities).
Emerging markets include any country determined by the Adviser to have an
emerging market economy, taking into account a number of factors, including
whether the country has a low- to middle-income economy according to the
International Bank for Reconstruction and Development, the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The Adviser determines whether an issuer's
principal activities are located in an emerging market country by considering
such factors as its country of organization, the principal trading market for
its securities and the source of its revenues and location of its assets. The
issuer's principal activities generally are deemed to be located in a
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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 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 changes in the value of one or
more specified underlying instruments. Indexed securities may be positively or
negatively indexed (i.e., their principal value or interest rates may increase
or decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself and could involve the loss of all
or a portion of or interest on the principal amount of the investment.
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 notional
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 could be used to shift a Fund's investment exposure
from one type of investment to another. For example, if a Fund agreed to
exchange payments in dollars for payments in foreign currency, in each case
based on a fixed rate, the swap agreement would tend to decrease the Fund's
exposure to U.S. interest rates and increase its exposure to foreign currency
and interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of a Fund's investments and its share price and
yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
a Fund's performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions. Swaps, caps, floors and collars are highly
specialized activities which involve certain risks as described in the SAI.
OPTIONS ON SECURITIES: Each Fund may write (sell) covered put and call
options and purchase put and call options on securities. Each Fund will write
options on securities for the purpose of increasing its return and/or to protect
the value of its portfolio. In particular, where a Fund writes an option that
expires unexercised or is closed out by the Fund at a profit, it will retain the
premium paid for the option which will increase its gross income and will offset
in part the reduced value of the portfolio security underlying the option, or
the increased cost of portfolio securities to be acquired. However, the writing
of options constitutes only a partial hedge, up to the amount of the premium
less any transaction costs. In contrast, 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.
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By writing a call option on a security, a Fund limits its opportunity
to profit from any increase in the market value of the underlying security,
since the holder will usually exercise the call option when the market value of
the underlying security exceeds the exercise price of the call. However, the
Fund retains the risk of depreciation in value of securities on which it has
written call options.
Each Fund may also purchase put or call options in anticipation of
market fluctuations which may adversely affect the value of its portfolio or the
prices of securities that a Fund wants to purchase at a later date. In the event
that the expected market fluctuations occur, a Fund may be able to offset the
resulting adverse effect on its portfolio, in whole or in part, through the
options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
security changes sufficiently, the option may expire without value to the Fund.
In certain instances, a Fund may enter into options on Treasury
securities that are "reset" options or "adjustable strike" options. These
options provide for periodic adjustment of the strike price and may also provide
for the periodic adjustment of the premium during the term of the option.
OPTIONS ON STOCK INDICES: Each Fund may write (sell) covered call and
put options and purchase call and put options on stock indices. Each Fund may
write options on stock indices for the purpose of increasing its gross income
and to protect its portfolio against declines in the value of securities it owns
or increases in the value of securities to be acquired. When a Fund writes an
option on a stock index, and the value of the index moves adversely to the
holder's position, the option will not be exercised, and the Fund will either
close out the option at a profit or allow it to expire unexercised. A Fund will
thereby retain the amount of the premium, less related transaction costs, which
will increase its gross income and offset part of the reduced value of portfolio
securities or the increased cost of securities to be acquired. Such
transactions, however, will constitute only partial hedges against adverse price
fluctuations, since any such fluctuations will be offset only to the extent of
the premium received by a Fund for the writing of the option, less related
transaction costs. In addition, if the value of an underlying index moves
adversely to a Fund's option position, the option may be exercised, and the Fund
will experience a loss which may only be partially offset by the amount of the
premium received.
Each Fund may also purchase put or call options on stock indices in
order, respectively, to hedge its investments against a decline in value or to
attempt to reduce the risk of missing a market or industry segment advance. A
Fund's possible loss in either case will be limited to the premium paid for the
option, plus related transaction costs.
"YIELD CURVE" OPTIONS: Each Fund may enter into options on the yield
"spread," or yield differential, between two securities, a transaction referred
to as a "yield curve" option, for hedging and non-hedging (an effort to increase
current income) purposes. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities
rather than the actual prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease. Yield curve options written by a Fund will be covered as
described in the SAI. The trading of yield curve 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 on stock indices, and may purchase and sell
Futures Contracts on foreign currencies or indices of foreign currencies
("Futures Contracts"). Each Fund may also purchase and write options on such
Futures Contracts. 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
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<PAGE> 674
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, which require use of segregated assets or "cover" in
connection with the purchase and sale of such contracts.
OPTIONS ON FOREIGN CURRENCIES: Each Fund may also purchase and write
options on foreign currencies ("Options on Foreign Currencies") for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. As in the
case of other types of options, however, the writing of an Option on Foreign
Currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund may be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
Option on Foreign Currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to a Fund's position, it may forfeit the entire amount of the premium paid for
the option plus related transaction costs. A Fund may also choose, or be
required to receive delivery of the foreign currencies underlying Options on
Foreign Currencies into which it has entered. Under certain circumstances, such
as where the Adviser believes that the applicable exchange rate is unfavorable
at the time the currencies are received or the Adviser anticipates, for any
other reason, that the exchange rate will improve, a Fund may hold such
currencies for an indefinite period of time.
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 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.
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MORTGAGE "DOLLAR ROLL" TRANSACTIONS: 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 Special Opportunities Fund and
the Convertible Securities Fund may invest in corporate asset-backed securities.
These securities, issued by trusts and special purpose corporations, are backed
by a pool of assets, such as credit card or automobile loan receivables,
representing the obligations of a number of different parties.
Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables permit
the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The underlying assets (e.g., loans) are also subject to prepayments which
shorten the securities' weighted average life and may lower their return.
Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. A Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The 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 Special Opportunities Fund and the Convertible Securities Fund
each may invest a portion of its assets in collateralized mortgage obligations
or
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<PAGE> 676
"CMOs," which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by certificates
issued by GNMA, the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"), but also may be collateralized
by whole loans or private mortgage pass-through securities (such collateral
collectively referred to as "Mortgage Assets"). Each of these Funds may also
invest a portion of its assets in multiclass pass-through securities which are
interests in a trust composed of Mortgage Assets. CMOs (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Payments of principal of and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
In a CMO, a series of bonds or certificates are usually issued in multiple
classes with different maturities. Each class of CMOs, often referred to as a
"tranche," is issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates, resulting in a loss of all
or part of the premium if any has been paid. Certain classes of CMOs have
priority over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which a Fund invests, the
investment may be subject to a greater or lesser risk of prepayments than other
types of mortgage-related securities.
The 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 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 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 Special Opportunities Fund and
the Convertible Securities Fund may invest in mortgage pass-through securities.
Mortgage pass-through securities are securities representing interests in
"pools" of mortgage loans. Monthly payments of interest and principal by the
individual borrowers on mortgages are passed through to the holders of the
securities (net of fees paid to the issuer or guarantor of the securities) as
the mortgages in the underlying mortgage pools are paid off. Payment of
principal and interest on some mortgage pass-through securities (but not the
market value of the securities themselves) may be guaranteed by the full faith
and credit of the U.S. Government (in the case of securities guaranteed by
GNMA); or guaranteed by U.S. Government-sponsored corporations (such as FNMA or
FHLMC, which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers).
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<PAGE> 677
BRADY BONDS: 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,
Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, Panama,
Peru, the Philippines, Poland, Slovenia, Uruguay and Venezuela. Brady Bonds have
been issued only recently, and for that reason do not have a long payment
history. Brady Bonds may be collateralized or uncollateralized, are issued in
various currencies (but primarily the U.S. dollar) and are actively traded in
over-the-counter secondary markets. U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized in full as to principal by U.S. Treasury zero coupon bonds having
the same maturity as the bonds. Brady Bonds are often viewed as having three or
four valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constituting the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
6. ADDITIONAL RISK FACTORS
The following discussion of additional risk factors supplements the risk factors
described above. Additional information concerning risk factors can be found
under the caption "Certain Securities and 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.
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<PAGE> 678
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.
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 Special Opportunities Fund, the Convertible
Securities Fund and the Science and Technology Fund may invest in fixed income
and 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
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<PAGE> 679
rates, the market's perception of their credit quality, and the outlook for
economic growth). In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. During certain periods, the higher yields on a
Fund's lower rated high yielding fixed income securities are paid primarily
because of the increased risk of loss of principal and income, arising from such
factors as the heightened possibility of default or bankruptcy of the issuers of
such securities. Due to the fixed income payments of these securities, a Fund
may continue to earn the same level of interest income while its net asset value
declines due to portfolio losses, which could result in an increase in the
Fund's yield despite the actual loss of principal. The market for these lower
rated fixed income securities may be less liquid than the market for investment
grade fixed income securities, and judgment may at times play a greater role in
valuing these securities than in the case of investment grade fixed income
securities. Changes in the value of securities subsequent to their acquisition
will not affect cash income or yield to maturity to a Fund but will be reflected
in the net asset value of shares of the Fund.
FOREIGN SECURITIES: Each Fund may invest in dollar denominated and
non-dollar denominated foreign securities. Investing in securities of foreign
issuers generally involves risks not ordinarily associated with investing in
securities of domestic issuers. These include changes in currency rates,
exchange control regulations, securities settlement practices, governmental
administration or economic or monetary policy (in the United States or abroad)
or circumstances in dealings between nations. Costs may be incurred in
connection with conversions between various currencies. Special considerations
may also include more limited information about foreign issuers, higher
brokerage costs, different accounting standards and thinner trading markets.
Foreign securities markets may also be less liquid, more volatile and less
subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. Each Fund may
hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. Each Fund may also hold foreign currency
in anticipation of purchasing foreign securities.
AMERICAN DEPOSITARY RECEIPTS: Each Fund may invest in American
Depositary Receipts ("ADRs") which are certificates issued by a U.S. depository
(usually a bank) and represent a specified quantity of shares of an underlying
non-U.S. stock on deposit with a custodian bank as collateral. Because ADRs
trade on U.S. securities exchanges, the Adviser does not treat them as foreign
securities. However, they are subject to many of the risks of foreign securities
described above such as changes in exchange rates and more limited information
about foreign issuers.
EMERGING MARKET SECURITIES: Each Fund may invest in emerging markets.
In addition to the general risks of investing in foreign securities, investments
in emerging markets involve special risks. Securities of many issuers in
emerging markets may be less liquid and more volatile than securities of
comparable domestic issuers. These securities may be considered speculative and,
while generally offering higher income and the potential for capital
appreciation, may present significantly greater risk. Emerging markets may have
different clearance and settlement procedures, and in certain markets there have
been times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of a Fund is uninvested and no return is earned thereon. The inability of
a Fund to make intended securities purchases due to settlement problems could
cause a Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result in losses to a
Fund due to subsequent declines in value of the portfolio security, a decrease
in the level of liquidity in the Fund's portfolio, or, if the Fund has entered
into a contract to sell the security, possible liability to the purchaser.
Certain markets may require payment for securities before delivery, and in such
markets a Fund bears the risk that the securities will not be delivered and that
the Fund's payments will not be returned. Securities prices in emerging markets
can be significantly more volatile than in the more developed nations of the
world, reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets may have
relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions on repatriation
of assets, and may have less protection of property rights than more developed
countries. The economies of countries with emerging markets may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or
global trade conditions, and may suffer from extreme and volatile debt burdens
or inflation rates. Local securities markets may trade a small number of
securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. Securities of issuers located in countries with emerging
markets may have limited marketability and may be subject to more abrupt or
erratic movements in price.
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<PAGE> 680
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 Conduct Rules
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).
Except with respect to a Fund's policy on borrowing and investing in illiquid
securities, 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 Core
Growth Fund and the Special Opportunities Fund, and January 2, 1997 with respect
to the remaining Funds (the "Advisory Agreements"). Under the Advisory
Agreements, the Adviser provides each Fund with overall investment advisory
services. Subject to such policies as the Trustees may determine, the Adviser
makes investment decisions for each Fund. For its services, the Adviser is
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>
CORE SPECIAL CONVERTIBLE BLUE SCIENCE AND
GROWTH OPPORTUNITIES SECURITIES CHIP TECHNOLOGY
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
0.75% 0.75% 0.65% 0.65% 0.75%
</TABLE>
For the period from the commencement of investment operations, to the fiscal
year end of August 31, 1997, 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.
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<PAGE> 681
The identity and background of the portfolio manager(s) for each Fund is set
forth below. Each portfolio manager has acted in that capacity since the
commencement of investment operations of each Fund.
FUND PORTFOLIO MANAGER(S)
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.
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.
Science and Technology Fund S. Irfan Ali, a 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.
MFS also serves as investment adviser to each of the other funds in the MFS
Family of Funds (the "MFS Funds") and to MFS(R) Municipal Income Trust, MFS
Multimarket Income Trust, MFS Government Markets Income Trust, MFS Intermediate
Income Trust, MFS Charter Income Trust, MFS Special Value Trust, MFS
Institutional Trust, MFS Variable Insurance Trust, MFS/Sun Life Series Trust and
seven variable accounts, each of which is a registered investment company
established by Sun Life Assurance Company of Canada (U.S.) ("Sun Life of Canada
(U.S.)") in connection with the sale of various fixed/variable annuity
contracts. MFS and its wholly owned subsidiary, MFS Institutional Advisors Inc.,
provide investment advice to substantial private clients.
MFS is America's oldest mutual fund organization. MFS and its predecessor
organizations have a history of money management dating from 1924 and the
founding of the first mutual fund in the U.S., Massachusetts Investors Trust.
Net assets under the management of the MFS organization were approximately $69.4
billion on behalf of approximately 2.7 million investor accounts as of November
30, 1997. As of such date, the MFS organization managed approximately $20.1
billion of assets invested in fixed income funds and fixed income portfolios,
approximately $4.1 billion of assets invested in foreign securities, and
approximately $44.2 billion of assets invested in equity securities. MFS is a
subsidiary of Sun Life of Canada (U.S.), a subsidiary of Sun Life of Canada
(U.S.) Holdings, Inc., which in turn is a wholly owned subsidiary of Sun Life
Assurance Company of Canada ("Sun Life"). The Directors of MFS are A. Keith
Brodkin, Jeffrey L. Shames, 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, Mark E. Bradley, Ellen M. Moynihan and James R. Bordewick, Jr., all of
whom are officers of MFS, are officers of the Trust.
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. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS, particularly when the same security is suitable for more than one client.
While in some cases this arrangement could have a detrimental effect on the
price or availability of the security as far as a Fund is concerned, in other
cases, however, it may produce increased investment opportunities for the Funds.
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<PAGE> 682
ADMINISTRATOR - MFS provides the Fund with certain financial, legal, compliance,
shareholder communications and other administrative services pursuant to a
Master Administrative Services Agreement dated March 1, 1997, as amended. Under
this Agreement, the Fund pays MFS an administrative fee of up to 0.015% per
annum of the Fund's average daily net assets. This fee reimburses MFS for a
portion of the costs it incurs to provide such services.
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. Dealers may also charge their customers fees
relating to investments in each Fund. As used in the Prospectus and any
appendices thereto, the term "dealer" includes any broker, dealer, bank
(including bank trust departments), registered investment adviser, financial
planner and any other financial institutions having a selling agreement or other
similar agreement with MFD.
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.
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 five 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
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<PAGE> 683
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;
(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;
and
(v) on investments in Class A shares by certain retirement plans
subject to ERISA, if: (a) the plan establishes an account with
the Shareholder Servicing Agent on or after July 1, 1997; (b)
such plan's records are maintained on a pooled basis by the
Shareholder Servicing Agent; and (c) the sponsoring
organization demonstrates to the satisfaction of MFD that, at
the time of purchase, the employer has at least 200 eligible
employees and the plan has aggregate assets of at least
$2,000,000.
In the case of such purchases, MFD will pay commissions to dealers on
new investments in Class A shares made through such dealers, as follows:
<TABLE>
<CAPTION>
COMMISSION PAID BY MFD TO DEALERS CUMULATIVE PURCHASE AMOUNT
<S> <C>
1.00%................................... On the first $2,000,000, plus
0.80%................................... Over $2,000,000 to $3,000,000, plus
0.50%................................... Over $3,000,000 to $50,000,000, plus
0.25%................................... Over $50,000,000
</TABLE>
For purposes of determining the level of commissions to be paid to
dealers with respect to a shareholder's new investment in Class A shares made on
or after April 1, 1996, purchases for each shareholder account (and certain
other accounts for which the shareholder is a record or beneficial holder) will
be aggregated over a 12-month period (commencing from the date of the first such
purchase).
See "Redemptions and Repurchases - Contingent Deferred Sales Charge" below 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
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<PAGE> 684
redemption of Class A shares is waived with respect to shares held by certain
retirement plans qualified under Section 401(a) or 403(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), and subject to ERISA, where:
(i) the retirement plan and/or sponsoring organization does not
subscribe to the MFS Participant Recordkeeping System; and
(ii) the retirement plan and/or sponsoring organization
demonstrates to the satisfaction of, and certifies to, the
Shareholder Servicing Agent that the retirement plan has, at
the time of certification, or will have pursuant to a purchase
order placed with the certification, a market value of
$500,000 or more invested in shares of any class or classes of
the MFS Funds and aggregate assets of at least $10 million;
provided, however, that the CDSC will not be waived (i.e., it will be imposed)
(a) with respect to plans which establish an account with the Shareholder
Servicing Agent on or after November 1, 1997, in the event that the plan makes a
complete redemption of all of its shares in the MFS Funds, or (b) with respect
to plans which established an account with the Shareholder Servicing Agent prior
to November 1, 1997, in the event that there is a change in law or 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 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>
CONTINGENT
YEAR OF REDEMPTION AFTER DEFERRED SALES
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" below 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 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.
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<PAGE> 685
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
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 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 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 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
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<PAGE> 686
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.
SUBSEQUENT INVESTMENT BY TELEPHONE. Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing agent
toll-free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing Agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4.00 p.m., Eastern time), the purchase will occur at the closing net
asset value of the shares purchased on that day. The Shareholder Servicing Agent
may be liable for any losses resulting from unauthorized telephone transactions
if it does not follow reasonable procedures designed to verify the identity of
the caller. The Shareholder Servicing agent will request personal or other
information from the caller, and will normally also record calls. Shareholders
should verify the accuracy of confirmation statements immediately after their
receipt.
RIGHT TO REJECT PURCHASE ORDERS/MARKET TIMING. Purchases and exchanges
should be made for investment purposes only. Each Fund and MFD each reserves the
right to restrict or to reject any specific purchase or exchange request. In the
event that a Fund or MFD rejects an exchange request, neither the redemption nor
the purchase side of the exchange will be processed.
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 and exchange requests by market
timers. In the event that any individual or entity is determined either by a
Fund or MFD, in its sole discretion, to be a market timer with respect to any
calendar year, the Fund and/or MFD will reject all exchange requests into the
Fund during the remainder of that calendar year. Other funds in the MFS Funds
may have different and/or more 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 or arrange for the
sale of 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 and other
employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees 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 and other employees 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,
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<PAGE> 687
however, a bank were prohibited from so acting, the Trustees would consider what
actions, if any, would be necessary to continue to provide efficient and
effective shareholder services in respect of shareholders who invested in a Fund
through a national bank. It is not expected that shareholders would suffer any
adverse financial consequence as a result of these occurrences. In addition,
state securities laws on this issue may differ from the interpretation of
federal law expressed herein and banks and financial institutions may be
required to register as broker-dealers pursuant to state law.
EXCHANGES
Subject to the requirements set forth below, some or all of the shares in an
account with a Fund for which payment has been received by the Fund (i.e., an
established account) may be exchanged for shares of the same class of any of the
other MFS Funds at net asset value (if available for sale). Shares of one class
may not be exchanged for shares of any other class.
EXCHANGES AMONG MFS FUNDS (EXCLUDING EXCHANGES FROM MFS MONEY MARKET FUNDS): No
initial sales charge or CDSC will be imposed in connection with an exchange from
shares of an MFS Fund to shares of any other MFS Fund, except with respect to
exchanges from an MFS money market fund to another MFS Fund which is not an MFS
money market fund (discussed below). With 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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<PAGE> 688
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 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 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
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<PAGE> 689
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.
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 $500 because of redemptions or exchanges, except in the
case of accounts being established for monthly automatic investments and certain
payroll savings programs, Automatic Exchange Plan accounts and tax-deferred
retirement plans, for which there is a lower minimum investment requirement. See
"Purchases - General Minimum Investment." Shareholders will be notified that the
value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
DISTRIBUTION PLAN
The Trustees have adopted a Distribution Plan for Class A, Class B and Class C
shares 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.
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<PAGE> 690
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: 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 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.
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<PAGE> 691
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 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 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 for
Class A shares under the Distribution Plan are currently being waived on a
voluntary basis and may be imposed at the discretion of MFD.
DISTRIBUTIONS
Each Fund intends to pay substantially all of its net investment income to its
shareholders as dividends at least annually. In determining the net investment
income available for distributions, each Fund may rely on projections of its
anticipated net investment income over a longer term, rather than its actual net
investment income for the period. If a Fund earns less than projected, or
otherwise distributes more than its earnings for the year, a portion of the
distributions may constitute a return of capital. Each Fund may make one or more
distributions during the calendar year to its shareholders from any long-term
capital gains and may also make one or more distributions during the calendar
year to its shareholders from short-term capital gains. Shareholders may elect
to receive dividends and capital gain distributions in either cash or additional
shares of the same class with respect to which a distribution is made. See "Tax
Status" and "Shareholder Services -- Distribution Options" below. Distributions
paid by a Fund with respect to Class A shares will generally be 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.
Because each 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 Funds 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.
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 reinvested in additional shares.
A portion of the dividends received from a Fund (but none of the Funds' capital
gains distributions) may qualify for the dividends-received deduction for
corporations. Shortly after the end of each year, each shareholder of a Fund
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 (as well as the
rate category or categories under which such
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<PAGE> 692
gain is taxable), 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 shortly 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 the rate of 30% (or any
lower rate permitted under an applicable treaty) on taxable 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. Each 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 Funds' Account Application for additional information regarding
backup withholding of federal income tax and should consult their own tax
advisers as to the tax consequences to them of an investment in a Fund.
NET ASSET VALUE
The net asset value per share of each class of each Fund is determined each day
during which the Exchange is open for trading. This determination is made once
each day as of the close of regular trading on the Exchange by deducting the
amount of the liabilities attributable to the class from the value of the assets
attributable to the class and dividing the difference by the number of shares of
the class outstanding. Assets in a Fund's portfolio are valued on the basis of
their market values or otherwise at their fair values, as described in the SAI.
All investments and assets are expressed in U.S. dollars based upon current
currency exchange rates. The net asset value per share of each class of shares
is effective for orders received in "good order" by the dealer prior to its
calculation and received by the dealer prior to the close of that business day.
EXPENSES
The Trust pays the compensation of the Trustees who are not officers of MFS and
all expenses of the Funds (other than those assumed by MFS) including but not
limited to: governmental fees; interest charges; taxes; membership dues in the
Investment Company Institute allocable to the Funds; fees and expenses of
independent auditors, of legal counsel, and of any transfer agent, registrar or
dividend disbursing agent of the Funds; expenses of repurchasing and redeeming
shares and servicing shareholder accounts; expenses of preparing, printing and
mailing prospectuses, periodic reports, notices and proxy statements to
shareholders and to governmental officers and commissions; brokerage and other
expenses connected with the execution, recording and settlement of portfolio
security transactions; insurance premiums; fees and expenses of State Street
Bank and Trust Company, the Funds' custodian, for all services to the Funds,
including safekeeping of funds and securities and maintaining required books and
accounts; expenses of calculating the net asset value of shares of the Funds;
and expenses of shareholder meetings. Expenses relating to the issuance,
registration and qualification of shares of the Funds and the preparation,
printing and mailing of prospectuses are borne by the Funds except that the
Distribution Agreement with MFD requires MFD to pay for prospectuses that are to
be used for sales purposes. Expenses of the Trust which are not attributable to
a specific series are allocated between the series in a manner believed by
management of the Trust to be fair and equitable.
Subject to termination or revision at the sole discretion of MFS, MFS has agreed
to bear the expenses of each Fund such that each such Fund's "Other Expenses,"
which are defined to include all Fund expenses except for management fees, Rule
12b-1 fees, taxes, extraordinary expenses, brokerage and transaction costs and
class specific expenses, do not exceed 1.50% per annum of its average daily net
assets (the "Maximum Percentage"). The obligation of MFS to bear these expenses
terminates on the last day of a Fund's fiscal year in which such Fund's "Other
Expenses" are less than or equal to the Maximum Percentage. The payments made by
MFS on behalf of these Funds under this arrangement are subject to reimbursement
by such Fund to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the Fund to MFS computed and paid monthly at a percentage
of its average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment such Fund's "Other Expenses" will
not exceed the Maximum Percentage. This expense reimbursement by the Fund to MFS
terminates on the earlier of the date on which payments made by the Fund equal
the prior payment of such reimbursable expenses by MFS or August 31, 2006.
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<PAGE> 693
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).
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" above). 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.
The following owned of record more than 25% of the outstanding shares of the
following funds:
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND CLASS PERCENTAGE
<S> <C> <C> <C>
TRS MFS Defined Contribution Plan Core Growth Fund I 60.39%
c/o Mark Leary
Mass Financial Services
500 Boylston St.
Boston, MA
TRS MFS Defined Contribution Plan Special Opportunities Fund I 45.56%
c/o Mark Leary
Mass Financial Services
500 Boylston St.
Boston, MA
MFS Fund Distributors, Inc. Convertible Securities Fund A 92.85%
C/o Mass Financial Services
Attn: Thomas B. Hastings
500 Boylston St.
Boston, MA
MFS Fund Distributors, Inc. Blue Chip Fund A 59.23%
C/o Mass Financial Services
Attn: Thomas B. Hastings
500 Boylston St.
Boston, MA
</TABLE>
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<PAGE> 694
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND CLASS PERCENTAGE
<S> <C> <C> <C>
TRS MFS Defined Contribution Plan Blue Chip Fund I 31.64%
c/o Mark Leary
Mass Financial Services
500 Boylston St.
Boston, MA
TRS MFS Defined Contribution Plan Science and Technology Fund I 64.43%
c/o Mark Leary
Mass Financial Services
500 Boylston St.
Boston, MA
</TABLE>
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 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. Each Fund offers multiple classes of shares which
were initially offered for sale to, and purchased by, the public on different
dates (the "class inception date"). The calculation of total rate of return for
a class of shares which has a later class inception date than another class of
shares of a Fund is based both on (i) the performance of the Fund's newer class
from its inception date and (ii) the performance of the Fund's oldest class from
its inception date up to the class inception date of the newer class. See the
SAI for further information on the calculation of total rate of return for share
classes with different class inception 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 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, 1997, please
see the Funds' annual report. 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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<PAGE> 695
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 Class A, Class B and Class C
shares of that shareholder in the MFS Funds or MFS Fixed Fund (a bank collective
investment fund) reaches a discount level.
DISTRIBUTION INVESTMENT PROGRAM: Shares of a particular class of a Fund
may be sold at net asset value (and without any applicable CDSC) through the
automatic reinvestment of dividend and capital gain distributions from the same
class of another MFS Fund. Furthermore, distributions made by a Fund may be
automatically invested at net asset value in shares of the same class of another
MFS Fund, if shares of such Fund are available for sale (without a sales charge
and not subject to any applicable CDSC).
SYSTEMATIC WITHDRAWAL PLAN: A shareholder may direct the Shareholder
Servicing Agent to send to him (or any one he designates) regular periodic
payments based upon the value of his account. Each payment under a Systematic
Withdrawal Plan (a "SWP") must be at least $100, except in certain limited
circumstances. The aggregate withdrawals of Class B and Class C shares in any
year pursuant to a SWP will not be subject to a CDSC and are generally limited
to 10% of the value of the account at the time of the establishment of the SWP.
The CDSC will not be waived in the case of SWP redemptions of Class A shares
which are subject to CDSC.
-40-
<PAGE> 696
DOLLAR COST AVERAGING PROGRAMS --
AUTOMATIC INVESTMENT PLAN: Cash investments of $50 or more may be made
through a shareholder's checking account on any day of the month. If the
shareholder does not specify a date, the investment will automatically occur on
the first business day of the month. Required forms are available from the
Shareholder Servicing Agent or investment dealers.
AUTOMATIC EXCHANGE PLAN: Shareholders having account balances of at
least $5,000 in any MFS Fund may participate in the Automatic Exchange Plan, a
dollar cost averaging program. The Automatic Exchange Plan provides for
automatic monthly or quarterly exchanges of funds from the shareholder's account
in an MFS Fund for investment in the same class of shares of other MFS Funds
selected by the shareholder (if available for sale). Under the Automatic
Exchange Plan, exchanges of at least $50 each may be made to up to six different
funds. A shareholder should consider the objectives and policies of a fund and
review its prospectus before electing to exchange money into such fund through
the Automatic Exchange Plan. No transaction fee is imposed in connection with
exchange transactions under the Automatic Exchange Plan. However, exchanges of
shares of MFS Money Market Fund, MFS Government Money Market Fund or Class A
shares of MFS Cash Reserve Fund will be subject to any applicable sales charge.
For federal and (generally) state income tax purposes, an exchange is treated as
a sale of the shares 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" above, 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.
-41-
<PAGE> 697
APPENDIX A
WAIVERS OF SALES CHARGES
This Appendix sets forth the various circumstances in which all applicable sales
charges are waived (Section I), the initial sales charge and the CDSC for Class
A shares are waived (Section II), and the CDSC for Class B and Class C shares is
waived (Section III). As used in the Prospectus and any appendices thereto, the
term "dealer" includes any broker, dealer, bank (including bank trust
departments), registered investment adviser, financial planner and any other
financial institutions having a selling agreement or other similar agreement
with MFD.
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;
- 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.
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.
A-1
<PAGE> 698
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;
- 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.
7. LOAN REPAYMENTS:
- Shares acquired pursuant to repayments by retirement
plan participants of loans from 401(a) or ESP Plans
with respect to which such Plan or its sponsoring
organization subscribes to the MFS FUNDamental 401(k)
Program or the MFS Recordkeeper Plus Program (but not
the MFS Recordkeeper Program).
II. WAIVERS OF CLASS A SALES CHARGES
In addition to the waivers set forth in Section I above, in the
following circumstances the initial sales charge imposed on purchases
of Class A shares and the CDSC imposed on certain redemptions of Class
A shares are waived:
1. WRAP ACCOUNT AND FUND "SUPERMARKET" INVESTMENTS
- Shares acquired by investments through certain
dealers (including registered investment advisers and
financial planners) which have established certain
operational arrangements with MFD which include a
requirement that such shares be sold for the sole
benefit of clients participating in a "wrap" account,
mutual fund "supermarket" account or a similar
program under which such clients pay a fee to such
dealer.
A-2
<PAGE> 699
2. INVESTMENT BY INSURANCE COMPANY SEPARATE ACCOUNTS
- Shares acquired by insurance company separate
accounts.
3. RETIREMENT PLANS
ADMINISTRATIVE SERVICES ARRANGEMENTS
- Shares acquired by retirement plans or trust accounts
whose third party administrators or dealers have
entered into an administrative services agreement
with MFD or one of its affiliates to perform certain
administrative services, subject to certain
operational and minimum size requirements specified
from time to time by MFD or one or more of its
affiliates.
REINVESTMENT OF DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS
- Shares acquired through the automatic reinvestment in
Class A shares of Class A or Class B distributions
which constitute required withdrawals from qualified
retirement plans.
SHARES REDEEMED ON ACCOUNT OF DISTRIBUTIONS MADE UNDER THE
FOLLOWING CIRCUMSTANCES:
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.
4. PURCHASES OF AT LEAST $5 MILLION (CDSC WAIVER ONLY)
- Shares acquired of Eligible Funds (as defined below)
if the shareholder's investment equals or exceeds $5
million in one or more Eligible Funds (the "Initial
Purchase") (this waiver applies to the shares
acquired from the Initial Purchase and all shares of
Eligible Funds subsequently acquired by the
shareholder); provided that the dealer through which
the Initial Purchase is made enters into an agreement
with MFD to accept delayed payment of commissions
with respect to the Initial Purchase and all
subsequent investments by the shareholder in the
Eligible Funds subject to such requirements as may be
established from time to time by MFD (for a schedule
of the amount of commissions paid by MFD to the
dealer on such investments, see "Purchases- Class A
Shares -Purchases subject to a CDSC" in the
Prospectus). The Eligible Funds are all funds
included in the MFS Family of Funds, except for
Massachusetts Investors Trust, Massachusetts
Investors Growth Stock Fund, MFS Municipal Bond Fund,
MFS Municipal Limited Maturity Fund, MFS Money Market
Fund, MFS Government Money Market Fund and MFS Cash
Reserve Fund.
A-3
<PAGE> 700
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 (or 15% per year, in the case
of accounts registered as IRAs where the redemption
is made pursuant to Section 72(t) of the Internal
Revenue Code of 1986, as amended) of the account
value at the time of establishment.
2. DEATH OF OWNER
- Shares redeemed on account of the death of the
account owner if the shares are held solely in the
deceased individual's name or in a living trust for
the benefit of the deceased individual.
3. DISABILITY OF OWNER
- Shares redeemed on account of the disability of the
account owner if shares are held either solely or
jointly in the disabled individual's name or in a
living trust for the benefit of the disabled
individual (in which case a disability certification
form is required to be submitted to the Shareholder
Servicing Agent.).
4. RETIREMENT PLANS. Shares redeemed on account of distributions
made under the following circumstances:
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> 701
APPENDIX B
DESCRIPTION OF BOND RATINGS
MOODY'S
AAA: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa to B. The modifier 1 indicates that the company
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
-1-
<PAGE> 702
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.
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
B-2
<PAGE> 703
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.
B-3
<PAGE> 704
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]
MFS(R) CORE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
500 Boylston Street, Boston, MA 02116
<PAGE> 705
[MFS LOGO]
MFS(R) CORE GROWTH FUND STATEMENT OF ADDITIONAL
MFS(R) SPECIAL OPPORTUNITIES FUND INFORMATION
MFS(R)CONVERTIBLE SECURITIES FUND
MFS(R)BLUE CHIP FUND JANUARY 1, 1998
MFS(R)SCIENCE AND TECHNOLOGY FUND
(Members of the MFS Family of Funds(R))
Each a series of MFS Series Trust I
500 Boylston Street, Boston, MA 02116
(617) 954-5000
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions................................................................. 1
2. Investment Objectives, Policies and Restrictions............................ 1
Certain Securities and Investment Techniques.......................... 1
Additional Risk Factors............................................... 14
3. Management of the Funds..................................................... 20
Trustees.............................................................. 20
Officers.............................................................. 20
Trustee Compensation Chart............................................ 21
Investment Adviser.................................................... 22
Administrator......................................................... 22
Custodian............................................................. 23
Shareholder Servicing Agent........................................... 23
Distributor........................................................... 23
4. Portfolio Transactions and Brokerage Commissions............................ 24
5. Shareholder Services........................................................ 26
Investment and Withdrawal Programs ................................... 26
Exchange Privilege.................................................... 28
Tax-Deferred Retirement Plans......................................... 29
6. Tax Status.................................................................. 29
7. Distribution Plan........................................................... 31
8. Determination of Net Asset Value and Performance............................ 32
9. Description of Shares, Voting Rights and Liabilities........................ 35
10. Independent Auditors and Financial Statements............................... 36
</TABLE>
This Statement of Additional Information, as amended or supplemented from time
to time ("SAI"), sets forth information which may be of interest to investors
but which is not necessarily included in the Funds' Prospectus dated January 1,
1998. 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> 706
I. DEFINITIONS
Core Growth
Fund MFS(R) Core Growth Fund,
a diversified series of
the Trust.
Special
Opportunities MFS(R) Special
Fund Opportunities Fund, a
non-diversified series
of the Trust.
Convertible MFS(R) Convertible
Securities Securities Fund, a
Fund diversified series of
the Trust.
Blue Chip MFS(R) Blue Chip Fund, a
Fund diversified series of
the Trust.
Science and
Technology MFS(R) Science and
Fund Technology Fund, a
diversified series of
the Trust.
"Fund(s)" Core Growth Fund,
Special Opportunities
Fund, Convertible
Securities Fund, Blue
Chip Fund and Science
and Technology Fund.
"Trust" MFS Series Trust I, a
Massachusetts business
Trust, organized on
July 22, 1986. The
Trust was known as "MFS
Lifetime Managed
Sectors Fund" prior to
August 1, 1993, and as
"Lifetime Managed
Sectors Trust" prior to
August 3, 1992.
"MFS" or Massachusetts Financial
the "Adviser" Services Company, a
Delaware corporation.
"MFD"
MFS Fund Distributors,
Inc., a Delaware
corporation.
"Prospectus" The Prospectus of the Funds, dated
January 1, 1998, as amended or
supplemented from time to time.
2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES AND POLICIES. The investment objective and policies of
each Fund are described in the Prospectus and below. The following discussion of
each Fund's investment techniques and restrictions supplements, and should be
read in conjunction with, the information set forth in the "Investment
Objectives and Policies," "Certain Securities and Investment Techniques" and
"Additional Risk Factors" sections of the Prospectus.
CERTAIN SECURITIES AND 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
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either case, the income to the Fund is unrelated to the interest rate on the
Government securities.
The repurchase agreement provides that in the event the seller fails to pay the
price agreed upon on the agreed upon delivery date or upon demand, as the case
may be, a Fund will have the right to liquidate the securities. If at the time
the Fund is contractually entitled to exercise its right to liquidate the
securities, the seller is subject to a proceeding under the bankruptcy laws or
its assets are otherwise subject to a stay order, the Fund's exercise of its
right to liquidate the securities may be delayed and result in certain losses
and costs to the Fund. Each Fund has adopted and follows procedures which are
intended to minimize the risks of repurchase agreements. For example, a Fund
only enters into repurchase agreements after the Adviser has determined that the
seller is creditworthy, and the Adviser monitors that seller's creditworthiness
on an ongoing basis. Moreover, under such agreements, the value of the
securities (which are marked to market every business day) is required to be
greater than the repurchase price, and the Fund has the right to make margin
calls at any time if the value of the securities falls below the agreed upon
margin.
"WHEN-ISSUED" SECURITIES: Each Fund may purchase securities on a "when-issued"
or on a "forward delivery" basis. When a Fund commits to purchase these
securities on a "when-issued" or "forward delivery" basis, it will set up
procedures consistent with the General Statement of Policy of the Securities and
Exchange Commission (the "SEC") concerning such purchases. Since that policy
currently recommends that an amount of each Fund's assets equal to the amount of
the purchase be held aside or segregated to be used to pay for the commitment, a
Fund will always have liquid assets 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
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the underlying foreign securities are denominated in foreign currency.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS: 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 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 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
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 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
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<PAGE> 709
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 Special Opportunities Fund and the
Convertible Securities Fund may invest a portion of its assets in stripped
mortgage-backed securities ("SMBS") which are derivative multiclass mortgage
securities issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including savings and
loan institutions, mortgage banks, commercial banks and investment banks.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions from a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all of the interest (the interest-only or "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 Special Opportunities Fund and the
Convertible Securities Fund may purchase loans and other direct indebtedness. In
purchasing a loan, a Fund acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate, governmental or other
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans that are fully secured
offer a Fund more protection than an unsecured loan in the event of non-payment
of scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the corporate
borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which a
Fund would assume all of the rights of the lending institution in a loan or as
an assignment, pursuant to which the Fund would purchase an assignment of a
portion of a lender's interest in a loan either directly from the lender or
through an intermediary. A Fund may also purchase trade or other claims against
companies, which generally represent money owned by the company to a supplier of
goods or services. These claims may also be purchased at a time when the company
is in default.
Certain of the loans and the other direct indebtedness acquired by a Fund may
involve revolving credit facilities or other standby financing commitments which
obligate the Fund to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring a Fund to increase its investment
in a company at a time when the Fund might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that a Fund is committed to
advance additional funds, it will at all times hold and maintain in a segregated
account liquid assets 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.
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Investments in such loans and other direct indebtedness may involve additional
risk to a Fund.
MORTGAGE PASS-THROUGH SECURITIES: 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 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
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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 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 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 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 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
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<PAGE> 712
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.
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 liquid assets in a segregated account with its custodian. A put
option written by a Fund is "covered" if the Fund maintains liquid assets with a
value equal to the exercise price in a segregated account with its custodian, or
else holds a put on the same security and in the same principal amount as the
put written where the exercise price of the put held is 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 liquid assets 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 counterparty 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.
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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 liquid assets. 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.
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
8
<PAGE> 714
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 liquid assets in a segregated account with its custodian. Each Fund
may cover put options on stock indices by maintaining liquid assets 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 liquid assets in a segregated account with its
custodian. Put and call options on stock indices may also be covered in such
other manner as may be in accordance with the rules of 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
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<PAGE> 715
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 liquid assets 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.
OPTIONS: 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
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<PAGE> 716
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 on stock
indices, and may purchase and sell futures contracts on foreign currencies or
indices of foreign currencies ("Futures Contracts"). The Special Opportunities
Fund and the Convertible Securities Fund may purchase and sell futures contracts
on foreign or domestic fixed income securities or indices of such securities
including municipal bond indices and any other indices of foreign or domestic
fixed income securities that may become available for trading. Such investment
strategies will be used for hedging purposes and for non-hedging purposes,
subject to applicable law.
A Futures Contract is a bilateral agreement providing for the purchase and sale
of a specified type and amount of a financial instrument or foreign currency, or
for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement date on which, in the case of the majority of interest rate
and foreign currency futures contracts, the fixed income securities or currency
are delivered by the seller and paid for by the purchaser, or on which, in the
case of stock index futures contracts and certain interest rate and foreign
currency futures contracts, the difference between the price at which the
contract was entered into and the contract's closing value is settled between
the purchaser and seller in cash. Futures Contracts differ from options in that
they are bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures Contracts call for settlement
only on the expiration date and cannot be "exercised" at any other time during
their term.
The purchase or sale of a Futures Contract differs from the purchase or sale of
a security or the purchase of an option in that no purchase price is paid or
received. Instead, an amount of cash or cash equivalents, which varies but may
be as low as 5% or less of the value of the contract, must be deposited with the
broker as "initial margin." Subsequent payments to and from the broker, referred
to as "variation margin," are made on a daily basis as the value of the index or
instrument underlying the Futures Contract fluctuates, making positions in the
Futures Contract more or less valuable - a process known as "mark-to-market."
Purchases or sales of stock index futures contracts are used to attempt to
protect a Fund's current or intended stock investments from broad fluctuations
in stock prices. For example, a Fund may sell stock index futures contracts in
anticipation of or during a market decline to attempt to offset the decrease in
market value of the Fund's securities portfolio that might otherwise result. If
such decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the futures position. When a Fund is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock index futures contracts will be closed out. In
a substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures position, but under unusual market
conditions, a long futures position may be terminated without a related purchase
of securities.
Interest rate Futures Contracts may be purchased or sold to attempt to protect
against the effects of interest rate changes on a Fund's current or intended
investments in fixed income securities. For example, if a Fund owned long-term
bonds and interest rates were expected to increase, that Fund might enter into
interest rate futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling some of the long-term bonds in that
Fund's portfolio. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of that Fund's interest
rate futures contracts would increase at approximately the same rate, thereby
keeping the net asset value of that Fund from declining as much as it otherwise
would have.
Similarly, if interest rates were expected to decline, interest rate futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
long-term bonds at higher prices. Since the fluctuations in the value of the
interest rate futures contracts should be similar to that of long-term bonds, a
Fund could protect itself against the effects of the anticipated rise in the
value of long-term bonds without actually buying them until the necessary cash
became available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated and that Fund's cash reserves could then
be used to buy long-term bonds on the 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
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<PAGE> 717
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 which require the use of segregated assets
or "cover" in connection with the purchase and sale of such Contracts. In those
instances in which the Fund satisfies this requirement through segregation of
assets, it will maintain, in a segregated account, liquid assets 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.
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<PAGE> 718
Options on Futures Contracts that are written or purchased by a Fund on U.S.
exchanges are traded on the same contract market as the underlying Futures
Contract, and, like Futures Contracts, are subject to regulation by the
Commodities Futures Trading Commission (the "CFTC") and the performance
guarantee of the 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 liquid assets 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 liquid assets in an
amount equal to the value of the security or index underlying the Futures
Contract, or (c) through the holding of a put on the same Futures Contract and
in the same principal amount as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written or
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 liquid assets in a
segregated account with its custodian. Put and call Options on Futures Contracts
may also be covered in such other manner as may be in accordance with the rules
of the exchange on which the option is traded and applicable laws and
regulations. Upon the exercise of a call Option on a Futures Contract written by
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
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<PAGE> 719
portion or all of the benefits of advantageous changes in such rates. Each Fund
may write options on foreign currencies for the same types of hedging purposes.
For example, where the Fund anticipates a decline in the dollar value of
foreign-denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received less related transaction costs. As in the
case of other types of options, therefore, the writing of Options on Foreign
Currencies will constitute only a partial hedge.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, each Fund could write
a put option on the relevant currency which, 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
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<PAGE> 720
Contracts, a Fund is subject to the risk of market movements between the time
that the option is exercised and the time of performance thereunder. This could
increase the extent of any loss suffered by a Fund in connection with such
transactions.
In writing a covered call option on a security, index or futures contract, a
Fund also incurs the risk that changes in the value of the instruments used to
cover the position will not correlate closely with changes in the value of the
option or underlying index or instrument. For example, where a Fund covers a
call option written on a stock index through segregation of securities, such
securities may not match the composition of the index, and the Fund may not be
fully covered. As a result, the Fund could be subject to risk of loss in the
event of adverse market movements.
The writing of options on securities, options on stock indices or Options on
Futures Contracts constitutes only a partial hedge against fluctuations in the
value of a Fund's portfolio. When a Fund writes an option, it will receive
premium income in return for the holder's purchase of the right to acquire or
dispose of the underlying obligation. In the event that the price of such
obligation does not rise sufficiently above the exercise price of the option, in
the case of a call, or fall below the exercise price, in the case of a put, the
option will not be exercised and the Fund will retain the amount of the premium,
less related transaction costs, which will constitute a partial hedge against
any decline that may have occurred in the Fund's portfolio holdings or any
increase in the cost of the instruments to be acquired.
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
15
<PAGE> 721
additional margin deposits. Prices have in the past moved to the daily limit on
a number of consecutive trading days.
The trading of Futures Contracts and options is also subject to the risk of
trading halts, suspensions, exchange or clearinghouse equipment failures,
government intervention, insolvency of a brokerage firm or clearinghouse or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
MARGIN. Because of low initial margin deposits made upon the opening of a
futures or forward position and the writing of an option, such transactions
involve substantial leverage. As a result, relatively small movements in the
price of the contract can result in substantial unrealized gains or losses.
Where a Fund enters into such transactions for hedging purposes, any losses
incurred in connection therewith should, if the hedging strategy is successful,
be offset, in whole or in part, by increases in the value of securities or other
assets held by the Fund or decreases in the prices of securities or other assets
the Fund intends to acquire. Where a Fund enters into such transactions for
other than hedging purposes, the margin requirements associated with such
transactions could expose the Fund to greater risk.
TRADING AND POSITION LIMITS. The exchange on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the portfolios
of the Fund.
RISKS OF OPTIONS ON FUTURES CONTRACTS. The amount of risk a Fund assumes when it
purchases an Option on a Futures 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
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<PAGE> 722
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, the
option writer and a trader of Forward Contracts could lose amounts substantially
in excess of their initial investments, due to the margin and collateral
requirements associated with such positions.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Fund's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with the Fund. Where
no such counterparty is available, it will not be possible to enter into a
desired transaction. There also may be no liquid secondary market in the trading
of over-the-counter contracts, and a Fund could be required to retain options
purchased or written, or Forward Contracts entered into, until exercise,
expiration or maturity. This in turn could limit the Fund's ability to profit
from open positions or to reduce losses experienced, and could result in greater
losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Fund will therefore be subject to the risk of
default by, or the bankruptcy of, the financial institution serving as its
counterparty. One or more of such institutions also may decide to discontinue
their role as market-makers in a particular currency or security, thereby
restricting the Fund's ability to enter into desired hedging transactions. A
Fund will enter into an over-the-counter transaction only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Options on securities, options on stock indices, Futures Contracts, Options on
Futures Contracts and options on foreign currencies may be traded on exchanges
located in foreign countries. Such transactions may not be conducted in the same
manner as those entered into on U.S. exchanges, and may be subject to different
margin, exercise, settlement or expiration procedures. As a result, many of the
risks of over-the-counter trading may be present in connection with such
transactions.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all foreign
currency option positions entered into on a national securities exchange are
cleared and guaranteed by the Options Clearing Corporation (the "OCC"), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting a Fund to liquidate
open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions on exercise.
POLICIES ON THE USE OF FUTURES AND OPTIONS ON FUTURES CONTRACTS. In order to
assure that the Fund will not be deemed to be a "commodity pool" for purposes of
the Commodity Exchange Act, regulations of the CFTC require that a Fund enter
into transactions in Futures Contracts and Options on Futures Contracts only (i)
for bona fide hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin and premiums on
such non-hedging positions does not exceed 5% of the liquidation value of the
Fund's assets. In addition, the Fund must comply with the requirements of
various state securities laws in connection with such transactions.
Each Fund has adopted the additional restriction that it will not enter into a
Futures Contract if, immediately thereafter, the value of securities and other
obligations underlying all such Futures Contracts would exceed 50% of the value
of such Fund's total assets. In addition, a Fund will not purchase put and call
options on Futures Contracts if as a result more than 5% of its total assets
would be invested in such options.
When a Fund purchases a Futures Contract, an amount of cash or securities will
be deposited in a segregated account with the Fund's custodian so that the
amount so segregated will at all times equal the value of the Futures Contract,
thereby ensuring that the leveraging effect of such Futures Contract is
minimized.
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<PAGE> 723
RISKS OF INVESTING IN LOWER RATED BONDS
The Special Opportunities Fund, the Convertible Securities 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.
---------
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): Except
for Investment Restriction (1) and non-fundamental investment policy (1), these
investment restrictions and policies are adhered to at the time of purchase of
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
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
18
<PAGE> 724
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).
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-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;
(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
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<PAGE> 725
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; or
(10)invest 25% or more of the market value of its total assets in securities
of issuers in any one industry.
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 8/18/26)
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: 36080 Shaker Blvd.,
Hunting Valley, 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
MARK E. BRADLEY,* Assistant Treasurer (born 11/23/59)
Massachusetts Financial Services Company, Vice President (since March 1997);
Putnam Investments, Vice President (from September 1994 until March 1997); Ernst
& Young, Senior Tax Manager (prior to September 1994).
ELLEN M. MOYNIHAN,* Assistant Treasurer (born 11/13/57)
Massachusetts Financial Services Company, Vice President (since September 1996);
Deloitte & Touche, LLP, Senior Manager (prior to September 1996).
STEPHEN E. CAVAN,* Secretary and Clerk (born 11/6/53)
Massachusetts Financial Services Company, Senior Vice President, General Counsel
and Assistant Secretary
20
<PAGE> 726
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.
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 $ 0 $ 0 6 $247,168
Bailey
A. Keith 0 0 N/A 0
Brodkin
Marshall N 0 0 6 149,258
Cohan
Lawrence H 0 0 16 136,508
Cohn
Sir J. David 0 0 6 136,508
Gibbons
Abby M 0 0 7 123,758
O'Neill
Walter E 0 0 6 149,258
Robb, III
Arnold D 0 0 N/A 0
Scott
Jeffrey L 0 0 N/A 0
Shames
J. Dale 0 0 18 149,258
Sherratt
Ward 0 0 10 149,258
Smith
</TABLE>
1) For the fiscal year ending August 31, 1997.
2) Based upon normal retirement age (75).
3) For calendar year 1996. All non-interested Trustees served as Trustees of 41
funds within the MFS fund complex (having aggregate net assets at December
31, 1996, of approximately $14.97 billion) while Mr. Bailey served as Trustee
of 81 funds within the MFS fund complex (having aggregate net assets at
December 31, 1996, of approximately $38.48 billion).
As of November 28, 1997, the Trustees and officers as a group owned 26,782.607
Class A shares of the Special Opportunities Fund, or 1.06% of Special
Opportunities Fund, and less than 1% of each other Fund, not including the
following Class I shares of each Fund owned of record
21
<PAGE> 727
by certain employee benefit plans of MFS of which Messrs. Brodkin, Scott and
Shames are Trustees:
NUMBER OF
FUND CLASS I SHARES % OF FUND
Core Growth 103,149.437 60.39%
Special 114,153.534 45.56%
Opportunities
Convertible 3,555.432 6.60%
Securities
Blue Chip 18,664.456 31.64%
Science and Technology 127,746.777 64.43%
See Appendix B for a list of record owners who owned more than 5% of a 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.
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 an
indirect 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 Core Growth Fund and the Special Opportunities Fund, and January 2, 1997,
with respect to the remaining funds (the "Advisory Agreements"). Under the
Advisory Agreements, the Adviser provides each Fund with overall investment
advisory services. Subject to such policies as the Trustees may determine, the
Adviser makes investment decisions for each Fund. For these services, 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 to the fiscal
year end of August 31, 1997, 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.
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, 1998, and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Fund's shares (as defined in "Investment 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.
ADMINISTRATOR
MFS provides the Fund with certain financial, legal, compliance, shareholder
communications and other administrative services pursuant to a Master
Administrative Services Agreement dated March 1, 1997, as amended. Under this
Agreement, the Fund pays MFS an administrative fee of up to 0.015% per annum of
the Fund's average daily net assets. This fee reimburses MFS for a
22
<PAGE> 728
portion of the costs it incurs to provide such services. For the period from
March 1, 1997 through August 31, 1997, MFS received fees under the
Administrative Services Agreement as follows:
<TABLE>
<S> <C>
Core Growth Fund $ 27
Special Opportunities Fund 276
Convertible Securities Fund 44
Blue Chip Fund 52
Science and Technology Fund 166
</TABLE>
CUSTODIAN
State Street Bank and Trust Company (the "Custodian") is the custodian of each
Fund's assets. The Custodian's responsibilities include safekeeping and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities, determining income and collecting interest and dividends on each
Fund's investments, maintaining books of original entry for portfolio and fund
accounting and other required books and 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
Shareholder Servicing Agreement dated September 10, 1986, as amended (the
"Agency Agreement"), with the Trust. The Shareholder Servicing Agent's
responsibilities under the Agency Agreement include administering and performing
transfer agent functions and the keeping 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 Fund at an effective annual
rate of 0.13%. In addition, the Shareholder Servicing Agent will be reimbursed
by each Fund for certain expenses incurred by the Shareholder Servicing Agent on
behalf of the Fund. 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
23
<PAGE> 729
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. 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, 1998 and will
continue in effect thereafter only if such continuance is specifically approved
at least annually by the Board of Trustees or by vote of a majority of the
Trust's shares (as defined in "Investment 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 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 Conduct Rules 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
24
<PAGE> 730
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 $50,980 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 fiscal year ended August 31, 1996, the Core Growth Fund and the Special
Opportunities Fund paid total brokerage commissions on total transactions as
follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
COMMISSIONS TRANSACTIONS
----------- ------------
<S> <C> <C>
CORE GROWTH FUND $ 1,544 $ 1,398,932
SPECIAL OPPORTUNITIES $ 3,451 $ 2,016,503
FUND
</TABLE>
For the fiscal year ended August 31, 1997, each Fund paid total brokerage
commissions on total transactions as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
COMMISSIONS TRANSACTIONS
----------- ------------
<S> <C> <C>
Core Growth Fund $ 28,023 $30,215,165
Special Opportunities 11,536 4,989,040
Fund
Convertible Securities 470 454,617
Fund
Blue Chip Fund 700 894,218
Science and 22,821 25,892,757
Technology Fund
</TABLE>
During the fiscal year ended August 31, 1997, the following Funds acquired and
retained securities issued by the following regular broker-dealers or affiliates
of regular broker-dealers of such Fund and such securities had the following
value as of August 31, 1997:
<TABLE>
<CAPTION>
VALUE AT
--------
FUND BROKER-DEALER 8/31/97
---- ------------- -------
<S> <C> <C>
Core Growth Fund Morgan Stanley, Dean $14,438
Witter, Discover & Co.
Special Opportunities Donaldson, Lufkin & 19,000
Fund Jenrette, Inc.
Blue Chip Fund General Electric Co. 16,250
Convertible Securities General Electric Co. 2,500
Fund
Convertible Securities Merrill Lynch, Pierce 12,975
Fund Fenner & Smith
Convertible Securities Merrill Lynch, 5,606
Fund Pierce Fenner & Smith
</TABLE>
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
25
<PAGE> 731
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 Class A, Class B and
Class C 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 additional $25,000 of Class A
shares of a Fund, the sales charge for the $25,000 purchase would be at the rate
of 4.00% (the rate applicable to single transactions of $100,000). A shareholder
must provide the Shareholder Servicing Agent (or his investment dealer must
provide MFD) with information to verify that the quantity sales charge discount
is applicable at the time the investment is made.
SUBSEQUENT INVESTMENT BY TELEPHONE: Each shareholder may purchase
additional shares of any MFS Fund by telephoning the Shareholder Servicing Agent
toll-free at (800) 225-2606. The minimum purchase amount is $50 and the maximum
purchase amount is $100,000. Shareholders wishing to avail themselves of this
telephone purchase privilege must so elect on their Account Application and
designate thereon a bank and account number from which purchases will be made.
If a telephone purchase request is received by the Shareholder Servicing agent
on any business day prior to the close of regular trading on the Exchange
(generally, 4:00 p.m., Eastern time), the purchase will occur at the closing net
asset value of the shares purchased on that day. The Shareholder Servicing Agent
may be liable for any losses resulting from unauthorized telephone transactions
if it does not follow
26
<PAGE> 732
reasonable procedures designed to verify the identity of the caller. The
Shareholder Servicing agent will request personal or other information from the
caller, and will normally also record calls. Shareholders should verify the
accuracy of confirmation statements immediately after their receipt.
DISTRIBUTION INVESTMENT PROGRAM: Distributions of dividends and capital
gains made by 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 is not a business day, the
transaction will
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<PAGE> 733
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
28
<PAGE> 734
the requirements set forth above have been complied with at that time. However,
payment of the redemption proceeds by a Fund, and thus the purchase of shares of
the other MFS Fund, may be delayed for up to seven days if the Fund determines
that such a delay would be in the best interest of all its shareholders.
Investment dealers which have satisfied criteria established by MFD may also
communicate a shareholder's Exchange Request to MFD by facsimile subject to the
requirements set forth above.
No CDSC is imposed on exchanges among the MFS Funds, although liability for the
CDSC is carried forward to the exchanged shares. For purposes of calculating the
CDSC upon redemption of shares acquired in an exchange, the purchase of shares
acquired in one or more exchanges is deemed to have occurred at the time of the
original purchase of the exchanged shares.
Additional information with respect to any of the MFS Funds, including a copy of
its current prospectus, may be obtained from investment dealers or the
Shareholder Servicing Agent. A shareholder considering an exchange should obtain
and read the prospectus of the other fund and consider the differences in
objectives and policies before making any exchange. Shareholders of the other
MFS Funds (except MFS Money Market 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 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 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 normally will have to pay federal income taxes and any
state or local taxes on the
29
<PAGE> 735
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 each Fund's ordinary income dividends is normally eligible for the
dividend-received deduction for corporations if the recipient otherwise
qualifies for that deduction with respect to its holding of Fund shares.
Availability of the deduction for particular corporate shareholders is subject
to certain limitations, and deducted amounts may be subject to the alternative
minimum tax and any 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 a Fund's shareholders as long-term capital gains for
federal income tax purposes without regard to the length of time shareholders
have held their shares. Such capital gains may be taxable to shareholders that
are individuals, estates or trusts at maximum rates of 20%, 25% or 28%,
depending on the source of the gain. 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. Each 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 a 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 a
Fund by a shareholder that holds such shares as a capital asset will be treated
as a long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise as a short-term capital gain or loss; a long-term
capital gain realized by an individual, estate or trust may be eligible for
reduced tax rates if the shares were held for more than 18 months. However, any
loss realized upon a disposition of shares in 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
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 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 will affect the amount,
timing, and character of distributions to its 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,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause that 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 holding that investment has state or local
governments or other tax-exempt organizations as shareholders.
A Fund's transactions in options, Futures Contracts, Forward Contracts, short
sales "against the box" and swaps and related transactions will be subject to
special tax rules that may affect the amount, timing and character of Fund
income and distributions to shareholders. For example, certain positions held by
a 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 a 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. Each 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 a Fund.
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. A Fund may elect
to mark-to-market any investments in "passive foreign investment companies" on
the last day of each year. This election may cause the Fund to recognize income
prior to the receipt of cash payments with respect to those investments; in
order to distribute this income and avoid a
30
<PAGE> 736
tax on the Fund, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold.
Investment income received by a Fund from foreign securities may be subject to
foreign income taxes withheld at the source; 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. 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.
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% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments to
Non-U.S. Persons that are subject to such withholding. 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 a Fund by Non-U.S. Persons may also be subject to
tax under the laws of their own jurisdictions. Each Fund is also required in
certain circumstances to apply backup withholding at 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.
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.
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During the period from the commencement of operations, to the fiscal year ended
August 31, 1997, distribution and service fees under the Distribution Plan were
not imposed.
GENERAL: The Distribution Plan will remain in effect until August 1, 1998, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by vote of both the Trustees and a majority of the
Trustees who are not "interested persons" or financially interested parties 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 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, Martin Luther King 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 stock market 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 stock market.
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
stock market, 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
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<PAGE> 738
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) 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.
Each Fund offers multiple classes of shares which were initially offered for
sale to, and purchased by, the public on different dates (the "class inception
date"). The calculation of total rate of return for a class of shares which has
a later inception date than another class of shares of a Fund is based both on
(i) the performance of the Fund's newer class from its inception date and (ii)
the performance of the Fund's oldest class from its inception date up to the
class inception date of the newer class.
As discussed in the Prospectus, the sales charges, expenses and expense ratios,
and therefore the performance, of a 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 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 Fund are presented in Appendix A
attached hereto under the heading "Performance Quotations."
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 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. Yield quotations for each
Fund are presented in Appendix A attached hereto under the heading "Performance
Quotations."
CURRENT DISTRIBUTION RATE: Yield, which is calculated according to a formula
prescribed by the SEC, is not indicative of the amounts which were or will be
paid to 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
33
<PAGE> 739
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. Current distribution rate quotations for each Fund are presented in
Appendix A attached hereto under the heading "Performance Quotations."
GENERAL: From time to time each Fund may, as appropriate, quote Fund rankings or
reprint all or a portion of evaluations of fund performance and operations
appearing in various independent publications, including but not limited to the
following: Money, Fortune, U.S. News and World Report, Kiplinger's Personal
Finance, The Wall Street Journal, Barron's, Investors Business Daily, Newsweek,
Financial World, Financial Planning, Investment Advisor, USA Today, Pensions and
Investments, SmartMoney, Forbes, Global Finance, Registered Representative,
Institutional Investor, the Investment Company Institute, Johnson's Charts,
Morningstar, Lipper Analytical Services, Inc., CDA Wiesenberger, Shearson Lehman
and Salomon Bros. Indices, Ibbotson, Business Week, Lowry Associates, Media
General, Investment Company Data, The New York Times, Your Money, Strangers
Investment Advisor, Financial Planning on Wall Street, Standard and Poor's,
Individual Investor, The 100 Best Mutual Funds You Can Buy, by Gordon K.
Williamson, Consumer Price Index, and Sanford C. Bernstein & Co. Fund
performance may also be compared to the performance of other mutual funds
tracked by financial or business publications or periodicals. Each Fund may also
quote evaluations mentioned in independent radio or television broadcasts and
use charts and graphs to illustrate the past performance of various indices such
as those mentioned above and illustrations using hypothetical rates of return to
illustrate the effects of compounding and tax-deferral. Each Fund may advertise
examples of the effects of periodic investment plans, including the principle of
dollar cost averaging. In such a program, an investor invests a fixed dollar
amount in a fund at periodic intervals, thereby purchasing fewer shares when
prices are high and more shares when prices are low. While such a strategy does
not assure a profit or guard against a loss in a declining market, the
investor's average cost per share can be lower than if fixed numbers of shares
are purchased at the same intervals.
From time to time, each Fund may discuss or quote its current portfolio manager
as well as other investment personnel, including such persons' views on: the
economy; securities markets; portfolio securities and their issuers; investment
philosophies, strategies, techniques and criteria used in the selection of
securities to be purchased or sold for the Fund; the Fund's portfolio holdings;
the investment research and analysis process; the formulation and evaluation of
investment recommendations; and the assessment and evaluation of credit,
interest rate, market and economic risks, and similar or related matters.
The Fund may also quote evaluations mentioned in independent radio or television
broadcasts.
From time to time the Fund may use charts and graphs to illustrate the past
performance of various indices such as those mentioned above and illustrations
using hypothetical rates of return to illustrate the effects of compounding and
tax-deferral.
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.
- -- 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.
34
<PAGE> 740
- -- 1933 -- Massachusetts Investors Trust is the first mutual fund to register
under the Securities Act of 1933 ("Truth in Securities Act" or "Full
Disclosure Act").
- -- 1936 -- Massachusetts Investors Trust is the first mutual fund to allow
shareholders to take capital gain distributions either in additional
shares or in cash.
- -- 1976 -- MFS(R) Municipal Bond Fund is among the first municipal bond funds
established.
- -- 1979 -- Spectrum becomes the first combination fixed/ variable annuity with
no initial sales charge.
- -- 1981 -- MFS(R) World Governments Fund is established as America's first
globally diversified fixed-income mutual fund.
- -- 1984 -- MFS(R) Municipal High Income Fund is the first open-end mutual fund
to seek high tax-free income from lower-rated municipal securities.
- -- 1986 -- MFS(R) Managed Sectors Fund becomes the first mutual fund to target
and shift investments among industry sectors for shareholders.
- -- 1986 -- MFS(R) Municipal Income Trust is the first closed-end, high-yield
municipal bond fund traded on the New York Stock Exchange.
- -- 1987 -- MFS(R) Multimarket Income Trust is the first closed-end, multimarket
high income fund listed on the New York Stock Exchange.
- -- 1989 -- MFS(R) Regatta becomes America's first non-qualified market value
adjusted fixed/variable annuity.
- -- 1990 -- MFS(R) World Total Return Fund is the first global balanced fund.
- -- 1993 -- MFS(R) World Growth Fund is the first global emerging markets fund
to offer the expertise of two sub-advisers.
- -- 1993 -- MFS(R) becomes money manager of MFS(R) Union Standard Trust, the
first Trust to invest solely in companies deemed to be
union-friendly by an advisory board of senior labor officials,
senior managers of companies with significant labor contracts,
academics and other national labor leaders or experts.
9. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional Shares of Beneficial Interest (without par value) of one or
more separate series and to divide or combine the shares of any series into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in that series. The Trustees have currently authorized
shares of each Fund and eight 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) of the eight other series of the Trust, all offer Class A and Class B
shares, seven offer Class I shares and seven offer Class C shares. Each share of
a class of a Fund represents an equal proportionate interest in the assets of
the Fund allocable to that class. Upon liquidation of a Fund, shareholders of
each class of the Fund are entitled to share pro rata in the Fund's net assets
allocable to such class available for distribution to shareholders. The Trust
reserves the right to create and issue a number of series and additional classes
of shares, in which case the shares of each class of a series would participate
equally in the earnings, dividends and assets allocable to that class of the
particular series.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to meetings of shareholders.
Although Trustees are not elected annually by the shareholders, the Declaration
of Trust provides that a Trustee may be removed from office at a meeting of
shareholders by a vote of two-thirds of the outstanding shares of the Trust. A
meeting of shareholders will be called upon the request of shareholders of
record holding in the aggregate not less than 10% of the outstanding voting
securities of the Trust. No material amendment may be made to the Declaration of
Trust 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
35
<PAGE> 741
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, 1997, the Statements of Operations for the period from January 2,
1996 for the Core Growth Fund and the Special Opportunities Fund, or January 2,
1997 for the Convertible Securities Fund, the Blue Chip Fund and the Science and
Technology fund, to August 31, 1997, the Statements of Changes in Net Assets for
the period from January 2, 1996 for the Core Growth Fund and the Special
Opportunities Fund, or January 2, 1997 for the Convertible Securities Fund, the
Blue Chip Fund and the Science and Technology Fund, August 31, 1997, 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.
36
<PAGE> 742
APPENDIX A
PERFORMANCE QUOTATIONS
PERFORMANCE QUOTATIONS ARE AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
ACTUAL
30-DAY 30-DAY
AVERAGE YIELD YIELD CURRENT
ANNUAL TOTAL RETURNS(1) (INCLUDING (WITHOUT DISTRIBUTION
1 YEAR(1) LIFE OF FUND ANY WAIVERS) ANY WAIVERS) RATE
--------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
MFS CORE GROWTH FUND
Class A Shares with sales charge 38.37% 37.84%(2) -0.58% -3.17% 0.00%
Class A Shares without sales charge 45.22 41.95(2) N/A N/A N/A
Class I Shares 45.31 42.00(3) -0.61 -2.84 N/A
MFS SPECIAL OPPORTUNITIES FUND
Class A Shares with sales charge 25.54 23.81(2) 0.55 -0.62 0.30
Class A Shares without sales charge 31.84 27.49(2) N/A N/A N/A
Class I Shares 32.23 27.72(3) 0.58 -0.17 N/A
MFS CONVERTIBLE SECURITIES FUND
Class A Shares with sales charge N/A 9.24(4) N/A N/A N/A
Class A Shares without sales charge N/A 14.70(4) N/A N/A N/A
Class I Shares N/A 14.60(4) N/A N/A N/A
MFS BLUE CHIP FUND
Class A Shares with sales charge N/A 12.10(4) N/A N/A N/A
Class A Shares without sales charge N/A 17.70(4) N/A N/A N/A
Class I Shares N/A 17.70(4) N/A N/A N/A
MFS SCIENCE AND TECHNOLOGY FUND
Class A Shares with sales charge N/A 19.33(4) N/A N/A N/A
Class A Shares without sales charge N/A 25.30(4) N/A N/A N/A
Class I Shares N/A 25.30(4) N/A N/A N/A
</TABLE>
Class B and Class C shares were not available for sale during the period.
(1) Total rate of return figures would have been lower if certain fee waivers
were not in place.
(2) From inception of Class A shares on January 2, 1996.
(3) Class I share performance includes the performance of the Fund's Class A
shares for the periods prior to the inception of Class I shares on January
2, 1997. Sales charges, expenses and expense ratios, and therefore
performance for Class I and A shares differ. Class I share performance has
been adjusted to reflect that Class I shares are not subject to an initial
sales charge, whereas Class A shares generally are subject to an initial
sales charge. Class I share performance has not, however, been adjusted to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are lower for Class I shares.
(4) Aggregate total return from the inception of Class A and Class I shares on
January 2, 1997.
<PAGE> 743
APPENDIX B
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND CLASS PERCENTAGE
---------------- ---- ----- ----------
<S> <C> <C> <C>
Ruth M. Scott Core Growth Fund A 10.12%
Westport, MA
The First National Bank of Boston TR Core Growth Fund A 9.33%
IRA R/O Howard Kahalnik
410 Mallard Dr.
Deerfield, IL
The First National Bank of Boston TR Core Growth Fund A 5.19%
IRA R/O Peter G. Harwood
211 Lindsay Pond Rd
Concord, MA
Arnold D. Scott Core Growth Fund A 28.90%
Ruth M. Scott Jt. Ten
Westport, MA
Joan S. Batchelder Core Growth Fund A 8.39%
Weston, MA
John David Davenport TTEE Core Growth Fund A 16.15%
John David Davenport 1994 Revocable Trust
c/o Arnold D. Scott MFS
500 Boylston St
Boston, MA
TRS MFS Defined Contribution Plan Core Growth Fund I 99.99%
c/o Mark Leary
Mass Financial Services
500 Boylston St
Boston, MA
Robert J. Manning & Special Opportunities Fund A 28.90%
Donna Manning JT WROS
Swampscott, MA
Leslie J. Nanberg Special Opportunities Fund A 5.74%
Boston, MA
Sandra E. Nanberg Special Opportunities Fund A 5.74%
Boston, MA
A. Keith Brodkin Special Opportunities Fund A 19.63%
Sherborn, MA
Judith Ann Brodkin Special Opportunities Fund A 15.78%
Sherborn, MA
John David Davenport TTEE Special Opportunities Fund A 9.49%
John David Davenport 1994 Revocable Trust
c/o Arnold D. Scott
500 Boylston St
Boston, MA
</TABLE>
<PAGE> 744
APPENDIX B
(CONTINUED)
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND CLASS PERCENTAGE
---------------- ---- ----- ----------
<S> <C> <C> <C>
TRS MFS Defined Contribution Plan Special Opportunities Fund I 99.99%
c/o Mark Leary
Mass Financial Services
500 Boylston St
Boston, MA
MFS Fund Distributors, Inc. Convertible Securities Fund A 99.45%
C/o Mass Financial Services
Attn: Thomas B. Hastings
500 Boylston St
Boston, MA
TRS MFS Defined Contribution Plan Convertible Securities Fund I 99.58%
c/o Mark Leary
Mass Financial Services
500 Boylston St
Boston, MA
MFS Fund Distributors, Inc. Blue Chip Fund A 86.67%
C/o Mass Financial Services
Attn: Thomas B. Hastings
500 Boylston St
Boston, MA
TRS MFS Defined Contribution Plan Blue Chip Fund I 99.92%
c/o Mark Leary
Mass Financial Services
500 Boylston St
Boston, MA
Robert J. Manning & Science and Technology Fund A 7.80%
Donna Manning JT WROS
Swampscott, MA
The First National Bank of Boston TR Science and Technology Fund A 5.66%
IRA R/O Howard Kahalnik
410 Mallard Dr.
Deerfield, IL
The First National Bank of Boston TR Science and Technology Fund A 28.55%
IRA R/O Ned L. Rigsbee
10 Nash St
Westboro, MA
Maura A. Shaughnessy Science and Technology Fund A 5.67%
Boston, MA
John S. Batchelder Science and Technology Fund A 14.06%
Weston, MA
</TABLE>
<PAGE> 745
APPENDIX B
(CONTINUED)
<TABLE>
<CAPTION>
NAME AND ADDRESS FUND CLASS PERCENTAGE
---------------- ---- ----- ----------
<S> <C> <C> <C>
John David Davenport TTEE Science and Technology Fund A 20.42%
The John David Davenport
1994 Revocable Trust
c/o Arnold D. Scott MFS 24
500 Boylston St.
Boston, MA
TRS MFS Def Contribution Plan Science and Technology Fund I 99.99%
c/o Mark Leary
Mass Financial Services
500 Boylston St.
Boston, MA
</TABLE>
<PAGE> 746
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) CORE GROWTH FUND
MFS(R) SPECIAL OPPORTUNITIES FUND
MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) BLUE CHIP FUND
MFS(R) SCIENCE AND TECHNOLOGY FUND
500 BOYLSTON STREET
BOSTON, MA 02116
[MFS LOGO]
<PAGE> 747
<PAGE>
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
ANNUAL REPORT
AUGUST 31, 1997
o MFS(R) CORE GROWTH FUND
o MFS(R) EQUITY INCOME FUND
o MFS(R) SPECIAL OPPORTUNITIES FUND
o MFS(R) BLUE CHIP FUND
o MFS(R) CONVERTIBLE SECURITIES FUND
o MFS(R) NEW DISCOVERY FUND
o MFS(R) RESEARCH INTERNATIONAL FUND
o MFS(R) SCIENCE AND TECHNOLOGY FUND
[Graphic Omitted]
<PAGE>
<TABLE>
<S> <C>
MFS(R) CORE GROWTH FUND MFS(R) CONVERTIBLE SECURITIES FUND
MFS(R) EQUITY INCOME FUND MFS(R) NEW DISCOVERY FUND
MFS(R) SPECIAL OPPORTUNITIES FUND MFS(R) RESEARCH INTERNATIONAL FUND
MFS(R) BLUE CHIP FUND MFS(R) SCIENCE AND TECHNOLOGY FUND
Trustees
A. Keith Brodkin* - Chairman and President SECRETARY
Stephen E. Cavan*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), ASSISTANT SECRETARY
Massachusetts Financial Services Company; James R. Bordewick, Jr.*
Director, Cambridge Bancorp; Director,
Cambridge Trust Company CUSTODIAN
State Street Bank and Trust Company
Marshall N. Cohan - Private Investor
AUDITORS
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Ernst & Young LLP
Brigham and Women's Hospital; Professor of Surgery,
Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
The Hon. Sir J. David Gibbons, KBE - Chief Executive 1-800-637-4458 anytime from a touch-tone telephone.
Officer, Edmund Gibbons Ltd.; Chairman, Bank of
N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call your financial
adviser or, for an information kit, call toll free:
Abby M. O'Neill - Private Investor; Director, Rockefeller 1-800-637-2929 any business day from 9 a.m. to 5 p.m.
Financial Services, Inc. (investment advisers) Eastern time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, Benchmark INVESTOR SERVICE
Advisors, Inc. (corporate financial consultants); President, MFSService Center, Inc.
Benchmark Consulting Group, Inc. (office services); P.O. Box 2281
Trustee, Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice President, Director For general information, call toll free: 1-800-225-2606
and Secretary, Massachusetts Financial Services Company any business day from 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired, call toll free:
Massachusetts Financial Services Company 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
J. Dale Sherratt - President, Insight Resources, Inc. equipped with a Telecommunications Device for the Deaf.)
(acquisition planning specialists)
For share prices, account balances, and exchanges, call toll
Ward Smith - Former Chairman (until 1994), NACCO free: 1-800-MFS-TALK (1-800-637-8255) anytime from a
Industries; Director, Sundstrand Corporation touch-tone telephone.
INVESTMENT ADVISER WORLD WIDE WEB
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
[DALBAR LOGO] For the fourth year in a row, MFS
Distributor earned a #1 ranking in the DALBAR, Inc.
MFS Fund Distributors, Inc. Broker/Dealer Survey, Main Office Operations
500 Boylston Street Service Quality Category. The firm achieved a
Boston, MA 02116-3741 3.42 overall score on a scale of 1 to 4 in the
1997 survey. A total of 111 firms responded,
PORTFOLIO MANAGERS* offering input on the quality of service they
Irfan Ali received from 29 mutual fund companies
John F. Brennan, Jr. nationwide. The survey contained questions
Mitchell D. Dynan about service quality in 11 categories,
Judith Noelle Lamb including "knowledge of operations contact,"
Robert J. Manning "keeping you informed," and "ease of doing
Lisa B. Nurme business" with the firm.
Kevin R. Parke
Stephen Pesek
Brian E. Stack
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*AFFILIATED WITH THE INVESTMENT ADVISER
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still
uncomfortably high. While some lenders are beginning to tighten standards to
address this problem, consumer debt and personal bankruptcies continue to
rise. The rapid pace of growth seen in the first quarter slowed slightly in
the second quarter, to an annual rate of 3.3%. While real (inflation-adjusted)
growth could moderate further in the third quarter, we believe economic
momentum will carry well into the first quarter of 1998. The money supply is
increasing at a rapid rate, the housing and automobile markets are
strengthening, and it now appears that Christmas sales could be quite good.
Because economic growth continues to be impressive, markets are likely to
begin focusing on the Federal Reserve Board's (the Fed's) willingness to raise
interest rates.
Although the U.S. equity market has seen increased price volatility of late,
we have been surprised by its overall strength thus far in 1997. Much of this
is the result of continuing gains in corporate earnings. Even as the current
recovery enters its seventh year, more and more U.S. companies have been
exceeding analysts' earnings estimates. In the first quarter of 1997, for
example, two-thirds of all companies met or exceeded analysts' expectations, a
trend that could be an important indicator of the U.S. equity market's future
direction. However, while the near-term outlook for profits is generally
favorable, we believe equity valuations have risen to a point where a cautious
investment approach seems warranted.
In the fixed-income markets, we have been encouraged by the Fed's decision at
its July meeting not to raise short-term interest rates. But we cannot rule
out the possibility of future monetary tightening in the second half of the
year if, as we now expect, the economy strengthens during the balance of 1997.
Therefore, our risk/reward outlook for the fixed-income markets is neutral,
and we believe that fixed-income investors should think in terms of earning
the coupon income from their investments rather than seeking possible gains
from price appreciation.
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 15, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEWS
MFS Core Growth Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 45.22%, and Class I shares returned 45.31%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the Standard & Poor's 500 Composite
Index (the S&P 500), a popular, unmanaged index of common stock total return
performance.
Four general themes best describe the Fund's current holdings, which are built
from the bottom up based on individual stock selection. First, the Fund seeks
companies with high unit sales growth that can support above-average revenue
growth. Second, the Fund looks for companies that 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 seem able to
control their own destinies through internal changes such as 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 that, in our opinion, have the potential to benefit from a fundamental
mismatch in the balance between supply and demand.
Positions in several industry sectors have been added to the Fund or have been
increased in recent months, including drug store chains, in which we expect to
see growth as the population ages, and entertainment companies, in which
consolidations are continuing. We have also increased the Fund's holdings in the
oil service sector, which is benefiting from a mismatch in supply and demand, as
well as in package delivery companies, which are capitalizing on the strong
economy and wage pressures at United Parcel Service.
/s/ Stephen Pesek
Stephen Pesek
Portfolio Manager
MFS Equity Income Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 38.05%, and Class I shares returned 37.95%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500.
The Fund's top holdings remain in the financial services, utilities, energy, and
industrial goods and services sectors. Within financial services, the Fund
remains heavily weighted in insurance stocks, in which restructuring and
consolidation are leading to improved returns and better valuations. The Fund's
utility holdings are concentrated in gas distribution companies, high-quality,
low-cost electric utilities, and well-positioned local and long-distance
telephone companies. Essentially, the Fund is seeking to invest in companies
that we believe are well insulated from heightened competition and/ or companies
that may benefit from continuing consolidation in these industries. The energy
sector remains a key one for the Fund, especially those companies that are
dedicated to increasing production, cutting costs, and improving returns in
lagging businesses such as refining. Pollution control is a growing portion of
the Fund's holdings in industrial goods and services. This industry has
underperformed the market for several years but is now refocusing on its core
business, embracing cost cutting, and allocating capital more carefully.
The Fund continues to seek holdings in companies that we believe provide
attractive dividend yields and reasonable valuations, characteristics that we
feel could provide protection against price declines in a volatile market.
/s/ Lisa B. Nurme
Lisa B. Nurme
Portfolio Manager
MFS Special Opportunities Fund
For the 12 months ended August 31, 1997, Class A shares of the Fund provided a
total return of 31.84%, and Class I shares returned 32.23%. These returns, which
assume the reinvestment of distributions but exclude the effects of any sales
charges, compare to a 40.78% return for the S&P 500 and to a 15.55% return for
the average high-yield corporate bond fund as tracked by CDA/ Wiesenberger, an
independent firm that reports mutual fund performance.
The Fund continues to have the majority of its assets in common stocks because
we have found few attractive investments in the distressed and high-yield
markets. The Fund's investment strategy continues to incorporate both growth
and value disciplines. We have found investment opportunities in companies
that have recently emerged from bankruptcy, companies with financially
leveraged capital structures but with strong cash flow and solid earnings
prospects, and companies with attractive growth prospects but with valuations
that don't fully reflect these prospects. Our overall stock market perspective
continues to be cautious; however, we have been able to find an adequate
number of special situations for investment. The weighting of high-yield and
distressed bonds is likely to increase as more-appealing investment ideas
become available.
/s/ John F. Brennan, Jr. /s/ Robert J. Manning
John F. Brennan, Jr. Robert J. Manning
Portfolio Manager Portfolio Manager
MFS Blue Chip Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
17.70%. These returns, which include the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 22.91% return for the S&P
500 for the same period.
The Fund's investment strategy continues to be predicated on the assumption that
the global economy will grow slowly during 1998 and that U.S. interest rates
will remain fairly stable. In the United States, this assumption is supported by
the longevity of the current economic recovery and the high levels of consumer
debt. Economic growth remains moderate in a good part of Europe. Double-digit
unemployment rates in France (in addition to tax increases) and Germany should
prevent these economies from accelerating. Japan is weak, and economic growth in
other Asian countries could slow as interest rates rise.
The Fund is positioned relatively defensively, with the bulk of its investments
in companies that we believe can sustain double-digit earnings growth in a
slow-growth environment. Earnings ultimately drive stock prices, and investors
will bid up the share prices of companies that can achieve above-average
earnings growth.
The Fund's holdings are diverse and spread across many industries. However,
consistent with this defensive posture, the Fund continues to be overweighted in
the consumer staples and health care sectors. Conversely, the Fund is
significantly underweighted in basic materials and automobiles and housing. The
industrial goods sector is overweighted but aerospace and defense companies have
been emphasized. We believe this sector should perform relatively well in a
slow-growth economy. Similarly, the retail weighting is greater than the
market's, but all of this is in supermarkets and drug stores. The financial
services sector is overweighted, with an emphasis on high-quality regional banks
and insurance companies. The weightings in energy and utilities and
communications approximate those of the market, with the primary energy holdings
being large multinational oil companies. While the utility holdings offer modest
price appreciation, they are viewed as the ballast in the portfolio and
contribute to the Fund's yield. Emphasis has also been placed on companies that
have significant recurring revenue streams and/or that participate in dynamic,
high-growth markets. Examples would be First Data, DST Systems, and Service
Corporation International. For the same reasons, the bulk of the Fund's
technology investments are in the software industry.
/s/ Mitchell D. Dynan
Mitchell D. Dynan
Portfolio Manager
MFS Convertible Securities Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 14.70%, while its
Class I shares returned 14.60%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 15.98%
return for the Merrill Lynch All Convertibles Index, an unmanaged index of
convertible securities, and to a 14.48% return for the average convertible
securities fund for the same period as tracked by Lipper Analytical Services,
Inc., an independent firm that reports mutual fund performance.
The Fund is taking an extremely defensive posture due to the stock market's
current high valuation and its increased volatility in order to preserve
capital. Convertible securities comprise 80% of the portfolio, versus the
required 65% minimum. Increased demand for the convertible asset class has led
to a more expensive convertible market, as illustrated by the aggressive pricing
of new issues. In response, the portfolio is skewed toward convertibles that are
technically cheap; that is, those whose price movements correlate well with
upward price movements in the underlying common stock and that have
above-average yield.
The Fund's overall strategy is to invest in companies that we believe are
benefiting from one or more of the following trends: industry consolidation,
market dominance, and cost containment. Performance was favorably impacted by
overweightings in industrial goods and services companies, including Browning
Ferris, Corning, and U.S. Filter; leisure companies, which included American
Radio Systems and Royal Caribbean Cruises; financial services companies such as
Frontier Insurance and MGIC Investment Corp.; and technology companies,
including Baan and Data General. Conversely, companies in the basic materials
sector, such as RMI Titanium and Titanium Metals, detracted from year-to-date
performance. A value-oriented approach will continue to be used to evaluate
company fundamentals and the technical aspects of convertible securities.
/s/ Judith Noelle Lamb
Judith Noelle Lamb
Portfolio Manager
MFS New Discovery Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, its Class A shares provided a total return of 30.70%, while its
Class I shares returned 30.80%. These returns, which assume the reinvestment of
distributions but exclude the effects of any sales charges, compare to a 17.97%
return for the Russell 2000 Total Return Index, an unmanaged index comprised of
2,000 of the smallest U.S.-domiciled company common stocks that are traded on
the New York Stock Exchange, the American Stock Exchange, and NASDAQ.
The Fund invests principally in the shares of emerging companies that we believe
have the potential to grow into large enterprises. We maintain significant
weightings in the technology, health care, lodging, media, and business and
information services industries. We regard these as fundamentally attractive
sectors within which innovative and well-managed companies can be expected to
experience sustainable unit and earnings growth well above that seen in the
broader economy.
Among the factors contributing to the Fund's favorable performance were gains in
the shares of Summit Design, a provider of electronic design and automation
software, and Idexx Laboratories, a manufacturer of veterinary diagnostics
equipment and consumables. In addition, advances were recorded by broadcasters
American Radio Systems and Jacor Communications. The portfolio also benefited
from appreciation in the shares of Affiliated Computer Services and in high- end
hotel operators such as Wyndham, Renaissance, and Doubletree hotels.
Our research efforts continue to identify many attractively valued, emerging
growth companies that we believe can deliver exceptional long-term returns.
This, coupled with a market backdrop that suggests the potential for renewed
interest in smaller-company shares, makes us optimistic about performance
prospects for the year ahead.
/s/ Brian E. Stack
Brian E. Stack
Portfolio Manager
MFS Research International Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
9.60%. These returns, which assume the reinvestment of distributions but exclude
the effects of any sales charges, compare to a 4.39% return for the Morgan
Stanley Capital International EAFE (Europe, Australia, Far East) Index, an
unmanaged index of international stocks.
The top five sectors in the Fund are financial services (at 14.8% of assets),
technology (12.1%), utilities and communications (11.8%), leisure (11.0%), and
industrial goods and services (9.3%). The three top holdings are Nippon
Broadcasting, Secom, and Canon. Nippon Broadcasting is the world's largest radio
network operating company and has held the top audience ratings in Japan for the
past 22 years. We believe the company can continue to increase earnings by 10%
to 15% per year over the next several years. Secom holds a dominant 60% market
share of the electronic security market in Japan and holds over a 70% market
share through subsidiaries in Korea, Taiwan, Thailand, Malaysia, and Singapore.
We expect Canon's underlying operating growth to be at 12% in the coming year.
The company's valuation is currently cheap for a quality growth company.
In the technology sector, Sony's new digital product launches and strong product
pipeline continue to offer the company significant opportunity, while its new
management's compensation is directly tied to the company's performance. Through
major distributors in Europe and Japan, Sony Pictures will soon exploit the
3,400 movie titles it has in its motion picture bank. As a result, we expect
operating profits to grow at an average of over 20% over the next couple of
years.
Within the financial services sector, several banks and insurance companies in
Hong Kong, Great Britain, France, and Japan continue to demonstrate good
earnings growth that, coupled with substantial cost savings, should yield
excellent results.
The Fund is based upon the international research analysts' best ideas within
their industries. Stocks are selected after careful, in-depth, fundamental
analysis of companes' earnings outlooks. Although each analyst incorporates
general economic forecasts into his or her decision-making process, ultimately,
stocks selected for the Fund represent companies that the analysts believe offer
the best possibilities for capital appreciation regardless of the economic
outlook. These companies typically demonstrate dominant and/or growing market
share, quality new and existing products, superior management teams, and strong
financial statements. Sector and industry weightings are a result of the "best
ideas" stock-selection process. However, the analysts revisit weightings
regularly to assure agreement within the changing economic landscape. We will
continue to use a bottom-up, fundamental approach to investing in companies for
the Fund.
/s/ Kevin R. Parke
Kevin R. Parke
Director of Research
The committee of MFS equity research analysts is responsible for the day-to-
day management of the Fund under the general supervision of Mr. Parke.
MFS Science and Technology Fund
The Fund commenced operations on January 2, 1997, and from that date through
August 31, 1997, both Class A and Class I shares provided total returns of
25.30%. These returns, which assume the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 23.44% return for the
NASDAQ Composite Index, an unmanaged index of common stocks traded on NASDAQ,
and to a 19.78% return for the average technology fund as tracked by CDA/
Wiesenberger, an independent firm that reports mutual fund performance.
The Fund continues to seek companies that we believe are fast growing, have
market share leadership, and have a defensible strategic position. Holdings
remain focused in the computer software, networking, business services, and
semiconductor areas. To date, the Fund has not made significant investments in
the health care sector.
The Fund's performance has been favorably impacted by stock selection and by a
generally strong technology market. The volatility of the technology sector has
also provided attractive buying opportunities during times of price weakness.
Top holdings include Oracle Systems, Microsoft, and Computer Associates
International. All three of these stocks have seen outstanding price
appreciation driven by a healthy industry environment and by each management's
ability to deliver superior financial results. We believe the outlook for the
technology sector remains highly attractive, while the outlook for the health
care sector should start to improve.
/s/ Irfan Ali
Irfan Ali
Portfolio Manager
<PAGE>
PORTFOLIO MANAGERS' PROFILES
Each portfolio manager has acted in that capacity since the commencement of
investment operations of each Fund.
MFS CORE GROWTH FUND
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.
MFS EQUITY INCOME FUND
Lisa B. 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.
MFS SPECIAL OPPORTUNITIES FUND
John F. Brennan, Jr., has been a member of the MFS investment staff since 1985.
A graduate of the University of Rhode Island and the Stanford University
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 in 1995.
Robert J. 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 the
Boston College Graduate School of Management, he was named Vice President
Investments in 1988 and Senior Vice President in 1993.
MFS BLUE CHIP FUND
Mitchell D. Dynan joined the MFS Research Department in 1986. A graduate of
Tufts University, he was named Assistant Vice President - Investments in 1987
and Vice President - Investments in 1988.
MFS CONVERTIBLE SECURITIES FUND
Judith Noelle Lamb joined MFS in 1992 as Vice President and analyst
specializing in convertible securities. She is a graduate of New York
University and the New York University Graduate School
of Business.
MFS NEW DISCOVERY FUND
Brian E. Stack joined the MFS Research Department as Vice President Investments
in 1993. A graduate of Boston College and the Darden School of Business at the
University of Virginia, he has worked as an equity analyst since 1987.
MFS RESEARCH INTERNATIONAL FUND
The committee of MFS equity research analysts is responsible for the day-to-day
management of the Fund under the general supervision of Kevin R. Parke. A
graduate of Lehigh University and the Harvard University Graduate School of
Business Administration, Mr. Parke joined the MFS Research Department in 1985 as
an industry specialist and was named Assistant Vice President - Investments in
1987, Vice President - Investments in 1988, Senior Vice President in 1993,
Director of Equity Research in 1995, and Executive Vice President in 1997.
MFS SCIENCE AND TECHNOLOGY FUND
Irfan Ali joined MFS in 1993 as an industry specialist. A graduate of Harvard
College and the Harvard University Graduate School of Business Administration,
he was named Assistant Vice President in 1996 and Vice President in 1997.
<PAGE>
INVESTMENT OBJECTIVES
MFS CORE GROWTH FUND
The objective of the Fund 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 that 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).
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS EQUITY INCOME FUND
The primary objective of the Fund is reasonable income and the secondary
objective is 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.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
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 that represent uncommon value by having the potential
for significant capital appreciation over a period of 12 months or longer.
Commencement of Investment Operations: Class A: January 2, 1996 Class I:
January 2, 1997
MFS BLUE CHIP FUND
The objective of the 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 that the Fund's investment
adviser believes have above-average capital appreciation potential. The Fund may
invest up to 35% of its total assets in other securities (including emerging
growth companies) offering an opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS CONVERTIBLE SECURITIES FUND
The objective of the 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 nonconvertible corporate and U.S.
government fixed-income securities, equity securities, and money market
instruments. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS NEW DISCOVERY FUND
The objective of the 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 that the Fund's manager believes offer superior
prospects for growth. The Fund 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.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS RESEARCH INTERNATIONAL FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies whose principal activities are located outside the United States
and may invest up to 35% of its total assets in other securities offering an
opportunity for capital appreciation.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
MFS SCIENCE AND TECHNOLOGY FUND
The objective of the Fund is capital appreciation. The Fund invests, under
normal market conditions, at least 65% of its total assets in equity securities
of companies that the Fund's manager 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). The Fund may also invest up to 35%
of its total assets in other securities offering an opportunity for capital
appreciation. The Fund may engage in short sales.
Commencement of Investment Operations: Class A: January 2, 1997 Class I:
January 2, 1997
PERFORMANCE SUMMARY
Currently, each Fund offers only Class A and Class I shares, 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.
The information below and on the following page illustrates the historical
performance of the Funds' Class A shares in comparison to various market
indicators. Class A share performance results reflect no sales charge; benchmark
comparisons are unmanaged and do not reflect any fees or expenses. The
performance of other share classes will be greater than or less than the line
shown, based on differences in charges and fees paid by shareholders investing
in different classes. It is not possible to invest directly in an index.
MFS CORE GROWTH FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2,
1996, through August 31, 1997)
MFS Core S&P 500 Consumer
Growth Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 12,330 $ 10,745 $ 10,253
2/97 $ 15,303 $ 13,166 $ 10,405
8/97 $ 17,905 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class A) at net asset value +45.22% +41.95%
- ------------------------------------------------------------------------------
MFS Core Growth Fund (Class I) at net asset value +45.31% +42.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS EQUITY INCOME FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Equity S&P 500 Consumer
Income Fund Composite Price Index
- Class A Index - U.S.
----------- --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,070 $ 10,745 $ 10,253
2/97 $ 13,312 $ 13,166 $ 10,405
8/97 $ 15,282 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
1 Year Life of Fund+
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class A) at net asset value +38.05% +29.05%
- ------------------------------------------------------------------------------
MFS Equity Income Fund (Class I) at net asset value +37.95% +29.00%
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
MFS SPECIAL OPPORTUNITIES FUND
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from January 2, 1996, through August 31, 1997)
MFS Special S&P 500 Consumer
Opportunities Fund Composite Price Index
- Class A Index - U.S.
------------------ --------- -----------
1/96 $ 10,000 $ 10,000 $ 10,000
8/96 $ 11,360 $ 10,745 $ 10,253
2/97 $ 12,789 $ 13,166 $ 10,405
8/97 $ 14,976 $ 15,112 $ 10,476
AVERAGE ANNUAL TOTAL RETURNS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
1 Year Life of Fund+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MFS Special Opportunities Fund (Class A) at net asset value +31.84% +27.49%
- ------------------------------------------------------------------------------------
MFS Special Opportunities Fund (Class I) at net asset value +32.23% +27.72%
- ------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index* +40.78% +28.29%
- ------------------------------------------------------------------------------------
Average high-yield corporate bond fund* +15.55% +13.22%
- ------------------------------------------------------------------------------------
Consumer Price Index*,** + 2.19% + 2.85%
- ------------------------------------------------------------------------------------
+ For the period from the commencement of the Fund's investment operations,
January 2, 1996, through August 31, 1997.
* Source: CDA/Wiesenberger.
** The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class I shares, which became available on January 2, 1997, have no sales charge
or Rule 12b-1 fees and are only available to certain institutional investors.
Class I share results include the performance and the operating expenses of
Class A shares for periods prior to the commencement of offering of Class I
shares. Because operating expenses attributable to Class A shares are greater
than those of Class I shares, Class I share performance generally would have
been higher than Class A share performance. The Class A share performance
included within the Class I share performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
DIVIDENDS-RECEIVED DEDUCTION
FOR THE YEAR ENDED AUGUST 31, 1997, THE PERCENTAGE OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS-RECEIVED DEDUCTION FOR THE FUNDS
WAS:
FUND DIVIDENDS-RECEIVED DEDUCTION
----------------------------------------------
MFS CORE GROWTH FUND 2.64%
MFS EQUITY INCOME FUND 21.37%
MFS SPECIAL OPPORTUNITIES FUND 4.84%
MFS BLUE CHIP FUND 48.57%
MFS CONVERTIBLE SECURITIES FUND 91.49%
MFS NEW DISCOVERY FUND 0.36%
MFS RESEARCH INTERNATIONAL FUND 0.04%
MFS SCIENCE AND TECHNOLOGY FUND 4.16%
FOREIGN TAX CREDIT
THE RESEARCH INTERNATIONAL FUND IS ESTIMATED TO HAVE DERIVED APPROXIMATELY
11.8% OF ITS ORDINARY INCOME FROM DIVIDENDS PAID BY FOREIGN COMPANIES, AND TO
HAVE PAID FOREIGN TAXES EQUIVALENT TO APPROXIMATELY 1.1% OF ITS ORDINARY
INCOME.
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CORE GROWTH FUND
Stocks - 96.2%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 90.9%
Aerospace - 0.6%
Thiokol Corp. 200 $ 15,925
- -------------------------------------------------------------------------------
Airlines - 0.5%
Continental Airlines Holdings, Inc.* 400 $ 14,650
- -------------------------------------------------------------------------------
Automotive - 0.5%
Hayes Wheels International, Inc.* 400 $ 13,000
- -------------------------------------------------------------------------------
Banks and Credit Companies - 1.3%
Comerica, Inc. 200 $ 14,163
Northern Trust Corp. 400 21,250
----------
$ 35,413
- -------------------------------------------------------------------------------
Business Machines - 2.1%
Affiliated Computer Services, Inc., "A"* 500 $ 13,125
Sun Microsystems, Inc.* 300 14,400
Texas Instruments, Inc. 275 31,247
----------
$ 58,772
- -------------------------------------------------------------------------------
Business Services - 3.1%
At Home Corp.* 100 $ 1,913
Computer Sciences Corp.* 350 26,031
Corporate Family Solutions, Inc.* 100 1,500
CUC International, Inc.* 1,200 28,200
Ikon Office Solutions, Inc. 800 20,800
Innova Corp.* 100 2,200
Lamalie Associates, Inc.* 100 1,900
Pierce Leahy Corp.* 100 2,725
----------
$ 85,269
- -------------------------------------------------------------------------------
Chemicals - 1.6%
Air Products & Chemicals, Inc. 300 $ 24,469
Ferro Corp. 500 18,813
----------
$ 43,282
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.7%
Microsoft Corp.* 150 $ 19,828
- -------------------------------------------------------------------------------
Computer Software - Systems - 8.0%
Aehr Test Systems* 100 $ 1,750
Aris Corp.* 100 2,450
BMC Software, Inc.* 300 18,788
Cadence Design Systems, Inc.* 600 28,538
Compaq Computer Corp.* 650 42,575
Computer Associates International, Inc. 500 33,438
Compuware Corp.* 550 33,963
Lear Corp.* 100 4,581
Oracle Systems Corp.* 900 34,313
Peritus Software Services, Inc.* 100 2,500
Synopsys, Inc.* 450 15,581
TSI International Software Ltd.* 100 1,225
----------
$ 219,702
- -------------------------------------------------------------------------------
Consumer Goods and Services - 7.5%
Colgate-Palmolive Co. 200 $ 12,550
Meyer Fred, Inc.* 400 20,800
Philip Morris Cos., Inc. 950 41,444
RJR Nabisco Holdings Corp. 550 19,147
Tyco International Ltd.* 1,440 112,950
----------
$ 206,891
- -------------------------------------------------------------------------------
Containers - 3.1%
AptarGroup, Inc. 350 $ 19,688
Corning, Inc. 550 29,081
Jefferson Smurfit Corp.* 700 13,606
Stone Container Corp. 1,300 22,425
----------
$ 84,800
- -------------------------------------------------------------------------------
Electrical Equipment - 0.5%
Westinghouse Electric Corp. 500 $ 12,875
- -------------------------------------------------------------------------------
Electronics - 7.7%
Altera Corp.* 350 $ 18,638
Analog Devices, Inc.* 500 16,563
Atmel Corp.* 700 24,762
Intel Corp. 600 55,275
International Rectifier Corp.* 600 13,688
KLA-Tencor Corp.* 200 14,175
Kulicke & Soffa Industries, Inc.* 600 27,563
Teradyne, Inc.* 750 41,766
----------
$ 212,430
- -------------------------------------------------------------------------------
Entertainment - 5.5%
American Radio Systems Corp., "A"* 650 $ 32,013
Clear Channel Communications, Inc.* 500 33,969
Gemstar Group Ltd.* 800 16,400
ITT Corp.* 250 15,703
LIN Television Corp.* 500 23,719
Univision Communications, Inc., "A"* 600 30,750
----------
$ 152,554
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
American Express Co. 325 $ 25,269
Associates First Capital Corp., "A" 200 11,613
Federal National Mortgage Assn. 500 22,000
Morgan Stanley, Dean Witter, Discover and Co. 300 14,438
----------
$ 73,320
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Archer-Daniels-Midland Co. 525 $ 11,353
Wrigley (Wm) Junior Co. 300 21,750
----------
$ 33,103
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Champion International Corp. 400 $ 23,675
- -------------------------------------------------------------------------------
Insurance - 5.5%
Chubb Corp. 225 $ 15,047
CIGNA Corp. 150 27,506
Conseco, Inc. 775 33,325
Frontier Insurance Group, Inc. 100 3,500
Hartford Life, Inc., "A" 100 3,731
Lincoln National Corp. 350 23,428
Nationwide Financial Services, Inc., "A" 100 2,775
Progressive Corp. 150 14,850
Reliastar Financial Corp. 250 18,688
Travelers Group, Inc. 150 9,525
----------
$ 152,375
- -------------------------------------------------------------------------------
Machinery - 0.1%
JLK Direct Distribution, Inc., "A"* 100 $ 2,413
- -------------------------------------------------------------------------------
Medical and Health Products - 6.8%
Arterial Vascular Engineering, Inc.* 600 $ 22,200
Boston Scientific Corp.* 400 28,200
Bristol-Myers Squibb Co. 400 30,400
McKesson Corp. 275 25,764
Mentor Corp. 1,000 30,750
Ocular Sciences, Inc.* 100 1,913
Schering Plough Corp. 960 46,080
Schick Technologies, Inc.* 100 2,650
----------
$ 187,957
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 5.0%
AmeriSource Health Corp. "A"* 600 $ 30,037
HEALTHSOUTH Corp.* 800 19,950
Mariner Health Group, Inc.* 300 4,350
Medtronic, Inc. 50 4,519
Orthalliance, Inc.* 100 1,388
St. Jude Medical, Inc.* 650 24,741
United Healthcare Corp. 840 40,845
Vencor, Inc.* 300 12,038
----------
$ 137,868
- -------------------------------------------------------------------------------
Office Equipment - 1.1%
Office Depot, Inc.* 1,600 $ 29,500
- -------------------------------------------------------------------------------
Oil Services - 4.0%
Trico Marine Services, Inc.* 400 $ 12,400
Baker Hughes, Inc. 200 8,475
Cal Dive International, Inc.* 100 3,400
Camco International, Inc. 250 17,219
Cooper Cameron Corp.* 300 19,463
Friede Goldman International, Inc.* 100 4,025
Noble Drilling Corp.* 800 22,750
Weatherford Enterra, Inc.* 500 23,031
----------
$ 110,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pollution Control - 0.9%
Republic Industries, Inc.* 500 $ 12,281
Waste Management, Inc. 400 12,800
----------
$ 25,081
- -------------------------------------------------------------------------------
Printing and Publishing - 0.7%
CMP Media, Inc.* 100 $ 2,675
Quipp, Inc.* 1,200 18,000
----------
$ 20,675
- -------------------------------------------------------------------------------
Railroads - 2.3%
Burlington Northern Santa Fe Railway Co. 225 $ 20,630
Kansas City Southern Industries, Inc. 200 14,975
Wisconsin Central Transportation Corp.* 900 27,900
----------
$ 63,505
- -------------------------------------------------------------------------------
Real Estate - 0.2%
Equity Office Properties Trust* 200 $ 5,838
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
Hilton Hotels Corp. 950 $ 29,153
Prime Hospitality Corp.* 500 9,500
Trendwest Resorts, Inc.* 100 1,825
----------
$ 40,478
- -------------------------------------------------------------------------------
Special Products and Services - 0.8%
Keystone International, Inc. 600 $ 22,613
- -------------------------------------------------------------------------------
Stores - 7.6%
CVS Corp. 800 $ 45,100
Dollar General Corp. 450 18,647
Linens 'N Things, Inc.* 450 13,050
Penney (J.C.), Inc. 400 24,000
Rite Aid Corp. 1,900 95,119
Viking Office Products, Inc.* 700 14,788
----------
$ 210,704
- -------------------------------------------------------------------------------
Telecommunications - 4.8%
3Com Corp.* 400 $ 19,975
Ascend Communications, Inc.* 250 10,609
Aspect Telecommunications Corp.* 1,200 26,400
Bay Networks, Inc.* 550 19,456
Cable Design Technologies Corp.* 500 16,719
Cisco Systems, Inc.* 250 18,844
Intermedia Communications, Inc.* 350 12,513
Qwest Communications International, Inc.* 200 8,150
----------
$ 132,666
- -------------------------------------------------------------------------------
Transportation - 1.3%
Caliber Systems, Inc. 500 $ 20,875
CNF Transportation, Inc. 400 14,450
----------
$ 35,325
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.7%
Sprint Corp. 400 $ 18,787
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,506,512
- -------------------------------------------------------------------------------
Foreign Stocks - 5.3%
Canada - 1.3%
Canadian National Railway Co. (Railroads) 500 $ 24,844
Coca-Cola Beverages Ltd. (Beverages)* 700 11,074
----------
$ 35,918
- -------------------------------------------------------------------------------
Ireland - 0.7%
Elan Corp. PLC, ADR (Health Products)* 450 $ 20,475
- -------------------------------------------------------------------------------
Netherlands - 0.6%
Akzo Nobel (Chemicals) 100 $ 15,466
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Kuoni Reisen Holdings AG (Transportation) 6 $ 24,620
- -------------------------------------------------------------------------------
United Kingdom - 1.8%
Danka Business Systems PLC, ADR (Business Services) 475 $ 22,206
British Petroleum PLC, ADR (Oil and Gas) 200 16,925
Grand Metropolitan PLC (Food and Beverage Products) 1,300 11,934
----------
$ 51,065
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 147,544
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,371,295) $2,654,056
- -------------------------------------------------------------------------------
Short-Term Obligation - 3.3%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 90 $ 89,987
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,461,282) $2,744,043
Other Assets, Less Liabilities - 0.5% 12,077
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,756,120
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS EQUITY INCOME FUND
Stocks - 89.3%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 78.1%
Aerospace - 3.9%
Allied Signal, Inc. 210 $ 17,338
General Dynamics Corp. 210 16,721
United Technologies Corp. 300 23,419
----------
$ 57,478
- -------------------------------------------------------------------------------
Agricultural Products - 1.1%
Case Corp. 240 $ 16,095
- -------------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Unifi, Inc. 390 $ 14,966
- -------------------------------------------------------------------------------
Automotive - 1.4%
Ford Motor Co. 200 $ 8,600
TRW, Inc. 240 12,510
----------
$ 21,110
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.6%
Bank of New York, Inc. 280 $ 12,495
CCB Financial Corp. 190 15,366
Comerica, Inc. 200 14,163
First Commerce Corp. 300 16,013
First Hawaiian, Inc. 350 12,906
National City Corp. 240 13,560
Northern Trust Corp. 250 13,281
PNC Bank Corp. 320 13,840
----------
$ 111,624
- -------------------------------------------------------------------------------
Business Machines - 1.1%
International Business Machines Corp. 160 $ 16,140
- -------------------------------------------------------------------------------
Cellular Telephones - 1.3%
Century Telephone Enterprises, Inc. 520 $ 18,883
- -------------------------------------------------------------------------------
Chemicals - 4.9%
Air Products & Chemicals, Inc. 260 $ 21,206
Dexter Corp. 200 7,600
Du Pont (E.I.) de Nemours & Co., Inc. 240 14,955
Ferro Corp. 380 14,298
Nalco Chemical Co. 370 14,800
----------
$ 72,859
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.5%
Meyer Fred, Inc.* 240 $ 12,480
Philip Morris Cos., Inc. 550 23,994
RJR Nabisco Holdings Corp. 240 8,355
Rubbermaid, Inc. 200 5,000
Tyco International Ltd. 200 15,687
----------
$ 65,516
- -------------------------------------------------------------------------------
Electrical Equipment - 3.3%
Cooper Industries, Inc. 320 $ 17,060
General Electric Co. 240 15,000
Hubbell, Inc. 350 16,056
----------
$ 48,116
- -------------------------------------------------------------------------------
Energy - 2.3%
Dresser Industries, Inc. 360 $ 15,030
Unocal Corp. 500 19,531
----------
$ 34,561
- -------------------------------------------------------------------------------
Financial Institutions - 1.7%
American Express Co. 150 $ 11,662
Union Planters Corp. 260 13,325
----------
$ 24,987
- -------------------------------------------------------------------------------
Food and Beverage Products - 3.2%
Archer-Daniels-Midland Co. 646 $ 13,970
General Mills, Inc. 80 5,130
Hormel Foods Corp. 480 14,280
Quaker Oats Co. 300 14,100
----------
$ 47,480
- -------------------------------------------------------------------------------
Food Products - 1.1%
Smucker (J.M.) Co. 650 $ 15,966
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.9%
Champion International Corp. 260 $ 15,389
Weyerhaeuser Co. 240 13,860
----------
$ 29,249
- -------------------------------------------------------------------------------
Insurance - 7.2%
Allstate Corp. 170 $ 12,421
Chubb Corp. 260 17,387
CIGNA Corp. 80 14,670
Conseco, Inc. 360 15,480
Hartford Financial Services Group, Inc. 150 11,963
Lincoln National Corp. 300 20,081
Torchmark Corp. 360 13,567
----------
$ 105,569
- -------------------------------------------------------------------------------
Medical and Health Products - 1.2%
Bristol-Myers Squibb Co. 240 $ 18,240
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.5%
United Healthcare Corp. 140 $ 6,808
- -------------------------------------------------------------------------------
Oils - 5.2%
Atlantic Richfield Co. 180 $ 13,500
Chevron Corp. 220 17,036
Exxon Corp. 250 15,297
Texaco, Inc. 150 17,288
USX-Marathon Group 420 13,676
----------
$ 76,797
- -------------------------------------------------------------------------------
Pollution Control - 2.5%
Browning Ferris Industries, Inc. 490 $ 17,119
Waste Management, Inc. 600 19,200
----------
$ 36,319
- -------------------------------------------------------------------------------
Real Estate Investment Trusts - 4.6%
Arden Realty, Inc. 240 $ 6,930
Boston Properties, Inc. 500 14,906
Kilroy Realty Corp. 300 7,669
Mid-America Apartment Communities, Inc. 480 13,170
Sovran Self Storage, Inc. 380 11,543
TriNet Corporate Realty Trust, Inc. 360 12,802
----------
$ 67,020
- -------------------------------------------------------------------------------
Stores - 3.1%
Longs Drug Stores Corp. 530 $ 13,415
Penney (J.C.), Inc. 340 20,400
Rite Aid Corp. 270 13,517
----------
$ 47,332
- -------------------------------------------------------------------------------
Supermarkets - 1.0%
Kroger Co.* 480 $ 14,460
- -------------------------------------------------------------------------------
Utilities - Electric - 4.7%
Cinergy Corp. 440 $ 14,547
FPL Group, Inc. 170 7,905
New Century Energies, Inc. 320 12,920
Pacificorp 420 8,715
Pinnacle West Capital Corp. 460 14,864
Sierra Pacific Resources 330 10,313
----------
$ 69,264
- -------------------------------------------------------------------------------
Utilities - Gas - 5.6%
Brooklyn Union Gas Co. 490 $ 14,792
Columbia Gas System, Inc. 200 13,200
Energen Corp. 300 10,819
National Fuel Gas Co. 300 13,331
Oneok, Inc. 420 13,597
UGI Corp. 630 16,459
----------
$ 82,198
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.2%
GTE Corp. 290 $ 12,923
Sprint Corp. 400 18,800
----------
$ 31,723
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,150,760
- -------------------------------------------------------------------------------
Foreign Stocks - 11.2%
Argentina - 0.5%
YPF Sociedad Anonima, ADR (Oils) 240 $ 7,815
- -------------------------------------------------------------------------------
Canada - 1.3%
Canadian National Railway Co. (Railroads) 390 $ 19,378
- -------------------------------------------------------------------------------
France - 2.1%
Alcatel Alsthom, ADR (Telecommunications) 560 $ 13,790
Elf Aquitaine, ADR (Oils) 320 17,840
----------
$ 31,630
- -------------------------------------------------------------------------------
Germany - 0.8%
Henkel Kgaa (Consumer Goods and Services) 250 $ 12,584
- -------------------------------------------------------------------------------
Italy - 0.4%
Eni S.p.A, ADR (Oils) 120 $ 6,660
- -------------------------------------------------------------------------------
Netherlands - 1.3%
Akzo Nobel (Chemicals) 120 $ 18,560
- -------------------------------------------------------------------------------
Switzerland - 1.0%
Novartis AG (Pharmaceuticals) 10 $ 14,122
- -------------------------------------------------------------------------------
United Kingdom - 3.8%
British Petroleum PLC, ADR (Oil and Gas) 333 $ 28,180
Grand Metropolitan (Food and Beverage Products) 1,550 14,229
SmithKline-Beecham PLC, ADR (Medical and Health
Products) 300 12,994
----------
$ 55,403
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 166,152
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,186,622) $1,316,912
- -------------------------------------------------------------------------------
Bonds - 0.8%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
U.S. Bonds - 0.8%
Automotive - 0.8%
Tower Automotive, Inc., 5s, 2004##
(Identified Cost, $10,000) $ 10 $ 10,800
- -------------------------------------------------------------------------------
Convertible Preferred Stocks - 5.3%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Aerospace - 0.6%
Loral Space & Communications Corp., 6s## 150 $ 8,025
- -------------------------------------------------------------------------------
Entertainment - 0.3%
Houston Industries, Inc., 7s 100 $ 5,075
- -------------------------------------------------------------------------------
Food Products - 0.7%
Ralston Purina Co., 7s, 2000 160 $ 9,530
- -------------------------------------------------------------------------------
Insurance - 0.8%
St. Paul Capital, 6s, 2025 180 $ 12,150
- -------------------------------------------------------------------------------
Medical and Health Technology Services- 0.8%
McKesson Financing Trust, 5s## 180 $ 12,375
- -------------------------------------------------------------------------------
Oils - 0.8%
Tosco Financing Trust, 5.75s## 190 $ 11,400
- -------------------------------------------------------------------------------
Utilities - Gas - 0.4%
Williams Cos., Inc., $3.50 Pref., 2049## 50 $ 5,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.9%
Salomon, Inc., 6.25s 250 $ 13,906
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $49,019) $ 77,961
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,245,641) $1,405,673
Other Assets, Less Liabilities - 4.6% 68,380
- -------------------------------------------------------------------------------
Net Assets - 100.0% $1,474,053
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SPECIAL OPPORTUNITIES FUND
Stocks - 86.2%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 76.5%
Aerospace - 5.6%
Allied Signal, Inc. 160 $ 13,210
B.E. Aerospace, Inc.* 3,500 124,250
Moog, Inc.* 1,600 58,200
Thiokol Corp. 300 23,887
----------
$ 219,547
- -------------------------------------------------------------------------------
Agricultural Products - 0.2%
AGCO Corp. 200 $ 6,500
----------
Apparel and Textiles - 0.2%
Reebok International Ltd. 200 $ 8,788
- -------------------------------------------------------------------------------
Automotive - 1.3%
Exide Corp. 2,500 $ 52,188
- -------------------------------------------------------------------------------
Banks and Credit Companies - 0.8%
Banc One Corp. 200 $ 10,725
Wells Fargo & Co. 76 19,323
----------
$ 30,048
- -------------------------------------------------------------------------------
Building - 4.4%
Newport News Shipbuilding, Inc. 300 $ 5,813
Nortek, Inc.* 3,000 75,375
Walter Industries, Inc.* 5,000 90,937
----------
$ 172,125
- -------------------------------------------------------------------------------
Business Machines - 1.4%
Compaq Computer Corp.* 875 $ 57,313
- -------------------------------------------------------------------------------
Business Services - 0.6%
Temple-Inland, Inc. 340 $ 21,930
- -------------------------------------------------------------------------------
Chemicals - 2.9%
Ferro Corp. 740 $ 27,842
NL Industries, Inc. 6,500 86,125
----------
$ 113,967
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 0.5%
Adobe Systems, Inc. 475 $ 18,703
- -------------------------------------------------------------------------------
Computer Software - Systems - 2.0%
Computer Associates International, Inc. 510 $ 34,106
Sybase, Inc.* 400 7,450
Synopsys, Inc.* 1,100 38,088
----------
$ 79,644
- -------------------------------------------------------------------------------
Conglomerates - 1.8%
MAXXAM, Inc.* 1,300 $ 71,500
- -------------------------------------------------------------------------------
Consumer Goods and Services - 13.0%
Darling International, Inc.* 2,300 $ 64,400
Meyer Fred, Inc.* 770 40,040
Philip Morris Cos., Inc. 870 37,954
Thermadyne Industries Holdings Corp.* 4,000 124,000
Tyco International Ltd.* 2,598 203,780
Westpoint Stevens, Inc.* 1,100 44,000
----------
$ 514,174
- -------------------------------------------------------------------------------
Containers - 4.3%
Atlantis Plastics, Inc.* 5,500 $ 32,312
Gaylord Container Corp.* 10,000 94,375
Jefferson Smurfit Corp.* 920 17,883
Stone Container Corp. 1,400 24,150
----------
$ 168,720
- -------------------------------------------------------------------------------
Electrical Equipment - 0.2%
Belden, Inc. 200 $ 7,750
- -------------------------------------------------------------------------------
Electronics - 1.0%
Atmel Corp.* 200 $ 7,075
Intel Corp. 65 5,988
Sony Corp. 50 4,406
Teradyne, Inc.* 370 20,605
----------
$ 38,074
- -------------------------------------------------------------------------------
Entertainment - 3.0%
American Radio Systems Corp., "A"* 802 $ 39,498
Casino America, Inc.* 1,100 3,025
Harrah's Entertainment, Inc.* 1,600 35,900
LIN Television Corp.* 350 16,603
Sodak Gaming, Inc.* 1,700 23,163
----------
$ 118,189
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Donaldson Lufkin & Jenrette, Inc. 320 $ 19,000
Federal Home Loan Mortgage Corp. 460 14,979
Union Planters Corp. 200 10,250
----------
$ 44,229
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.5%
Smith's Food & Drug Centers, Inc., "B"* 1,120 $ 61,320
- -------------------------------------------------------------------------------
Insurance - 3.5%
Chubb Corp. 400 $ 26,750
CIGNA Corp. 120 22,005
Conseco, Inc. 650 27,950
Hartford Financial Services Group, Inc. 250 19,938
Lincoln National Corp. 300 20,081
Reliastar Financial Corp. 310 23,172
----------
$ 139,896
- -------------------------------------------------------------------------------
Machinery - 0.3%
Greenfield Industries, Inc. 400 $ 10,550
- -------------------------------------------------------------------------------
Medical and Health Products - 0.6%
Bristol-Myers Squibb Co. 300 $ 22,800
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 2.1%
Integrated Health Services, Inc. 560 $ 18,480
St. Jude Medical, Inc.* 490 18,651
Tenet Healthcare Corp.* 700 19,075
United Healthcare Corp. 530 25,771
----------
$ 81,977
- -------------------------------------------------------------------------------
Metals and Minerals - 1.4%
Commonwealth Industries, Inc. 3,000 $ 57,375
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Dawson Production Services, Inc.* 2,100 $ 39,375
- -------------------------------------------------------------------------------
Oils - 1.3%
Enron Oil & Gas Co. 1,000 $ 24,125
Texaco, Inc. 220 25,355
----------
$ 49,480
- -------------------------------------------------------------------------------
Photographic Products - 1.4%
Anacomp, Inc.* 3,725 $ 56,806
- -------------------------------------------------------------------------------
Pollution Control - 0.7%
Waste Management, Inc. 900 $ 28,800
- -------------------------------------------------------------------------------
Railroads - 0.9%
Wisconsin Central Transportation Corp.* 1,140 $ 35,340
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.2%
Hilton Hotels Corp. 640 $ 19,640
Promus Hotel Corp.* 2,800 108,675
----------
$ 128,315
- -------------------------------------------------------------------------------
Special Products and Services - 1.0%
Keystone International, Inc. 1,100 $ 41,456
- -------------------------------------------------------------------------------
Stores - 6.0%
Arbor Drugs, Inc. 300 $ 7,163
Carson Pirie Scott & Co.* 1,800 63,900
CVS Corp. 700 39,462
Gantos, Inc.* 15,000 35,625
Gymboree Corp.* 220 5,390
Phar Mor, Inc.* 5,700 42,394
Rite Aid Corp. 850 42,553
----------
$ 236,487
- -------------------------------------------------------------------------------
Supermarkets - 2.0%
Ingles Markets, Inc. 3,900 $ 52,162
Safeway, Inc.* 512 26,080
----------
$ 78,242
- -------------------------------------------------------------------------------
Telecommunications - 3.8%
Cellular Communications International* 2,600 $ 93,600
HSN, Inc.* 1,775 58,575
----------
$ 152,175
- -------------------------------------------------------------------------------
Utilities - Electric - 1.1%
El Paso Electric Co.* 6,800 $ 42,500
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.4%
Sprint Corp. 370 $ 17,390
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 3,023,673
- -------------------------------------------------------------------------------
Foreign Stocks - 9.7%
Canada - 2.4%
Canadian National Railway Co. (Railroads) 810 $ 40,247
Gulf Canada Resources Ltd. (Oil Services)* 7,000 56,438
----------
$ 96,685
- -------------------------------------------------------------------------------
Hong Kong - 0.8%
Semi-Tech (Global) Ltd. (Electronics)* 21,000 $ 31,436
- -------------------------------------------------------------------------------
Japan - 0.7%
Canon, Inc., ADR (Special Products and Services) 145 $ 20,173
Sony Corp. (Electronics) 100 8,707
----------
$ 28,880
- -------------------------------------------------------------------------------
Netherlands - 0.3%
Akzo Nobel (Chemicals) 70 $ 10,826
- -------------------------------------------------------------------------------
Portugal - 0.4%
Banco Totta E Acores (Financial Institutions) 800 $ 14,351
- -------------------------------------------------------------------------------
South Korea - 0.2%
SK Telecom Ltd, ADR (Telecommunications)* 800 $ 7,200
- -------------------------------------------------------------------------------
Sweden - 0.3%
Sparbanken Sverige AB (Banks and Credit Cos.) 500 $ 10,821
- -------------------------------------------------------------------------------
Switzerland - 0.9%
Novartis AG (Pharmaceuticals) 25 $ 35,305
- -------------------------------------------------------------------------------
United Kingdom - 3.7%
British Petroleum PLC, ADR (Oil and Gas) 422 $ 35,712
Central Transport Rental Group PLC, ADR (Special
Products and Services)* 48,187 33,129
Gallaher Group PLC, ADR
(Consumer Goods and Services)* 1,100 19,731
News Corp. Ltd., ADR (Entertainment) 2,900 43,863
Storehouse PLC (Retail)* 2,200 8,164
Tomkins PLC (Diversified Operations) 1,600 7,752
----------
$ 148,351
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 383,855
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,790,956) $3,407,528
- -------------------------------------------------------------------------------
Preferred Stock - 1.0%
- -------------------------------------------------------------------------------
Renaissance Cosmetics, Inc. (Consumer Goods and
Services)* 22 $ 18,040
Supermarkets General Holdings Corp. (Supermarkets)* 1,100 22,275
- -------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $47,819) $ 40,315
- -------------------------------------------------------------------------------
Warrants - 0.6%
- -------------------------------------------------------------------------------
Gothic Energy Corp.* 30,000 $ 21,563
Peoples Choice TV Corp.* 45 0
Renaissance Cosmetics, Inc.* 20 2,000
Semi Tech Global* 2,100 509
- -------------------------------------------------------------------------------
Total Warrants (Identified Cost, $21,666) $ 24,072
- -------------------------------------------------------------------------------
Bonds - 1.7%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Automotive - 0.5%
Harvard Industries, Inc., 11.125s, 2005 $ 45 $ 18,900
- -------------------------------------------------------------------------------
Entertainment - 0.1%
Marvel Holdings, Inc., 0s, 1998 $ 30 $ 4,200
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.7%
Santa Fe Hotel, Inc., 11s, 2000 $ 35 $ 28,525
- -------------------------------------------------------------------------------
Telecommunications - 0.4%
Peoples Choice TV Corp., 13.125s, 2004 $ 45 $ 15,188
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $65,666) $ 66,813
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.8%
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $150 $ 149,978
- -------------------------------------------------------------------------------
Put Options Purchased - 0.7%
- -------------------------------------------------------------------------------
NUMBER OF CONTRACTS
- -------------------------------------------------------------------------------
Standard & Poor Index 500 Put (Identified Cost, $38,812) 4 $ 28,650
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $3,114,897) $3,717,356
- -------------------------------------------------------------------------------
Securities Sold Short - (3.2)%
- --------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
Advanced Micro Devices, Inc.* (500) $ (18,719)
Arcadia Financial Ltd.* (1,800) (17,775)
Jayhawk Acceptance Corp.* (2,800) (3,325)
LCI International, Inc. (1,700) (40,800)
Station Casinos, Inc.* (2,300) (17,393)
Western Digital Corp.* (600) (28,875)
- -------------------------------------------------------------------------------
Total Securities Sold Short (Proceeds Received, $122,480) $ (126,887)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 9.2% 364,342
- -------------------------------------------------------------------------------
Net Assets - 100.0% $3,954,811
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS BLUE CHIP FUND
Stocks - 99.0%
- --------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 97.5%
Aerospace - 4.1%
General Dynamics Corp. 100 $ 7,963
Lockheed-Martin Corp. 150 15,553
United Technologies Corp. 80 6,245
----------
$ 29,761
- -------------------------------------------------------------------------------
Automotive - 1.0%
Goodrich (B.F.) Co. 170 $ 7,161
- -------------------------------------------------------------------------------
Banks and Credit Companies - 7.5%
Chase Manhattan Corp. 110 $ 12,231
Comerica, Inc. 145 10,268
Corestates Financial Corp. 140 8,610
National City Corp. 120 6,780
Norwest Corp. 120 6,892
U.S. Bancorp 110 9,632
----------
$ 54,413
- -------------------------------------------------------------------------------
Business Machines - 1.9%
International Business Machines Corp. 140 $ 14,122
- -------------------------------------------------------------------------------
Business Services - 3.3%
DST Systems, Inc.* 380 $ 13,751
First Data Corp. 250 10,266
----------
$ 24,017
- -------------------------------------------------------------------------------
Cellular Telephones - 1.0%
AirTouch Communications, Inc.* 220 $ 7,439
- -------------------------------------------------------------------------------
Chemicals - 3.3%
Air Products & Chemicals, Inc. 100 $ 8,156
Du Pont (E.I.) de Nemours & Co., Inc. 140 8,724
Praxair, Inc. 130 6,947
----------
$ 23,827
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 1.6%
Microsoft Corp.* 90 $ 11,897
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.7%
BMC Software, Inc.* 150 $ 9,393
Computer Associates International, Inc. 130 8,694
Oracle Systems Corp.* 240 9,150
----------
$ 27,237
- -------------------------------------------------------------------------------
Consumer Goods and Services - 11.0%
Avon Products, Inc. 100 $ 6,406
Colgate-Palmolive Co. 80 5,020
Gillette Co. 100 8,281
Philip Morris Cos., Inc. 330 14,396
Procter & Gamble Co. 70 9,315
Service Corp. International 300 9,600
Sherwin Williams Co. 200 5,488
Tyco International Ltd.* 275 21,570
----------
$ 80,076
- -------------------------------------------------------------------------------
Electrical Equipment - 3.2%
General Electric Co. 260 $ 16,250
Honeywell, Inc. 100 6,912
----------
$ 23,162
- -------------------------------------------------------------------------------
Electronics - 1.3%
Intel Corp. 100 $ 9,213
- -------------------------------------------------------------------------------
Financial Institutions - 1.1%
Federal Home Loan Mortgage Corp. 235 $ 7,652
- -------------------------------------------------------------------------------
Food and Beverage Products - 8.3%
Coca-Cola Co. 140 $ 8,024
CPC International, Inc. 80 7,130
Hershey Foods Corp. 130 6,939
Interstate Bakeries Corp. 125 7,328
McCormick & Co., Inc. 330 7,796
Nabisco Holdings Corp. 170 7,055
PepsiCo, Inc. 190 6,840
Ralston-Ralston Purina Co. 100 9,000
----------
$ 60,112
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Kimberly-Clark Corp. 120 $ 5,693
- -------------------------------------------------------------------------------
Insurance - 8.0%
Allstate Corp. 140 $ 10,229
CIGNA Corp. 60 11,002
Hartford Financial Services Group, Inc. 120 9,570
MBIA, Inc. 100 11,325
Progressive Corp. 80 7,920
Torchmark Corp. 220 8,291
----------
$ 58,337
- -------------------------------------------------------------------------------
Medical and Health Products - 9.0%
American Home Products Corp. 120 $ 8,640
Bristol-Myers Squibb Co. 140 10,640
Johnson & Johnson 200 11,338
Lilly (Eli) & Co. 80 8,370
Merck & Co., Inc. 100 9,181
Pfizer, Inc. 310 17,166
----------
$ 65,335
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 3.0%
Cardinal Health, Inc. 100 $ 6,625
HEALTHSOUTH Corp.* 300 7,481
United Healthcare Corp. 160 7,780
----------
$ 21,886
- -------------------------------------------------------------------------------
Oil Services - 1.0%
Schlumberger Ltd. 100 $ 7,619
- -------------------------------------------------------------------------------
Oils - 6.1%
Chevron Corp. 100 $ 7,744
Exxon Corp. 320 19,580
Mobil Corp. 140 10,185
Texaco, Inc. 60 6,915
----------
$ 44,424
- -------------------------------------------------------------------------------
Railroads - 1.3%
Burlington Northern Santa Fe 100 $ 9,169
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.5%
HFS, Inc.* 200 $ 11,138
- -------------------------------------------------------------------------------
Stores - 2.4%
CVS Corp. 100 $ 5,637
Rite Aid Corp. 240 12,015
----------
$ 17,652
- -------------------------------------------------------------------------------
Supermarkets - 3.4%
Kroger Co.* 480 $ 14,460
Safeway, Inc.* 200 10,187
----------
$ 24,647
- -------------------------------------------------------------------------------
Utilities - Electric - 3.3%
Cinergy Corp. 210 $ 6,943
CMS Energy Corp. 160 5,750
Pinnacle West Capital Corp. 170 5,493
Public Service Co. of New Mexico 300 5,475
----------
$ 23,661
- -------------------------------------------------------------------------------
Utilities - Gas - 2.6%
Columbia Gas System, Inc. 110 $ 7,260
Pacific Enterprises 180 5,929
Union Pacific Resources Group, Inc. 220 5,500
----------
$ 18,689
- -------------------------------------------------------------------------------
Utilities - Telephone - 2.8%
BellSouth Corp. 155 $ 6,820
SBC Communications, Inc. 125 6,797
Sprint Corp. 150 7,050
----------
$ 20,667
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 709,006
- -------------------------------------------------------------------------------
Foreign Stocks - 1.5%
United Kingdom - 1.5%
British Petroleum PLC, ADR (Oil and Gas)
(Identified Cost, $9,035) 131 $ 11,086
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $624,151) $ 720,092
Other Assets, Less Liabilities - 1.0% 7,397
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 727,489
- -------------------------------------------------------------------------------
* Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS CONVERTIBLE SECURITIES FUND
Convertible Preferred Stocks - 50.8%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
Aerospace - 0.8%
Loral Space & Communications Corp., 6s## 100 $ 5,350
- -------------------------------------------------------------------------------
Airlines - 0.6%
Continental Airlines Finance Trust, 8.5s 50 $ 4,100
- -------------------------------------------------------------------------------
Chemicals - 0.4%
Atlantic Richfield Co., 9.01s 120 $ 2,850
- -------------------------------------------------------------------------------
Computer Software - Systems - 0.4%
Wang Labs, Inc., 6.5s*## 50 $ 2,494
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.6%
Corning Delaware L.P., 6s 200 $ 16,600
- -------------------------------------------------------------------------------
Entertainment - 6.3%
American Radio Systems Corp., 7s*## 225 $ 14,681
Golden Books Financing Trust, 8.75s*## 200 10,500
Houston Industries, Inc./Time Warner, 7s* 100 5,075
Royal Caribbean Cruises Ltd., 7.25s 150 10,238
----------
$ 40,494
- -------------------------------------------------------------------------------
Financial Institutions - 8.6%
Finova Finance Trust, 5.5s, 2016 250 $ 15,500
Jefferson Pilot Corp., 7.25s, 2000 100 10,513
Merrill Lynch/MGIC Investment Corp., 6.5s 150 12,975
Merrill Lynch/IMC Global, 6.25s 150 5,606
Salomon/Financial Security Insurance, 7.625s 300 10,575
----------
$ 55,169
- -------------------------------------------------------------------------------
Food - 0.9%
Ralston Purina Interstate Bakeries, 7s* 100 $ 5,956
- -------------------------------------------------------------------------------
Food and Beverage Products - 2.5%
Dole Food, 7s 425 $ 16,150
- -------------------------------------------------------------------------------
Forest and Paper Products - 1.4%
International Paper Capital Trust, 5.25s 150 $ 8,775
- -------------------------------------------------------------------------------
Insurance - 5.9%
American Heritage Life Investment, 8.5s* 100 $ 5,950
Conseco, Inc., 7s 100 14,556
Frontier Financing Trust, 6.25s*## 100 8,025
SunAmerica, Inc., $3.188 150 6,647
SunAmerica, Inc., $3.10 25 2,875
----------
$ 38,053
- -------------------------------------------------------------------------------
Machinery & Tools - 1.8%
Greenfield Capital Trust, 6s, 2016* 250 $ 11,812
- -------------------------------------------------------------------------------
Medical Equipment - 1.1%
McKesson Financing Trust, 5s## 100 $ 6,875
- -------------------------------------------------------------------------------
Metals and Minerals - 1.7%
Timet Capital Trust, 6.625s*## 100 $ 5,913
USX Marathon/RMI Titanium, 6.75s* 200 5,050
----------
$ 10,963
- -------------------------------------------------------------------------------
Oil & Gas - 1.9%
Tosco Financing Trust, 5.75s## 200 $ 12,000
- -------------------------------------------------------------------------------
Pollution Control - 2.6%
Browning Ferris Industries, Inc., 7.25s 500 $ 16,531
- -------------------------------------------------------------------------------
Restaurants and Lodging - 3.3%
Hilton Hotels Corp., 8s 100 $ 2,800
Host Marriott Financial Trust, 6.75s*## 300 18,450
----------
$ 21,250
- -------------------------------------------------------------------------------
Steel - 0.5%
AK Steel Holding Corp., 7s 75 $ 2,962
- -------------------------------------------------------------------------------
Stores - 1.6%
AnnTaylor Finance Trust, 8.5s*# 75 $ 4,406
K-Mart Financing I, 7.75s 100 5,894
----------
$ 10,300
- -------------------------------------------------------------------------------
Telecommunications - 1.0%
Intermedia Communication, Inc., 7s*## 100 $ 2,700
IXC Communications Inc., 7.25s*## 20 2,570
Qualcomm Financial Trust, 5.75s*## 25 1,116
----------
$ 6,386
- -------------------------------------------------------------------------------
Transportation - 0.6%
Hvide Capital Trust, 6.5s *## 60 $ 3,803
- -------------------------------------------------------------------------------
Utilities - Electric - 1.8%
Calenergy Capital Trust III, 6.5s*## 250 $ 11,750
- -------------------------------------------------------------------------------
Utilities - Gas - 0.9%
Enron Corp., 6.25s 250 $ 5,734
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
Salomon/Cincinnati Bell, 6.25s 175 $ 9,734
- -------------------------------------------------------------------------------
Total Convertible Preferred Stocks
(Identified Cost, $292,959) $ 326,091
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 Omitted)
- -------------------------------------------------------------------------------
Convertible Bonds - 27.5%
- --------------------------------------------------------------------------------
Aerospace - 1.4%
Hexcel Corp., 7s, 2003 $ 5 $ 9,287
- -------------------------------------------------------------------------------
Building - 0.3%
Continental Homes Holding Corp., 6.875s, 2002 $ 2 $ 2,248
- -------------------------------------------------------------------------------
Business Services - 1.6%
Protection One Alarm Monitoring, 6.75s, 2003 $ 9 $ 10,114
- -------------------------------------------------------------------------------
Computer Software - Systems - 3.9%
Adaptec, Inc., 4.75s, 2004## $ 8 $ 9,240
Data General Corp., 6s, 2004## 6 9,413
Read Rite Corp., 6.5s, 2004 3 3,135
Wind River Systems Inc., 5s, 2002## 3 3,386
----------
$ 25,174
- -------------------------------------------------------------------------------
Electronics - 3.9%
Cymer, Inc., 3.5s (7.25s, 8/1/00), 2004## $ 6 $ 7,162
Photronics, Inc., 6s, 2004 2 2,545
Solectron Corp., 6s, 2006## 3 4,196
Xilinx, Inc., 5.25s, 2002## 10 11,225
----------
$ 25,128
- -------------------------------------------------------------------------------
Medical and Health Products - 0.3%
North American Vaccine, Inc., 6.5s, 2003## $ 2 $ 1,843
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 1.4%
FPA Medical Management, Inc., 6.5s, 2001## $ 5 $ 6,675
Healthsource, Inc., 5s, 2003 2 2,010
----------
$ 8,685
- -------------------------------------------------------------------------------
Oil Services - 3.9%
Diamond Offshore Drilling, Inc., 3.75s, 2007 $ 5 $ 6,525
Nabors Industries, Inc., 5s, 2006 3 6,015
Parker Drilling Co., 5.5s, 2004 6 6,540
Pogo Producing Co., 5.5s, 2006 5 5,906
----------
$ 24,986
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.5%
Dura Pharmaceuticals Inc., 3.5s, 2002 $ 3 $ 2,921
- -------------------------------------------------------------------------------
Pollution Control - 3.7%
Sanifill, Inc., 5s, 2006 $ 5 $ 7,856
U.S. Filter Corp., 6s, 2005 5 10,075
USA Waste Services, Inc., 4s, 2002 5 5,700
----------
$ 23,631
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.9%
Hilton Hotels Corp., 5s, 2006 $ 5 $ 5,675
- -------------------------------------------------------------------------------
Special Products and Services - 3.6%
Corporate Express, Inc., 4.5s, 2000 $ 10 $ 9,150
Personnel Group Of America Inc., 5.75s, 2004## 6 7,088
Sunrise Assisted Living Inc., 5.5s, 2002## 3 3,210
United States Office Products Company, 5.5s, 2001 3 3,697
----------
$ 23,145
- -------------------------------------------------------------------------------
Stores - 2.1%
Home Depot, Inc., 3.25s, 2001 $ 5 $ 5,800
Office Depot, Inc., 0s, 2008 5 2,988
Saks Holdings, Inc., 5.5s, 2006 5 4,337
----------
$ 13,125
- -------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $152,930) $ 175,962
- -------------------------------------------------------------------------------
Stocks - 14.4%
- -------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------
U.S. Stocks - 12.8%
Aerospace - 0.6%
United Technologies Corp. 50 $ 3,903
- -------------------------------------------------------------------------------
Building - 0.7%
Newport News Shipbuilding, Inc. 220 $ 4,263
- -------------------------------------------------------------------------------
Chemicals - 0.2%
Du Pont (E.I.) de Nemours & Co., Inc. 25 $ 1,558
- -------------------------------------------------------------------------------
Consumer Goods and Services - 2.5%
Colgate-Palmolive Co. 60 $ 3,765
Gillette Co. 60 4,969
Procter & Gamble Co. 25 3,326
Tyco International Ltd.* 48 3,765
----------
$ 15,825
- -------------------------------------------------------------------------------
Electrical Equipment - 0.4%
General Electric Co. 40 $ 2,500
- -------------------------------------------------------------------------------
Electronics - 1.1%
Intel Corp. 20 $ 1,843
Solectron Corporation* 50 2,094
Sony Corp. 35 3,084
----------
$ 7,021
- -------------------------------------------------------------------------------
Insurance - 0.6%
Hartford Life, Inc., "A"* 100 $ 3,731
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Bristol-Myers Squibb Co. 75 $ 5,700
Johnson & Johnson 50 2,835
McKesson Corp. 25 2,342
----------
$ 10,877
- -------------------------------------------------------------------------------
Oils - 0.7%
Devon Energy Corp. 100 $ 4,269
- -------------------------------------------------------------------------------
Pollution Control - 0.8%
Browning Ferris Industries, Inc. 100 $ 3,494
U.S. Filter Corp.* 50 1,800
----------
$ 5,294
- -------------------------------------------------------------------------------
Restaurants and Lodging - 0.2%
Hilton Hotels Corp. 50 $ 1,534
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
Stanley Works 100 $ 4,256
- -------------------------------------------------------------------------------
Stores - 0.6%
Rite Aid Corp. 75 $ 3,755
- -------------------------------------------------------------------------------
Telecommunications - 2.0%
IXC Communications Inc.* 50 $ 1,350
Lucent Technologies, Inc. 100 7,787
Qwest Communications International, Inc.* 100 4,075
----------
$ 13,212
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 81,998
- -------------------------------------------------------------------------------
Foreign Stocks - 1.6%
Sweden - 0.2%
Skandia Foersaekrings AB (Insurance) 40 $ 1,544
- -------------------------------------------------------------------------------
Switzerland - 0.7%
Novartis AG (Pharmaceuticals) 3 $ 4,237
- -------------------------------------------------------------------------------
United Kingdom - 0.7%
British Petroleum PLC, ADR (Oil and Gas) 50 $ 4,231
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 10,012
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $77,794) $ 92,010
- -------------------------------------------------------------------------------
Foreign Preferred Stocks - 1.6%
- -------------------------------------------------------------------------------
Australia - 1.6%
National Australia Bank Ltd., 7.875s Capital Unit
Exchangeable 350 $ 9,997
- -------------------------------------------------------------------------------
Total Foreign Preferred Stocks (Identified Cost, $8,750) $ 9,997
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.1%
- -------------------------------------------------------------------------------
<PAGE>
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost$ 20 $ 19,997
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $552,430) $ 624,057
Other Assets, Less Liabilities - 2.6% 16,470
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 640,527
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS NEW DISCOVERY FUND
Stocks - 94.6%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 93.8%
Aerospace - 1.0%
Fairchild Corp.* 1,000 $ 21,063
- -------------------------------------------------------------------------------
Airlines - 0.5%
Atlas Air, Inc.* 400 $ 11,100
- -------------------------------------------------------------------------------
Business Machines - 2.3%
Affiliated Computer Services, Inc., "A"* 1,750 $ 45,937
- -------------------------------------------------------------------------------
Business Services - 17.8%
AccuStaff, Inc.* 1,500 $ 39,844
BDM International, Inc.* 500 12,625
BISYS Group, Inc.* 500 16,875
Claremont Technology Group, Inc.* 400 7,100
Comdisco, Inc. 450 12,234
Corporate Family Solutions, Inc.* 100 1,500
Dendrite International, Inc.* 600 11,325
Diamond Offshore Drilling, Inc. 300 16,388
Diamond Technology Partner, Inc.* 600 9,225
DST Systems, Inc.* 100 3,619
Fine Host Corp.* 200 6,950
First USA Paymentech, Inc.* 700 21,262
Interim Services, Inc.* 700 34,562
Learning Tree International, Inc.* 750 20,625
May and Speh, Inc.* 1,300 16,575
Mecon, Inc.* 3,000 15,000
NOVA Corp.* 1,000 25,375
Personnel Group of America, Inc.* 300 10,050
PMT Services, Inc.* 1,100 18,563
Robert Half International, Inc.* 200 11,675
Staff Leasing, Inc.* 100 1,975
Technology Solutions Co.* 525 12,206
TeleSpectrum Worldwide, Inc.* 2,100 9,581
Teletech Holdings, Inc.* 900 14,737
Transaction System Architects, Inc.* 300 10,388
----------
$ 360,259
- -------------------------------------------------------------------------------
Computer Software - Systems - 16.1%
Aehr Test Systems* 100 $ 1,750
American Business Information, Inc.* 500 13,687
Aspen Technology, Inc.* 300 10,238
Black Box Corp.* 220 8,003
Cadence Design Systems, Inc.* 685 32,580
Compuware Corp.* 450 27,787
Daou Systems, Inc.* 400 9,500
Data Systems Network Corp.* 2,500 39,062
Fair, Isaac & Co., Inc. 200 8,438
IKOS Systems, Inc.* 1,300 19,256
Intelligroup, Inc.* 100 1,488
Metromail Corp.* 700 15,225
Peerless Systems Corp.* 900 13,163
RWD Technologies, Inc.* 100 1,925
Simulation Sciences, Inc.* 2,100 29,662
Smart Modular Technologies, Inc.* 500 29,500
Summit Design, Inc.* 2,700 32,400
Synopsys, Inc.* 200 6,925
USCS International, Inc.* 650 11,619
Vantive Corp.* 200 6,100
Xionics Document Technologies, Inc.* 650 8,775
----------
$ 327,083
- -------------------------------------------------------------------------------
Consumer Goods and Services - 4.9%
Alternative Resources Corp.* 1,000 $ 22,375
Ballantyne of Omaha, Inc.* 800 15,600
Blyth Industries, Inc.* 100 3,694
Cole National Corp.* 100 4,456
Meta Group, Inc.* 400 8,350
Schweitzer-Mauduit International, Inc. 450 18,000
Silgan Holdings, Inc.* 650 26,650
----------
$ 99,125
- -------------------------------------------------------------------------------
Containers - 2.4%
AptarGroup, Inc. 200 $ 11,250
Gaylord Container Corp.* 1,900 17,931
Stone Container Corp. 1,100 18,975
----------
$ 48,156
- -------------------------------------------------------------------------------
Electrical Equipment - 1.3%
AFC Cable Systems, Inc.* 600 $ 18,000
QLogic Corp.* 200 7,850
----------
$ 25,850
- -------------------------------------------------------------------------------
Electronics - 5.5%
Actel Corp.* 600 $ 12,188
Burr Brown* 550 19,525
DuPont Photomasks, Inc.* 200 13,100
International Rectifier Corp.* 600 13,687
Microchip Technology, Inc.* 300 12,131
Photronic, Inc.* 100 5,900
PMC Sierra, Inc.* 700 20,081
SDL, Inc.* 900 15,975
----------
$ 112,587
- -------------------------------------------------------------------------------
Entertainment - 5.7%
American Radio Systems Corp., "A"* 300 $ 14,775
Cox Radio, Inc.* 900 24,075
Gemstar Group Ltd.* 1,100 22,550
Heftel Broadcasting Corp.* 200 12,400
Jacor Communications, Inc., "A"* 500 22,000
LIN Television Corp.* 400 18,975
----------
$ 114,775
- -------------------------------------------------------------------------------
Financial Institutions - 2.7%
BA Merchants Services, Inc.* 500 $ 9,156
Financial Federal Corp.* 900 14,119
Franklin Resources, Inc. 350 27,081
TCF Financial Corp. 100 5,331
----------
$ 55,687
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.2%
Smith's Food & Drug Centers, Inc., "B"* 150 $ 8,212
Suiza Foods Corp.* 400 16,500
----------
$ 24,712
- -------------------------------------------------------------------------------
Insurance - 2.7%
CapMAC Holdings, Inc. 300 $ 8,325
Compdent Corp.* 500 12,125
Equitable of Iowa Cos. 150 9,769
Hartford Life, Inc.,"A" 100 3,731
Life Re Corp. 400 20,525
----------
$ 54,475
- -------------------------------------------------------------------------------
Machinery - 1.4%
Greenfield Industries, Inc. 200 $ 5,275
Hirsch International Group* 900 22,950
----------
$ 28,225
- -------------------------------------------------------------------------------
Medical and Health Products - 1.7%
Phycor, Inc.* 150 $ 4,416
Rexall Sundown, Inc.* 500 17,375
Steris Corp.* 350 13,125
----------
$ 34,916
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 9.1%
AmeriSource Health Corp., "A"* 200 $ 10,013
CRA Managed Care, Inc.* 200 11,100
HCIA, Inc.* 700 10,850
Hologic, Inc.* 650 15,762
IDEXX Labs, Inc.* 1,300 24,456
IDX Systems Corp.* 300 10,163
NCS Healthcare, Inc.* 200 4,925
Orthalliance, Inc.* 100 1,388
Orthodontic Centers America, Inc.* 200 3,425
Physician Sales and Service, Inc.* 200 3,400
Physician Support Systems, Inc.* 1,200 20,250
Quorum Health Group, Inc.* 250 8,516
Renal Treatment Centers, Inc.* 500 16,937
Total Renal Care Holdings, Inc.* 300 13,725
United Dental Care, Inc.* 1,300 22,912
United Payors & United Providers, Inc.* 400 5,900
----------
$ 183,722
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Hanover Compressor* 100 2,363
----------
$ 5,763
- -------------------------------------------------------------------------------
Oils - 0.2%
Santa Fe International Corp.* 100 $ 4,475
- -------------------------------------------------------------------------------
Pharmaceuticals - 0.3%
Kos Pharmaceuticals, Inc.* 200 $ 6,900
- -------------------------------------------------------------------------------
Printing and Publishing - 1.0%
Applied Graphics Technologies* 500 $ 20,625
- -------------------------------------------------------------------------------
Restaurants and Lodging - 5.2%
Capstar Hotel Co.* 300 $ 9,825
Doubletree Corp.* 250 12,500
HFS, Inc.* 500 27,844
Interstate Hotels Co.* 750 21,469
Prime Hospitality Corp.* 850 16,150
Promus Hotel Corp.* 200 7,762
Roadhouse Grill, Inc.* 1,400 7,525
Trendwest Resorts, Inc.* 100 1,825
----------
$ 104,900
- -------------------------------------------------------------------------------
Special Products and Services - 0.7%
CHS Electronics, Inc.* 100 $ 3,863
Equity Corp. International* 450 10,378
----------
$ 14,241
- -------------------------------------------------------------------------------
Stores - 4.7%
AnnTaylor Stores Corp.* 500 $ 8,563
Corporate Express, Inc.* 600 10,237
CVS Corp. 400 22,550
Gymboree Corp.* 450 11,025
Mazel Stores, Inc.* 300 6,375
Petco Animal Supplies, Inc.* 400 11,850
PETsMART, Inc.* 600 5,138
U.S. Office Products Co.* 300 9,825
Viking Office Products, Inc.* 500 10,562
----------
$ 96,125
- -------------------------------------------------------------------------------
Telecommunications - 4.4%
APAC Teleservices, Inc.* 600 $ 9,900
Aspect Telecommunications Corp.* 1,800 39,600
Cable Design Technologies Corp.* 400 13,375
Intermedia Communications, Inc.* 400 14,300
Transaction Network Services, Inc.* 600 8,625
VDI Media* 300 4,275
----------
$ 90,075
- -------------------------------------------------------------------------------
Transportation - 0.1%
Carey International, Inc.* 100 $ 1,388
- -------------------------------------------------------------------------------
Utilities - Telephone - 0.6%
Brooks Fiber Properties, Inc.* 350 $ 11,769
- -------------------------------------------------------------------------------
Total U.S. Stocks $1,903,933
- -------------------------------------------------------------------------------
Foreign Stocks - 0.8%
Ireland - 0.1%
Warner Chilcott Laboratories* 100 $ 1,850
- -------------------------------------------------------------------------------
Mexico - 0.1%
TV Azteca, S.A. de C V (Broadcasting)* 100 $ 1,800
- -------------------------------------------------------------------------------
United Kingdom - 0.6%
News Corp. Ltd., ADR (Entertainment) 900 $ 13,612
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 17,262
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,742,794) $1,921,195
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.7%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97,
at Amortized Cost $ 75 $ 74,989
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,817,783) $1,996,184
Other Assets, Less Liabilities - 1.7% 33,679
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,029,863
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS RESEARCH INTERNATIONAL FUND
Stocks - 97.1%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 2.6%
Agricultural Products - 1.1%
AGCO Corp. 760 $ 24,700
- -------------------------------------------------------------------------------
Insurance - 0.5%
Equitable of Iowa Cos. 190 $ 12,374
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.0%
MCI Communications Corp. 865 $ 24,652
- -------------------------------------------------------------------------------
Total U.S. Stocks $ 61,726
- -------------------------------------------------------------------------------
Foreign Stocks - 94.5%
Australia - 1.3%
Q.B.E. Insurance Group Ltd. (Insurance) 5,805 $ 31,338
- -------------------------------------------------------------------------------
Brazil - 0.8%
Telecomunicacoes Brasileiras SA, ADR
(Telecommunications) 152 $ 17,936
- -------------------------------------------------------------------------------
Canada - 1.6%
Canadian National Railway Co. (Railroads) 773 $ 38,408
- -------------------------------------------------------------------------------
Chile - 1.0%
Chilectra SA, ADR (Utilities - Electric) 785 $ 24,224
- -------------------------------------------------------------------------------
China - 0.4%
China Southern Airlines Ltd. (Airlines) 300 $ 9,431
- -------------------------------------------------------------------------------
Czech Republic - 1.1%
Tabak (Tobacco) 100 $ 25,187
- -------------------------------------------------------------------------------
Finland - 0.9%
Huhtamaki Oy Group (Food Company) 230 $ 9,081
TT Tieto Oy (Computer Software - Systems) 135 12,122
----------
$ 21,203
- -------------------------------------------------------------------------------
France - 5.2%
Chargeurs SA (Apparels and Textiles) 250 $ 14,779
Rhone-Poulenc SA (Pharmaceuticals)* 786 28,756
Societe Nationale Elf Aquitaine (Oils) 330 36,577
Televison Francaise (Broadcasting) 270 21,946
Union des Assurances Federales SA (Insurance) 190 19,655
----------
$ 121,713
- -------------------------------------------------------------------------------
Germany - 3.7%
Adidas AG (Apparel and Textiles) 96 $ 11,537
Henkel Kgaa (Consumer Goods and Services) 538 27,081
Phoenix AG (Auto Parts) 1,225 21,322
Prosieben Media AG (Broadcasting) 200 9,029
SAP AG, Preferred (Computer Software - Systems) 79 18,028
----------
$ 86,997
- -------------------------------------------------------------------------------
Greece - 2.1%
Athens Medical Care SA (Medical and Health Technology
and Services) 1,800 $ 17,260
Hellenic Telecommunication Organization SA
(Telecommunications) 880 19,520
Papastratos Cigarettes SA (Consumer Goods and
Services) 660 11,232
----------
$ 48,012
- -------------------------------------------------------------------------------
Hong Kong - 8.9%
Asia Satellite Telecommunications Holdings Ltd.
(Telecommunications)* 9,000 $ 25,087
Citic Pacific Ltd. (Conglomerates) 5,000 26,649
Dah Sing Financial Group (Banks and Credit Cos.) 2,600 $ 10,871
Hong Kong Electric Holdings Ltd. (Utilities -
Electric) 8,000 27,978
Hutchison Whampoa (Real Estate) 1,000 8,324
Ka Wah Bank (Bank and Credit Cos.) 1,000 2,446
Li & Fung Ltd. (Wholesale) 36,000 36,701
Liu Chong Hing Bank (Banks and Credit Cos.) 3,000 7,994
Vanda Systems & Communication Holdings Ltd.
(Computers Software - Systems) 44,000 24,984
Wharf Holdings Ltd. (Real Estate) 6,000 21,719
Wing Hang Bank Ltd. (Banks and Credit Cos.) 3,600 15,331
----------
$ 208,084
- -------------------------------------------------------------------------------
Indonesia - 0.5%
PT Indosat (Telecommunications) 500 $ 1,031
PT Indosat, ADR (Telecommunications) 270 5,856
PT Semen Gresik (Building Materials) 4,500 4,639
----------
$ 11,526
- -------------------------------------------------------------------------------
Ireland - 2.4%
Allied Irish Banks (Banks and Credit Cos.) 2,486 $ 20,989
Anglo Irish Bank Corp. (Banks and Credit Cos.) 16,800 23,957
Smurfit Jefferson (Paper/Plastic) 3,700 12,292
----------
$ 57,238
- -------------------------------------------------------------------------------
Italy - 3.3%
Gucci Group Designs NV (Apparel and Textiles) 304 $ 18,506
INA - Instituto Nazionale delle Assicurazioni
(Insurance) 8,225 11,980
Industrie Natuzzi S.P.A., ADR (Consumer Goods and
Services) 974 26,785
Telecom Italia S.P.A., Saving Shares
(Telecommunications) 12,235 20,416
----------
$ 77,687
- -------------------------------------------------------------------------------
Japan - 23.4%
Bank of Tokyo Mitsubishi (Banks and Credit Cos.) 1,000 $ 18,159
Bridgestone Corp. (Tire and Rubber) 1,000 22,139
Canon, Inc. (Special Products and Services) 2,000 55,224
DDI Corp. (Telecommunications) 3 15,672
Fuji Photo Film Co Ltd., ADR (Photographic Products) 600 22,950
Fujimi Inc. (Distribution Wholesale) 400 22,388
Hirose Electric Co. (Electronics) 100 7,007
Jusco Co. (Retail) 1,000 26,700
Keyence Corp. (Electronics) 110 16,053
Kinki Coca-Cola Bottling Co. (Beverages) 1,000 12,438
Kirin Beverage Corp. (Beverages) 2,000 32,338
Nippon Broadcasting (Broadcasting) 1,000 73,880
Nippon Telephone & Telegraph Co. (Utilities -
Telephone) 2 18,740
Osaka Sanso Kogyo Ltd. (Chemicals) 4,000 8,458
Secom Co. (Consumer Goods and Services) 1,000 71,061
Sony Corp. (Electronics) 300 26,119
Takeda Chemical Industries (Pharmaceuticals) 1,000 26,617
TDK Corp., ADR (Electronics) 680 52,955
Terumo Corp. (Computers) 1,000 18,242
----------
$ 547,140
- -------------------------------------------------------------------------------
Malaysia - 0.2%
UMW Holdings Berhad (Automobiles) 2,000 $ 5,377
- -------------------------------------------------------------------------------
Mexico - 1.0%
Companhia Cerveja Ria Brahma (Broadcasting) 1,400 $ 18,988
TV Azteca SA De CV (Television) 300 5,400
----------
$ 24,388
- -------------------------------------------------------------------------------
Netherlands - 5.1%
Ahrend Kon (Office Furnishers) 630 $ 20,557
Akzo Nobel (Chemicals) 160 24,746
Brunel International NV (Human Resources) 300 6,183
Computer Services (Computers) 2,000 19,038
Fugro NV (Engineering) 100 3,410
Philips Electronics NV (Manufacturing) 260 18,460
Royal Dutch Petroleum (Oils) 544 27,547
----------
$ 119,941
- -------------------------------------------------------------------------------
Peru - 0.9%
Telefonica del Peru SA, ADR (Telecommunications) 870 $ 20,336
- -------------------------------------------------------------------------------
Philippines - 0.2%
Alsons Cement Corp. (Building Materials)*## 41,500 $ 3,860
- -------------------------------------------------------------------------------
Poland - 0.3%
Bank Handlowy Warsza (Banks and Credit Cos.)+ 200 $ 2,525
Kghm Polska Miedz SA (Diversified - Metals)## 400 4,884
----------
$ 7,409
- -------------------------------------------------------------------------------
Portugal - 2.3%
Banco Espirito Santo e Comercial de Lisboa SA (Banks
and Credit Cos.) 500 $ 12,268
Banco Totta E Acores (Financial Institutions) 1,275 22,872
Telecel - Comunicacaoes Pessoais SA
(Telecommunication) 240 17,457
----------
$ 52,597
- -------------------------------------------------------------------------------
Singapore - 2.7%
City Developments Ltd. (Real Estate) 2,000 $ 12,637
Hong Leong Finance Ltd. (Finance)+ 3,000 5,855
Mandarin Oriental International, Ltd.
(Restaurants and Lodgings) 27,000 30,240
Singapore Land Ltd. (Conglomerates) 3,000 13,298
----------
$ 62,030
- -------------------------------------------------------------------------------
Spain - 1.0%
Abengoa SA (Construction)* 300 $ 13,260
Acerinox SA (Iron and Steel) 64 10,507
----------
$ 23,767
- -------------------------------------------------------------------------------
Sweden - 3.1%
Astra AB (Pharmaceuticals) 1,053 $ 16,726
Skandia Foersaekrings AB (Insurance) 705 27,214
Sparbanken Sverige AB (Banks and Credit Cos.) 1,271 27,508
----------
$ 71,448
- -------------------------------------------------------------------------------
Switzerland - 3.5%
Kuoni Reisen Holdings AG (Transportation) 9 $ 36,930
Novartis AG (Pharmaceuticals) 31 43,778
----------
$ 80,708
- -------------------------------------------------------------------------------
Taiwan - 1.6%
ASE Test Limited (Electronics) 500 $ 36,500
- -------------------------------------------------------------------------------
United Kingdom - 15.1%
ASDA Group PLC (Supermarkets) 9,401 $ 21,937
Bank of Scotland (Banks and Credit Cos.) 1,700 11,433
British Aerospace PLC (Aerospace and Defense) 1,486 34,772
British Petroleum PLC (Oil and Gas) 2,155 30,103
Carlton Communicatons PLC (Broadcasting) 2,660 21,165
Corporate Services Group (Business Services) 5,200 16,348
Grand Metropolitan (Food and Beverage Products) 2,910 26,714
Jarvis Hotels PLC (Restaurants and Lodging)*+ 10,900 27,378
JBA Holdings Diversified Operations) 900 12,397
Kwik-Fit Holdings PLC (Retail) 7,704 37,453
Lloyds TSB Group PLC (Banks and Credit Cos.) 2,382 27,445
PowerGen PLC (Utilities - Electric)* 2,113 26,708
Storehouse PLC (Retail)* 6,100 22,637
Tomkins PLC (Diversified Operations) 5,100 24,711
Williams Holdings (Diversified Operations) 2,200 12,424
----------
$ 353,625
- -------------------------------------------------------------------------------
Venezuela - 0.9%
Compania Anonima Nacional Telefonos de Venezuela, ADR
(Telecommunications)* 509 $ 20,996
- -------------------------------------------------------------------------------
Total Foreign Stocks $2,209,106
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,318,693) $2,270,832
- -------------------------------------------------------------------------------
Short-Term Obligations - 2.6%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 60 $ 59,991
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,378,684) $2,330,823
Other Assets, Less Liabilities - 0.3% 5,265
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,336,088
- -------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+Restricted security.
See notes to financial statements
<PAGE>
PORTFOLIO OF INVESTMENTS - August 31, 1997
MFS SCIENCE AND TECHNOLOGY FUND
Stocks - 88.4%
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
U.S. Stocks - 85.2%
Apparel and Textiles - 0.1%
Polo Ralph Lauren Corp.* 100 $ 2,625
- -------------------------------------------------------------------------------
Business Machines - 5.4%
Affiliated Computer Services, Inc., "A"* 1,880 $ 49,350
Compaq Computer Corp.* 200 13,100
Silicon Graphics, Inc.* 500 13,719
Sun Microsystems, Inc.* 1,240 59,520
----------
$ 135,689
- -------------------------------------------------------------------------------
Business Services - 6.1%
AccuStaff, Inc.* 2,180 $ 57,906
First Data Corp. 780 32,029
First USA Paymentech, Inc.* 1,320 40,095
Galieo International, Inc.* 100 2,644
Hall Kinion & Associates, Inc.* 100 2,137
Lamalie Associates, Inc.* 100 1,900
Teletech Holdings, Inc.* 1,000 16,375
----------
$ 153,086
- -------------------------------------------------------------------------------
Computer Software - Personal Computers - 14.0%
Activision, Inc.* 1,500 $ 19,500
Adobe Systems, Inc. 1,165 45,872
Autodesk, Inc.* 1,710 74,812
Electronic Arts, Inc.* 1,200 36,975
Microsoft Corp.* 1,000 132,187
Midway Games, Inc.* 960 20,280
Spectrum Holobyte, Inc.* 4,600 22,138
----------
$ 351,764
- -------------------------------------------------------------------------------
Computer Software - Services - 0.9%
Ingram Micro, Inc.* 750 $ 21,563
- -------------------------------------------------------------------------------
Computer Software - Systems - 32.5%
BMC Software, Inc.* 1,180 $ 73,897
Cadence Design Systems, Inc.* 2,831 134,649
Computer Associates International, Inc. 2,095 140,103
Compuware Corp.* 1,660 102,505
Engineering Animation, Inc.* 470 17,977
Great Plains Software, Inc.* 100 2,638
Oracle Systems Corp.* 3,480 132,675
Peoplesoft, Inc.* 660 37,125
Peritus Software Services, Inc.* 100 2,500
Rational Software Corp.* 1,010 16,665
Summit Design, Inc.* 4,400 52,800
Sybase, Inc.* 380 7,078
Synopsys, Inc.* 2,830 97,989
TSI International Software Ltd.* 100 1,225
----------
$ 819,826
- -------------------------------------------------------------------------------
Electronics - 5.1%
Atmel Corp.* 440 $ 15,565
Intel Corp. 340 31,322
Sony Corp. 250 22,031
Teradyne, Inc.* 900 50,119
Xilinx, Inc.* 200 9,500
----------
$ 128,537
- -------------------------------------------------------------------------------
Medical and Health Products - 2.0%
Bristol-Myers Squibb Co. 610 $ 46,360
Ocular Sciences, Inc.* 100 1,912
Schick Technologies, Inc.* 100 2,650
----------
$ 50,922
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.6%
Centennial Healthcare Corp.* 100 $ 2,012
HBO & Co. 1,085 77,713
Horizon CMS Healthcare Corp.* 700 14,394
Monarch Dental Corp.* 100 1,813
Oxford Health Plans, Inc.* 370 27,056
Pacificare Health Systems, Inc., "B"* 130 8,889
United Healthcare Corp. 1,240 60,295
----------
$ 192,172
- -------------------------------------------------------------------------------
Oil Services - 0.3%
Cal Dive International, Inc.* 100 $ 3,400
Domain Energy Corp.* 100 1,525
Hanover Compressor* 100 2,363
----------
$ 7,288
- -------------------------------------------------------------------------------
Printing and Publishing - 0.1%
CMP Media, Inc.* 100 $ 2,675
- -------------------------------------------------------------------------------
Stores - 0.2%
CVS Corp. 100 $ 5,638
- -------------------------------------------------------------------------------
Telecommunications - 9.3%
Ascend Communications, Inc.* 1,105 $ 46,893
Aspect Telecommunications Corp.* 2,770 60,940
Cabletron Systems, Inc.* 700 21,175
Cisco Systems, Inc.* 1,055 79,521
Lucent Technologies, Inc. 290 22,584
Qwest Communications International, Inc.* 100 4,075
----------
$ 235,188
- -------------------------------------------------------------------------------
Utilities - Telephone - 1.6%
MCI Communications Corp. 1,410 $ 40,185
- -------------------------------------------------------------------------------
Total U.S. Stocks $2,147,158
- -------------------------------------------------------------------------------
Foreign Stocks - 3.2%
Germany - 1.7%
SAP AG, Preferred (Computer Software - Systems) 185 $ 42,217
- -------------------------------------------------------------------------------
Japan - 1.5%
Canon, Inc., ADR (Special Products and Services) 80 $ 11,130
Sony Corp. (Electronics) 300 26,120
----------
$ 37,250
- -------------------------------------------------------------------------------
Total Foreign Stocks $ 79,467
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $1,850,603) $2,226,625
- -------------------------------------------------------------------------------
Short-Term Obligations - 11.5%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 9/02/97, at Amortized Cost $ 290 $ 289,957
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,140,560) $2,516,582
Other Assets, Less Liabilities - 0.1% 2,168
- -------------------------------------------------------------------------------
Net Assets - 100.0% $2,518,750
- -------------------------------------------------------------------------------
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
AUGUST 31, 1997 FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost,
$2,461,282, $1,245,641 and $3,114,897,
respectively) $2,744,043 $1,405,673 $3,717,356
Cash 1,141 19,505 489
Deposit with brokers for securities sold short -- -- 95,437
Foreign currency, at value (identified cost, $0,
$0 and $4,055, respectively) -- -- 4,042
Receivable for Fund shares sold -- 50,000 --
Receivable for investments sold 37,779 6,595 262,105
Net receivable for foreign currency exchange
contracts closed or subject to master netting
agreements -- -- 175
Interest and dividends receivable 897 2,892 2,064
Receivable from investment adviser 10,414 -- 17,514
Deferred organization expenses 1,669 1,676 1,688
Other assets 1,288 -- --
---------- ---------- ----------
Total assets $2,797,231 $1,486,341 $4,100,870
---------- ---------- ----------
Liabilities:
Securities sold short, at value (proceeds
received, $0, $0 and $122,480, respectively) $ -- $ -- $ 126,887
Payable for investments purchased 29,934 10,405 5,991
Accrued expenses and other liabilities 11,177 1,883 13,181
---------- ---------- ----------
Total liabilities $ 41,111 $ 12,288 $ 146,059
---------- ---------- ----------
Net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Net assets consist of:
Paid-in capital $2,164,935 $1,179,568 $3,083,892
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 282,768 160,027 598,225
Accumulated undistributed net realized gain on
investments and foreign currency transactions 107,865 123,884 244,151
Accumulated undistributed net investment income 200,552 10,574 28,543
---------- ---------- ----------
Total $2,756,120 $1,474,053 $3,954,811
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 67,032 34,434 140,925
Class I 107,057 65,074 149,230
---------- ---------- ----------
Total shares of beneficial interest
outstanding 174,089 99,508 290,155
========== ========== ==========
Net assets:
Class A $1,060,643 $ 510,280 $1,919,478
Class I 1,695,477 963,773 2,035,333
---------- ---------- ----------
Total net assets $2,756,120 $1,474,053 $3,954,811
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price
per share (net assets / shares of beneficial interest outstanding) $15.82 $14.82 $13.62
====== ====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $15.84 $14.81 $13.64
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments, at value (identified cost, $624,151,
$552,430 and $1,817,783, respectively) $ 720,092 $ 624,057 $1,996,184
Cash 6,338 3,982 33,748
Foreign currency, at value (identified cost, $0, $26
and $0, respectively) -- 26 --
Receivable for investments sold -- 9,904 --
Interest and dividends receivable 1,149 2,643 180
---------- ---------- ----------
Total assets $ 727,579 $ 640,612 $2,030,112
---------- ---------- ----------
Liabilities:
Accrued expenses and other liabilities $ 90 $ 85 $ 249
---------- ---------- ----------
Net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Net assets consist of:
Paid-in capital $ 617,975 $ 557,991 $1,579,754
Unrealized appreciation on investments and
translation of assets and liabilities in foreign
currencies 95,941 71,627 178,401
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 12,369 (1,197) 126,577
Accumulated undistributed net investment income 1,204 12,106 145,131
---------- ---------- ----------
Total $ 727,489 $ 640,527 $2,029,863
---------- ---------- ----------
Shares of beneficial interest outstanding:
Class A 41,316 50,266 41,008
Class I 20,514 5,555 114,238
---------- ---------- ----------
Total shares of beneficial interest outstanding 61,830 55,821 155,246
========== ========== ==========
Net assets:
Class A $ 486,110 $ 576,830 $ 536,157
Class I 241,379 63,697 1,493,706
---------- ---------- ----------
Total net assets $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
Class A shares:
Net asset value and offering and redemption price per share (net assets /
shares of beneficial interest outstanding) $11.77 $11.48 $13.07
====== ====== ======
Class I shares:
Net asset value and redemption price per share (net assets / shares of
beneficial interest outstanding) $11.77 $11.47 $13.08
====== ====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Assets and Liabilities - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
AUGUST 31, 1997 FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments, at value (identified cost, $2,378,684 and
$2,140,560, respectively) $2,330,823 $2,516,582
Cash 924 3,165
Foreign currency, at value (identified cost, $1,560 and $46,
respectively) 1,164 43
Receivable for Fund shares sold 10,000 --
Receivable for investments sold 17,901 --
Interest and dividends receivable 4,591 54
Receivable from investment adviser 6,854 8,711
Other assets -- 250
---------- ----------
Total assets $2,372,257 $2,528,805
---------- ----------
Liabilities:
Payable for investments purchased $ 26,952 $ --
Accrued expenses and other liabilities 9,217 10,055
---------- ----------
Total liabilities $ 36,169 $ 10,055
---------- ----------
Net assets $2,336,088 $2,518,750
========== ==========
Net assets consist of:
Paid-in capital $2,134,309 $2,036,119
Unrealized appreciation (depreciation) on investments and
translation of
assets and liabilities in foreign currencies (48,333) 376,018
Accumulated undistributed net realized gain (loss) on
investments and
foreign currency transactions 239,440 (69,545)
Accumulated undistributed net investment income 10,672 176,158
---------- ----------
Total $2,336,088 $2,518,750
---------- ----------
Shares of beneficial interest outstanding:
Class A 119,940 70,359
Class I 93,365 130,608
---------- ----------
Total shares of beneficial interest outstanding 213,305 200,967
========== ==========
Net assets:
Class A $1,313,579 $ 881,888
Class I 1,022,509 1,636,862
---------- ----------
Total net assets $2,336,088 $2,518,750
========== ==========
Class A shares:
Net asset value and offering and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
Class I shares:
Net asset value and redemption price per share
(net assets / shares of beneficial interest outstanding) $10.95 $12.53
====== ======
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EQUITY SPECIAL
GROWTH INCOME OPPORTUNITIES
YEAR ENDED AUGUST 31, 1997 FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 217,465 $ 27,016 $ 21,095
Interest 7,705 2,229 22,623
---------- ---------- ----------
Total investment income $ 225,170 $ 29,245 $ 43,718
---------- ---------- ----------
Expenses -
Management fee $ 12,775 $ 6,926 $ 23,164
Shareholder servicing agent fee 2,233 1,209 4,030
Distribution and service fee - Class A 4,216 2,468 9,410
Administrative fee 27 83 --
Registration fee 2,763 2,335 --
Auditing fee 5,101 5,501 8,272
Postage 341 82 119
Printing 2,928 1,635 --
Legal fee 3,223 2,618 2,026
Custodian fee 5,695 5,166 5,902
Amortization of organization expenses 434 434 434
Miscellaneous 4,671 354 325
---------- ---------- ----------
Total expenses $ 44,407 $ 28,811 $ 53,682
Fees paid indirectly (690) (388) (1,010)
Reduction of expenses by investment adviser,
shareholder servicing
agent and distributor (19,224) (14,434) (36,604)
---------- ---------- ----------
Net expenses $ 24,493 $ 13,989 $ 16,068
---------- ---------- ----------
Net investment income $ 200,677 $ 15,256 $ 27,650
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 147,884 $ 130,162 $ 314,835
Securities sold short -- -- (6,786)
Foreign currency transactions (112) (8) (173)
---------- ---------- ----------
Net realized gain on investments and
foreign currency transactions $ 147,772 $ 130,154 $ 307,876
---------- ---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ 264,806 $ 134,063 $ 542,028
Securities sold short -- -- 14,842
Translation of assets and liabilities in foreign
currencies 12 (5) 173
---------- ---------- ----------
Net change in unrealized appreciation $ 264,818 $ 134,058 $ 557,043
---------- ---------- ----------
Net realized and unrealized gain on investments
and
foreign currency $ 412,590 $ 264,212 $ 864,919
---------- ---------- ----------
Increase in net assets from operations $ 613,267 $ 279,468 $ 892,569
========== ========== ==========
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- --------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND* FUND*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
Income -
Dividends $ 6,880 $ 12,186 $ 155,787
Interest 978 5,669 6,670
---------- ---------- ----------
Total investment income $ 7,858 $ 17,855 $ 162,457
---------- ---------- ----------
Expenses -
Management fee $ 2,849 $ 2,458 $ 8,539
Shareholder servicing agent fee 576 497 1,498
Distribution and service fee - Class A 1,480 1,738 1,286
Administrative fee 52 44 132
Registration fee 4,030 4,000 4,505
Auditing fee 5,500 5,900 6,000
Printing 2,237 1,135 2,892
Postage 42 -- 25
Legal fee 3,871 3,214 4,534
Custodian fee 392 459 720
Miscellaneous 557 213 271
---------- ---------- ----------
Total expenses $ 21,586 $ 19,658 $ 30,402
Fees paid indirectly (173) (168) (451)
Reduction of expenses by investment adviser,
shareholder servicing
agent, and distributor (14,749) (13,739) (12,625)
---------- ---------- ----------
Net expenses $ 6,664 $ 5,751 $ 17,326
---------- ---------- ----------
Net investment income $ 1,194 $ 12,104 $ 145,131
---------- ---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,369 $ 5,932 $ 126,577
Securities sold short -- (7,129) --
Foreign currency transactions 10 2 --
---------- ---------- ----------
Net realized gain (loss) on investments and
foreign currency
transactions $ 12,379 $ (1,195) $ 126,577
---------- ---------- ----------
Change in unrealized appreciation on investments and
translation
of assets and liabilities in foreign currencies $ 95,941 $ 71,627 $ 178,401
---------- ---------- ----------
Net realized and unrealized gain on investments
and foreign
currency $ 108,320 $ 70,432 $ 304,978
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
========== ========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Operations - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997 FUND* FUND*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income:
Income -
Dividends $ 32,673 $ 183,332
Interest 4,208 12,047
Foreign taxes withheld (3,096)
---------- ----------
Total investment income $ 33,785 $ 195,379
---------- ----------
Expenses -
Management fee $ 14,026 $ 10,517
Shareholder servicing agent fee 1,819 1,845
Distribution and service fee - Class A 4,164 2,112
Administrative fee 168 166
Registration fee 4,500 4,010
Auditing fees 5,500 5,500
Postage 468 129
Printing 3,357 3,181
Legal fees 3,451 5,691
Custodian fee 4,387 910
Miscellaneous 1,762 327
---------- ----------
Total expenses $ 43,602 $ 34,388
Fees paid indirectly (480) (559)
Reduction of expenses by investment adviser, shareholder
servicing agent, and distributor (20,009) (14,474)
---------- ----------
Net expenses $ 23,113 $ 19,355
---------- ----------
Net investment income $ 10,672 $ 176,024
---------- ----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 241,403 $ (69,545)
Foreign currency transactions (1,963) 134
---------- ----------
Net realized gain (loss) on investments and foreign
currency
transactions $ 239,440 $ (69,411)
---------- ----------
Change in unrealized appreciation (depreciation) -
Investments $ (47,861) $ 376,022
Translation of assets and liabilities in foreign currencies (472) (4)
---------- ----------
Net change in unrealized appreciation (depreciation) $ (48,333) $ 376,018
---------- ----------
Net realized and unrealized gain on investments and
foreign currency $ 191,107 $ 306,607
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
========== ==========
* For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income (loss) $ 200,677 $ (362)
Net realized gain on investments and foreign
currency transactions 147,772 66,889
Net unrealized gain on investments and foreign
currency translation 264,818 17,950
---------- ----------
Increase in net assets from operations $ 613,267 $ 84,477
---------- ----------
Distributions declared to shareholders from net
realized gain on investments - Class A $ (106,559) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,273,798 $ 605,756
Net asset value of shares issued to shareholders
in reinvestment of distributions 106,552 --
Cost of shares reacquired (817,088) (4,083)
---------- ----------
Increase in net assets from Fund share
transactions $1,563,262 $ 601,673
---------- ----------
Total increase in net assets $2,069,970 $ 686,150
Net assets:
At beginning of period 686,150 --
---------- ----------
At end of period (including accumulated
undistributed net investment income (loss) of
$200,552 and $(13), respectively) $2,756,120 $ 686,150
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 15,256 $ 4,878
Net realized gain on investments and foreign
currency transactions 130,154 7,246
Net unrealized gain on investments and foreign
currency translation 134,058 25,969
---------- ----------
Increase in net assets from operations $ 279,468 $ 38,093
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (9,552) $ --
From net realized gain on investments - Class A (13,524) --
---------- ----------
Total distributions declared to shareholders $ (23,076) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $1,191,109 $ 449,397
Net asset value of shares issued to shareholders
in reinvestment of distributions 23,074 --
Cost of shares reacquired (473,902) (10,110)
---------- ----------
Increase in net assets from Fund share
transactions $ 740,281 $ 439,287
---------- ----------
Total increase in net assets $ 996,673 $ 477,380
Net assets:
At beginning of period 477,380 --
---------- ----------
At end of period (including accumulated
undistributed net investment income
of $10,574 and $4,878, respectively) $1,474,053 $ 477,380
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,650 $ 10,016
Net realized gain on investments and foreign
currency transactions 307,876 168,487
Net unrealized gain on investments and foreign
currency translation 557,043 41,182
---------- ----------
Increase in net assets from operations $ 892,569 $ 219,685
---------- ----------
Distributions declared to shareholders -
From net investment income - Class A $ (8,950) $ --
From net realized gain on investments - Class A (232,385) --
---------- ----------
Total distributions declared to shareholders $ (241,335) $ --
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,798,830 $2,038,964
Net asset value of shares issued to shareholders
in reinvestment of distributions 241,330 --
Cost of shares reacquired (1,995,218) (14)
---------- ----------
Increase in net assets from Fund share
transactions $1,044,942 $2,038,950
---------- ----------
Total increase in net assets $1,696,176 $2,258,635
Net assets:
At beginning of period 2,258,635 --
---------- ----------
At end of period (including accumulated
undistributed net investment income of $28,543
and $10,016, respectively) $3,954,811 $2,258,635
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statements of Changes in Net Assets - continued
- ---------------------------------------------------------------------------------------------------------------------------------
BLUE CONVERTIBLE NEW
CHIP SECURITIES DISCOVERY
PERIOD ENDED AUGUST 31, 1997* FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 1,194 $ 12,104 $ 145,131
Net realized gain (loss) on investments and
foreign currency transactions 12,379 (1,195) 126,577
Net unrealized gain on investments and foreign
currency translation 95,941 71,627 178,401
---------- ---------- ----------
Increase in net assets from operations $ 109,514 $ 82,536 $ 450,109
---------- ---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 720,959 $ 559,838 $1,935,566
Cost of shares reacquired (102,984) (1,847) (355,812)
---------- ---------- ----------
Increase in net assets from Fund share
transactions $ 617,975 $ 557,991 $1,579,754
---------- ---------- ----------
Total increase in net assets $ 727,489 $ 640,527 $2,029,863
Net assets:
At beginning of period -- -- --
---------- ---------- ----------
At end of period (including accumulated
undistributed net investment income of $1,204,
$12,106 and $145,131, respectively) $ 727,489 $ 640,527 $2,029,863
========== ========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
RESEARCH SCIENCE AND
INTERNATIONAL TECHNOLOGY
PERIOD ENDED AUGUST 31, 1997* FUND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 10,672 $ 176,024
Net realized gain (loss) on investments and foreign currency
transactions 239,440 (69,411)
Net unrealized gain (loss) on investments and foreign
currency translation (48,333) 376,018
---------- ----------
Increase in net assets from operations $ 201,779 $ 482,631
---------- ----------
Fund share (principal) transactions -
Net proceeds from sale of shares $2,472,688 $2,470,527
Cost of shares reacquired (338,379) (434,408)
---------- ----------
Increase in net assets from Fund share transactions $2,134,309 $2,036,119
---------- ----------
Total increase in net assets $2,336,088 $2,518,750
Net assets:
At beginning of period -- --
---------- ----------
At end of period (including accumulated undistributed net
investment income of $10,672 and $176,158, respectively) $2,336,088 $2,518,750
========== ==========
*For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
CORE GROWTH FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 12.33 $ 10.00 $ 12.99
---------- ---------- ----------
Income from investment operations# -
Net investment income (loss)(S) $ 1.24 $ (0.01) $ 1.50
Net realized and unrealized gain on investments and
foreign currency transactions 3.93 2.34 1.35
---------- ---------- ----------
Total from investment operations $ 5.17 $ 2.33 $ 2.85
---------- ---------- ----------
Less distributions declared to shareholders from net
realized gain on investments $ (1.68) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 15.82 $ 12.33 $ 15.84
========== ========== ==========
Total return 45.22% 23.30%++ 21.94%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.45% 1.50%+ 1.48%+
Net investment income (loss) 9.12% (0.11)%+ 14.08%+
Portfolio turnover 1,043% 204% 1,043%
Average commission rate $ 0.0248 $ 0.0411 $ 0.0248
Net assets at end of period
(000 omitted) $ 1,061 $ 686 $ 1,695
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the periods
indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the
net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 1.06 $ (0.18) $ 1.40
Ratios (to average net assets):
Expenses## 2.82% 4.28%+ 2.35%
Net investment income (loss) 7.75% (2.34)%+ 13.20%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
EQUITY INCOME FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.07 $ 10.00 $ 12.20
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.13 $ 0.15
Net realized and unrealized gain on investments and
foreign currency transactions 3.91 0.94 2.46
---------- ---------- ----------
Total from investment operations $ 4.13 $ 1.07 $ 2.61
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.16) $ -- $ --
From net realized gain on investments (0.22) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (0.38) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 14.82 $ 11.07 $ 14.81
========== ========== ==========
Total return 38.05% 10.70%++ 21.39%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50% 1.50%+ 1.50%+
Net investment income 1.75% 1.83%+ 1.51%+
Portfolio turnover 118% 56% 118%
Average commission rate $ 0.0393 $ 0.0331 $ 0.0393
Net assets at end of
period (000 omitted) $ 510 $ 477 $ 964
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had been waived by the Fund and/or if actual expenses were over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ 0.02 $ (0.06) $ 0.03
Ratios (to average net assets):
Expenses## 3.40% 4.67%+ 2.67%+
Net investment income (loss) (0.15)% (0.78)%+ 0.35%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
SPECIAL OPPORTUNITIES FUND AUGUST 31, 1997 AUGUST 31, 1996* AUGUST 31, 1997**
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- ----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C>
Net asset value - beginning of period $ 11.36 $ 10.00 $ 11.39
---------- ---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.08 $ 0.06 $ 0.11
Net realized and unrealized gain on investments
and foreign currency transactions 3.35 1.30 2.14
---------- ---------- ----------
Total from investment operations $ 3.43 $ 1.36 $ 2.25
---------- ---------- ----------
Less distributions declared to shareholders -
From net investment income $ (0.04) $ -- $ --
From net realized gain on investments and
foreign currency transactions (1.13) -- --
---------- ---------- ----------
Total distributions declared to shareholders $ (1.17) $ -- $ --
---------- ---------- ----------
Net asset value - end of period $ 13.62 $ 11.36 $ 13.64
========== ========== ==========
Total return 31.84% 13.60%++ 19.75%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.74% 1.50%+ 0.18%+
Net investment income 0.65% 0.78%+ 1.26%+
Portfolio turnover 161% 108% 161%
Average commission rate $ 0.0387 $ 0.0361 $ 0.0387
Net assets at end of period (000 omitted) $ 1,920 $ 2,259 $ 2,035
* For the period from the commencement of the Fund's investment operations, January 2, 1996, through August 31, 1996.
** For the period from the commencement of the Fund's offering of Class I shares, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly. (S)The Adviser voluntarily agreed to
maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net assets. The investment adviser,
distributor and shareholder servicing agent did not impose any of their fees for the periods indicated. If these fees
had not been waived by the Fund and/or if actual expenses had been over/under this limitation, the net investment income
(loss) per share and ratios would have been:
Net investment income (loss) $ (0.06) $ (0.01) $ 0.01
Ratios (to average net assets):
Expenses## 1.92% 2.97%+ 1.36%+
Net investment income (loss) (0.53)% (0.16)%+ 0.08%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
BLUE CHIP FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.02 $ 0.02
Net realized and unrealized gain on
investments 1.75 1.75
---------- ----------
Total from investment operations $ 1.77 $ 1.77
---------- ----------
Net asset value - end of period $ 11.77 $ 11.77
========== ==========
Total return 17.70%++ 17.70%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 0.28%+ 0.24%+
Portfolio turnover 32% 32%
Average commission rate $ 0.0427 $ 0.0427
Net assets at end of period (000 omitted) $ 486 $ 241
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The Investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for
the periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income loss per share and the ratios would have been:
Net investment loss $ (0.26) $ (0.23)
Ratios (to average net assets):
Expenses## 5.04%+ 4.54%+
Net investment loss (3.25)%+ (2.80)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations -
Net investment income(S) $ 0.25 $ 0.26
Net realized and unrealized gain on
investments 1.23 1.21
---------- ----------
Total from investment operations $ 1.48 $ 1.47
---------- ----------
Net asset value - end of period $ 11.48 $ 11.47
========== ==========
Total return 14.70%++ 14.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 3.16%+ 3.19%+
Portfolio turnover 76% 76%
Average commission rate $ 0.0453 $ 0.0453
Net assets at end of period (000 omitted) $ 577 $ 64
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's daily net
assets. The investment adviser, distributor, and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment income (loss) $ (0.04) $ --
Ratios (to average net assets):
Expenses## 5.19%+ 4.69%+
Net investment income (loss) (0.53)%+ --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
NEW DISCOVERY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.98 $ 1.01
Net realized and unrealized gain on
investments 2.09 2.07
---------- ----------
Total from investment operations $ 3.07 $ 3.08
---------- ----------
Net asset value - end of period $ 13.07 $ 13.08
========== ==========
Total return 30.70%++ 30.80%++
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.50%+ 1.50%+
Net investment income 12.41%+ 12.65%+
Portfolio turnover 887% 887%
Average commission rate $ 0.0250 $ 0.0250
Net assets at end of period (000 omitted) $ 536 $ 1,494
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily
net assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.89 $ 0.92
Ratios (to average net assets):
Expenses## 3.10%+ 2.52%+
Net investment income 10.81%+ 11.63%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.06 $ 0.07
Net realized and unrealized gain on
investments 0.89 0.88
---------- ----------
Total from investment operations $ 0.95 $ 0.95
---------- ----------
Net asset value - end of period $ 10.95 $ 10.95
========== ==========
Total return 9.60%++ 9.60%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.68%+ 1.68%+
Net investment income 0.71%+ 0.85%+
Portfolio turnover 137% 137%
Average commission rate $ 0.0198 $ 0.0198
Net assets at end of period (000 omitted) $ 1,314 $ 1,022
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.75% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
periods indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income (loss) per share and the ratios would have been:
Net investment loss $ (0.01) $ --
Ratios (to average net assets):
Expenses## 3.31%+ 2.81%+
Net investment loss (0.92)%+ (0.28)%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND PERIOD ENDED AUGUST 31, 1997*
- -------------------------------------------------------------------------------------------------------------
CLASS A CLASS I
- -------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C> <C>
Net asset value - beginning of period $ 10.00 $ 10.00
---------- ----------
Income from investment operations# -
Net investment income(S) $ 0.84 $ 1.05
Net realized and unrealized gain on
investments and foreign currency transactions 1.69 1.48
---------- ----------
Total from investment operations $ 2.53 $ 2.53
---------- ----------
Net asset value - end of period $ 12.53 $ 12.53
========== ==========
Total return 25.30%++ 25.30%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.40%+ 1.41%+
Net investment income 10.73%+ 13.11%+
Portfolio turnover 792% 792%
Average commission rate $ 0.0243 $ 0.0243
Net assets at end of period (000 omitted) $ 882 $ 1,637
* For the period from the commencement of the Fund's investment operations, January 2, 1997, through August 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The Adviser voluntarily agreed to maintain the expenses of the Fund at not more than 1.50% of the Fund's average daily net
assets. The investment adviser, distributor and shareholder servicing agent did not impose any of their fees for the
period indicated. If these fees had not been waived by the Fund and/or if actual expenses had been over/under this
limitation, the net investment income per share and the ratios would have been:
Net investment income $ 0.73 $ 0.98
Ratios (to average net assets):
Expenses## 2.77%+ 2.28%+
Net investment income 9.36%+ 12.24%+
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund,
MFS Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund, MFS Science and Technology Fund are diversified
series of MFS Series Trust I (the Trust), and MFS Special Opportunities Fund is
a non-diversified series of 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 reported at market value using last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues and forward contracts and interest rate
swaps, 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. 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. Short-term obligations,
which mature in 60 days or less, are valued at amortized cost, which
approximates market value. Futures contracts, options, and options on futures
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Deferred Organization Expenses - Costs incurred by each 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 each
Fund's operations.
Forward Foreign Currency Exchange Contracts - Each 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 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. Each Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, each Fund 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, each Fund 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 as unrealized until the contract settlement date. On contract
settlement date, the gains or losses are recorded as realized gains or losses on
foreign currency transactions.
Written Options - Each Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, each Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by each Fund. Each 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 part of an income producing strategy reflecting the view of each
Fund's management on the direction of interest rates.
Short Sales - The Special Opportunities Fund, the Convertible Securities Fund,
the New Discovery Fund, and the Science and Technology Fund may enter into short
sales. A short sale transaction involves selling a security which a Fund does
not own with the intent of purchasing it later at a lower price. A 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 a Fund must
replace the borrowed security. Losses can exceed the proceeds from short sales
and 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 a Fund may be required to pay
in connection with a short sale. Whenever a Fund engages in short sales, its
custodian segregates cash or marketable 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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. 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 and the Convertible Securities Fund may 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 Funds use the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - Each Fund's custody fee is calculated as a percentage of
each Fund's average daily net assets. The fee is reduced according to an
arrangement which measures 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 - Each 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. 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.
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 year ended August 31, 1997, the following amounts were reclassified
between accumulated undistributed net investment income and accumulated net
realized gain on investments 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>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ (10) $ (2) $ 112 $ 8
Accumulated undistributed net
investment income (loss) $ 10 $ 2 $ (112) $ (8)
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
INCREASE (DECREASE) FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated undistributed net
realized gain (loss) on
investments and foreign
currency transactions $ -- $ 1,963 $ (134) $ 173
Accumulated undistributed net
investment income (loss) $ -- $ (1,963) $ 134 $ (173)
</TABLE>
At August 31, 1997, the Convertible Securities Fund, for federal income tax
purposes, had a capital loss carryforward of $1,022 which may be applied against
any net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on August 31, 2005.
Multiple Classes of Shares of Beneficial Interest - The Funds offer multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of each Fund pro
rata based on average daily net assets of each class, without distinction
between share classes. Dividends are declared separately for each class. No
class has preferential dividend rights; differences in per share dividend rates
are generally due to differences in separate class expenses.
(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
0.65% of average daily net assets for the Blue Chip Fund and the Convertible
Securities Fund, at an annual rate of 0.75% of average daily net assets for the
Core Growth Fund, the Equity Income Fund, the New Discovery Fund, the Science
and Technology Fund, and the Special Opportunities Fund, and at an annual rate
of 1.00% of average daily net assets for the Research International Fund. For
the year ended August 31, 1997, the investment adviser did not impose any of its
fee, which is reflected as a reduction of expenses in the Statement of
Operations.
Each Fund has a temporary expense reimbursement agreement whereby MFS has
voluntarily agreed to pay all of each Fund's operating expenses, exclusive of
management, distribution and service fees. Each Fund in turn will pay MFS an
expense reimbursement fee not greater than 1.50% of average daily net assets,
except that the Research International Fund will pay a fee of 1.75%. 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,
1997, the aggregate unreimbursed expenses owed to MFS by each Fund amounted to:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,844 $9,046 $ -- $8,413 $1,302 $ -- $ -- $ --
</TABLE>
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 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 each Fund.
Administrator - Effective March 1, 1997, the Funds have an administrative
services agreement with MFS to provide the Fund with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Funds pay
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales on Class A shares of each Fund for the year
ended August 31, 1997.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's 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 by 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 year ended August 31, 1997,
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 0.13%. Prior to January 1, 1997, the fee was calculated as a
percentage of the average daily net assets of Class A shares at an effective
annual rate of up to 0.15%. MFSC is currently waiving its fee for an indefinite
period.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments $ 801,689 $ 916,065 $ 17,817,514 $ 1,735,832
========== ========== ============= ============
Sales
- ----------
Investments $ 189,892 $ 382,668 $ 16,161,162 $ 1,069,051
========== ========== ============= ============
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases
- ----------
Investments (non-U.S. government
securities) $ 14,628,778 $ 4,633,699 $ 15,372,426 $ 4,871,185
============= ============ ============= ============
Sales
- ----------
Investments (non-U.S. government
securities) $ 13,012,489 $ 2,561,525 $ 13,452,258 $ 4,574,155
============= ============ ============= ============
</TABLE>
The cost and unrealized appreciation or depreciation in value of the investments
owned by each Fund, as computed on a federal income tax basis, are as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY
CHIP SECURITIES GROWTH INCOME
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 624,151 $ 552,605 $ 2,467,904 $1,245,767
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 99,721 $ 77,886 $ 310,563 $ 163,961
Gross unrealized depreciation (3,780) (6,434) (34,424) (4,055)
------------ ---------- ------------ ----------
Net unrealized appreciation $ 95,941 $ 71,452 $ 276,139 $ 159,906
============ ========== ============ ==========
<CAPTION>
NEW RESEARCH SCIENCE AND SPECIAL
DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate cost $ 1,823,392 $2,379,678 $ 2,151,232 $3,115,308
------------ ---------- ------------ ----------
Gross unrealized appreciation $ 215,761 $ 128,745 $ 427,647 $ 687,707
Gross unrealized depreciation (42,969) (177,600) (62,297) (85,659)
------------ ---------- ------------ ----------
Net unrealized appreciation
(depreciation) $ 172,792 $ (48,855) $ 365,350 $ 602,048
============ ========== ============ ==========
</TABLE>
(5) Shares of Beneficial Interest
Each 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
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
--------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 46,967 $ 474,750 50,444 $ 504,497 59,769 $ 808,314
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- 8,292 106,552
Shares reacquired (5,651) (56,185) (178) (1,847) (56,691) (726,457)
------ ---------- ------ ---------- ------ ----------
Net increase 41,316 $ 418,565 50,266 $ 502,650 11,370 $ 188,409
====== ========== ====== ========== ====== ==========
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 28,321 $ 354,214 46,587 $ 483,036 145,874 $ 1,462,123
Shares issued to
shareholders in
reinvestment of
distributions 1,898 23,074 -- -- -- --
Shares reacquired (38,910) (473,850) (5,579) (56,315) (25,934) (255,253)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) (8,691) $ (96,562) 41,008 $ 426,721 119,940 $ 1,206,870
====== ========== ====== ========== ======= ============
<CAPTION>
Class A Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 78,193 $ 811,064 80,611 $ 941,341
Shares issued to
shareholders in
reinvestment of
distributions -- -- 21,566 241,330
Shares reacquired (7,834) (79,182) (160,079) (1,817,353)
------ ---------- ------- -----------
Net increase
(decrease) 70,359 $ 731,882 (57,902) $ (634,682)
====== ========== ======= ===========
<CAPTION>
Class A Shares
PERIOD ENDED AUGUST 31, 1996*
---------------------------------------------------------------------------------------------
CORE GROWTH FUND EQUITY INCOME FUND SPECIAL OPPORTUNITIES FUND
---------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 56,000 $ 605,756 44,072 $ 449,397 198,828 $ 2,038,964
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (338) (4,083) (947) (10,110) (1) (14)
------ ---------- ------ ---------- ------- ------------
Net increase
(decrease) 55,662 $ 601,673 43,125 $ 439,287 198,827 $ 2,038,950
====== ========== ====== ========== ======= ============
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
BLUE CHIP FUND** CONVERTIBLE SECURITIES FUND** CORE GROWTH FUND
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 24,471 $ 246,209 5,555 $ 55,341 113,207 $ 1,465,484
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (3,957) (46,799) -- -- (6,150) (90,631)
------ ---------- ----- --------- ------- ------------
Net increase 20,514 $ 199,410 5,555 $ 55,341 107,057 $ 1,374,853
====== ========== ===== ========= ======= ============
*For the period from the commencement of investment operations, January 2, 1996, through August 31, 1996.
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
<TABLE>
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
------------------------------------------------------------------------------------------
EQUITY INCOME FUND NEW DISCOVERY FUND** RESEARCH INTERNATIONAL FUND**
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 65,078 $ 836,895 144,634 $ 1,452,530 100,754 $ 1,010,565
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- -- -- --
Shares reacquired (4) (52) (30,396) (299,497) (7,389) (83,126)
------ ---------- ------- ------------ ------ ----------
Net increase 65,074 $ 836,843 114,238 $ 1,153,033 93,365 $ 927,439
====== ========== ======= ============ ====== ==========
<CAPTION>
Class I Shares
YEAR ENDED AUGUST 31, 1997
--------------------------------------------------------------
SCIENCE AND TECHNOLOGY FUND** SPECIAL OPPORTUNITIES FUND
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 164,633 $ 1,659,463 163,990 $ 1,857,489
Shares issued to
shareholders in
reinvestment of
distributions -- -- -- --
Shares reacquired (34,025) (355,226) (14,760) (177,865)
------- ------------ ------- ------------
Net increase 130,608 $ 1,304,237 149,230 $ 1,679,624
======= ============ ======= ============
**For the period from the commencement of investment operations, January 2, 1997, through August 31, 1997.
</TABLE>
(6) Line of Credit
Each Fund and other affiliated funds participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of each
Fund's 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 Fund for the year ended August 31, 1997, were as follows:
<TABLE>
<CAPTION>
BLUE CONVERTIBLE CORE EQUITY NEW RESEARCH SCIENCE AND SPECIAL
CHIP SECURITIES GROWTH INCOME DISCOVERY INTERNATIONAL TECHNOLOGY OPPORTUNITIES
FUND FUND FUND FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$6 $3 $3 $8 $2 $8 $1 $4
</TABLE>
(7) Restricted Securities
Each 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, 1997, the
Research International Fund owned the following restricted securities
(consisting of 1.53% of its net assets) which 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 brokers or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF
FUND/DESCRIPTION ACQUISITION SHARES COST VALUE
- ------------------------------------------------------------------------------------------------------------------
RESEARCH INTERNATIONAL FUND
<S> <C> <C> <C> <C>
Bank Handlowy Warsza 6/18/97 200 $ 2,162 $ 2,525
Hong Leong Finance Ltd. 1/15/96 3,000 11,940 5,855
Jarvis Hotels 6/21/96 - 7/02/96 10,900 30,014 27,378
-------
$35,758
=======
</TABLE>
(8) 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 the Funds have in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts for the Special
Opportunities Fund amounted to a net receivable of $175 with Deutschebank at
August 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust I and Shareholders of MFS Core Growth Fund,
MFS Equity Income Fund, MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS
Convertible Securities Fund, MFS New Discovery Fund, MFS Research International
Fund and MFS Science and Technology Fund:
We have audited the accompanying statements of assets and liabilities of MFS
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund (the Funds)
(eight of the portfolios constituting MFS Series Trust I) including the
schedules of portfolio investments as of August 31, 1997, and the related
statements of operations, the statements of changes in net assets and the
financial highlights for each of the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of August 31, 1997, by correspondence with the custodian and
brokers or by 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
Core Growth Fund, MFS Equity Income Fund, MFS Special Opportunities Fund, MFS
Blue Chip Fund, MFS Convertible Securities Fund, MFS New Discovery Fund, MFS
Research International Fund and MFS Science and Technology Fund at August 31,
1997, and the results of their operations, the changes in their net assets, and
the financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
October 9, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) Core Growth Fund
MFS(R) Equity Income Fund
MFS(R) Special Opportunities Fund
MFS(R) Blue Chip Fund
MFS(R) Convertible SecuritiesFund
MFS(R) New Discovery Fund
MFS(R) Research InternationalFund
MFS(R) Science and Technology Fund
500 Boylston Street
Boston, MA02116-3741
[LOGO: M F S(SM)]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
INC-2 10/97 970
<PAGE> 748
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 three years ended August 31, 1997, 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, 1997:
Portfolio of Investments*
Statement of Assets and Liabilities*
For the two years ended August 31, 1997:
Statement of Changes in Net Assets*
For the year ended August 31, 1997:
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 three years ended August 31, 1997, 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, 1997:
Portfolio of Investments**
Statement of Assets and Liabilities**
For the two years ended August 31, 1997:
Statement of Changes in Net Assets**
For the year ended August 31, 1997:
Statement of Operations**
<PAGE> 749
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, 1997 and the
period from July 22, 1994 through August 31, 1994:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At August 31, 1997:
Portfolio of Investments***
Statement of Assets and Liabilities***
For the years ended August 31, 1997 and August 31,1996:
Statement of Changes in Net Assets***
For the year ended August 31, 1997:
Statement of Operations***
MFS CORE GROWTH FUND, MFS EQUITY INCOME FUND, MFS SPECIAL
OPPORTUNITIES FUND, MFS BLUE CHIP FUND, MFS NEW DISCOVERY FUND, MFS
CONVERTIBLE SECURITIES FUND, MFS RESEARCH INTERNATIONAL FUND AND
MFS SCIENCE AND TECHNOLOGY FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
For the year ended August 31, 1997 and the period ended
August 31, 1996 for MFS Core Growth Fund, MFS Equity
Income Fund and MFS Special Opportunities Fund, and
For the period ended August 31, 1997 for MFS Blue Chip
Fund, MFS Convertible Securities Fund, MFS New
Discovery Fund and MFS Research International Fund:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT: At
August 31, 1997:
Portfolio of Investments****
Statement of Assets and Liabilities****
<PAGE> 750
For the year ended August 31, 1997 and the period ended
August 31, 1996 for MFS Core Growth Fund, MFS Equity
Income Fund and MFS Special Opportunities Fund, and
For the period ended August 31, 1997 for MFS Blue Chip
Fund, MFS Convertible Securities Fund, MFS New
Discovery Fund and MFS Research International Fund:
Statement of Changes in Net Assets****
For the year ended August 31, 1997:
Statement of Operations****
MFS STRATEGIC GROWTH FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
For the year ended August 31, 1997 and the period ended
August 31, 1996:
Financial Highlights
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT:
At August 31, 1997:
Portfolio of Investments*****
Statement of Assets and Liabilities*****
For the year ended August 31, 1997 and the period ended
August 31, 1996:
Statement of Changes in Net Assets*****
For the year ended August 31, 1997:
Statement of Operations*****
MFS RESEARCH GROWTH AND INCOME FUND
(a) FINANCIAL STATEMENTS INCLUDED IN PARTS A AND B:
INCLUDED IN PART A OF THIS REGISTRATION STATEMENT:
For the year ended August 31, 1997 and the period ended
August 31, 1996:
Financial Highlights
<PAGE> 751
INCLUDED IN PART B OF THIS REGISTRATION STATEMENT: At
August 31, 1997:
Portfolio of Investments******
Statement of Assets and Liabilities******
For the year ended August 31, 1997 and the period ended
August 31, 1996:
Statement of Changes in Net Assets******
For the year ended August 31, 1997:
Statement of Operations******
* Incorporated by reference to the MFS Managed Sectors Fund's Annual Report
to Shareholders dated August 31, 1997, filed with the SEC on October 29,
1997.
** Incorporated by reference to the MFS Cash Reserve Fund's Annual Report to
Shareholders dated August 31, 1997, filed with the SEC on October 27,
1997.
*** Incorporated by reference to the MFS World Asset Allocation Fund's Annual
Report to shareholders dated August 31, 1997, filed with the SEC on
October 29, 1997.
**** Incorporated by reference to the Annual Report to Shareholders dated
August 31, 1997 for MFS Core Growth Fund, MFS Equity Income Fund, MFS
Special Opportunities Fund, MFS Blue Chip Fund, MFS Convertible Securities
Fund, MFS New Discovery Fund, MFS Research International Fund and MFS
Science and Technology Fund, filed with the SEC on October 30, 1997.
***** Incorporated by reference to the Annual Report to Shareholders dated
August 31, 1997 for MFS Strategic Growth Fund, filed with the SEC on
October 29, 1997.
******Incorporated by reference to the Annual Report to Shareholders dated
August 31, 1997 for MFS Research Growth and Income Fund, filed with the
SEC on October 27, 1997.
(b) EXHIBITS:
1 (a) Amended and Restated Declaration of Trust, dated
January 6, 1995. (4)
(b) Amendment to Declaration of Trust, dated October 12,
1995. (5)
(c) Amendment to Declaration of Trust, dated February
21, 1996. (6)
(d) Amendment to Declaration of Trust, dated June 12,
1996. (7)
(e) Amendment to Declaration of Trust, dated October 9,
1996. (8)
(f) Amendment to Declaration of Trust, dated December
19, 1996 to redesignate Class P Shares as Class I
Shares. (12)
(g) Amendment to Declaration of Trust, dated April 9,
1997 to redesignate MFS Aggressive Growth Fund as
MFS Strategic Growth Fund. (12)
<PAGE> 752
2 Amended and Restated By-Laws dated December 14, 1994.
(4)
3 Not Applicable.
4 Form of Share Certificate for Classes of shares. (7)
5 (a) Investment Advisory Agreement for MFS(R) Cash
Reserve Fund, dated September 1, 1993. (5)
(b) Investment Advisory Agreement for MFS(R) Managed
Sectors Fund, dated September 1, 1993. (5)
(c) Investment Advisory Agreement for MFS(R) World Asset
Allocation Fund, dated June 2, 1994. (5)
(d) Investment Advisory Agreement for MFS(R) Equity Income
Fund, dated January 2, 1996. (6)
(e) Amendment to Investment Advisory Agreement for MFS(R)
Research Growth and Income Fund, dated January 2,
1997. (12)
(f) Investment Advisory Agreement for MFS(R) Core Growth
Fund, dated January 2, 1996. (6)
(g) Investment Advisory Agreement for MFS(R) Aggressive
Growth Fund, dated January 2, 1996. (6)
(h) Investment Advisory Agreement for MFS(R) Special
Opportunities Fund, dated January 2, 1996. (6)
(i) Investment Advisory Agreement for MFS(R) Convertible
Securities Fund, dated January 2, 1997. (12)
(j) Investment Advisory Agreement for MFS(R) Blue Chip
Fund, dated January 2, 1997. (12)
(k) Investment Advisory Agreement for MFS(R) New Discovery
Fund, dated October 30, 1997; filed herewith.
(l) Investment Advisory Agreement for MFS(R) Science and
Technology Fund, dated January 2, 1997. (12)
(m) Investment Advisory Agreement for MFS(R) Research
International Fund, dated January 2, 1997. (12)
<PAGE> 753
6 (a) Distribution Agreement, dated January 1, 1995. (4)
(b) Dealer Agreement between MFS Fund Distributors,
Inc., ("MFD") and a dealer and the Mutual Fund
Agreement between MFD and a bank or NASD affiliate,
as amended on April 11, 1997. (10)
7 Retirement Plan for Non-Interested Person Trustees,
dated January 1, 1991. (5)
8 (a) Custodian Agreement, dated January 28, 1988. (5)
(b) Amendment No. 1 to the Custodian Agreement, dated
February 29, 1988 and October 1, 1989,
respectively. (5)
(c) Amendment No. 2 to the Custodian Agreement, dated
October 9, 1991. (5)
9 (a) Shareholder Servicing Agent Agreement, dated
September 10, 1986. (5)
(b) Amendment to Shareholder Servicing Agent Agreement
to amend fee schedule, dated January 1, 1997. (12)
(c) Exchange Privilege Agreement, dated July 30, 1997.
(13)
(d) Loan Agreement by and among the Banks named therein,
the MFS Borrowers and The First National Bank of
Boston dated as of February 21, 1995. (2)
(e) Third Amendment dated February 14, 1997 to Loan
Agreement dated February 21, 1995 by and among the
Banks named therein and The First National Bank of
Boston. (12)
(f) Dividend Disbursing Agent Agreement dated September
10, 1986. (5)
(g) Master Administrative Services Agreement dated March
1, 1997. (9)
10 Consent and Opinion of Counsel, dated December 22,
1997; filed herewith.
<PAGE> 754
11 (a) Auditor's Consent Letter for Deloitte & Touche LLP
regarding MFS Managed Sectors Fund and MFS Cash Reserve
Fund; filed herewith.
(b) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS World Asset Allocation Fund; filed
herewith.
(c) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Core Growth Fund, MFS Equity Income Fund,
MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS
Convertible Securities Fund, MFS New Discovery Fund,
MFS Research International Fund and MFS Science and
Technology Fund; filed herewith.
(d) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Research Growth and Income Fund; filed
herewith.
(e) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Strategic Growth Fund; filed herewith.
12 Not Applicable.
13 Not Applicable.
14 (a) Forms for Individual Retirement Account Disclosure
Statement as currently in effect. (3)
(b) Forms for MFS 403(b) Custodial Account Agreement as
currently in effect. (3)
(c) Forms for MFS Prototype Paired Defined Contribution
Plans as Trust Agreement as currently in effect. (3)
15 (a) Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 effective
January 1, 1997. (11)
(b) Exhibits as revised December 10, 1997 to Master
Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 to replace those
exhibits to the Master Distribution Plan contained in
Exhibit 15(a) above; filed herewith.
16 Schedule for Computation of Performance Quotations -
Yield Calculation, Average Annual and Aggregate
Total Return and Current Distribution Rate. (1)
<PAGE> 755
17 Financial Data Schedules; filed herewith.
18 Plan pursuant to Rule 18f-3(d) under the Investment
Company Act of 1940. (7)
Power of Attorney, dated August 11, 1994. (5)
(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 Post-Effective 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.
(3) 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.
(4) Incorporated by reference to the Registrant's Post-Effective Amendment No.
20 filed with the SEC via EDGAR on March 30, 1995.
(5) Incorporated by reference to the Registrant's Post-Effective Amendment No.
21 filed with the SEC via EDGAR on October 17, 1995.
(6) Incorporated by reference to Registrant's Post-Effective Amendment No. 23
filed with the SEC via EDGAR on March 29, 1996.
(7) Incorporated by reference to Registrant's Post-Effective Amendment No. 25
filed with the SEC via EDGAR on August 27, 1996.
(8) Incorporated by reference to Registrant's Post-Effective Amendment No. 26
filed with the SEC via EDGAR on October 15, 1996.
(9) Incorporated by reference to MFS/Sun Life Series Trust (File Nos. 2-83616
and 811-3732) Post-Effective Amendment No. 19 filed with the SEC via EDGAR
on March 18, 1997.
(10)Incorporated by reference to MFS Series Trust III (File Nos. 2-60491 and
811-2794) Post-Effective Amendment No. 24 filed with the SEC via EDGAR on
May 29, 1997.
(11)Incorporated by reference to MFS Government Limited Maturity Fund (File
Nos. 2-96738 and 811-4253) Post-Effective Amendment No. 18 filed with the
SEC via EDGAR on April 29, 1997.
(12)Incorporated by reference to the Registrant's Post-Effective Amendment No.
28 filed with the SEC on June 26, 1997.
(13)Incorporated by reference to Massachusetts Investors Growth Stock Fund
(File Nos. 2-14677 and 811-859) Post-Effective Amendment No. 64 filed with
the SEC on October 29, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
FOR MFS MANAGED SECTORS FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 21,549
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 13,039
(without par value) (as of November 30, 1997)
<PAGE> 756
Class I Shares of Beneficial Interest 2
(without par value) (as of November 30, 1997)
FOR MFS CASH RESERVE FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 4,843
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 25,319
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 1,112
(without par value) (as of November 30, 1997)
FOR MFS WORLD ASSET ALLOCATION FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 7,956
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 10,602
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 2,113
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30, 1997)
FOR MFS EQUITY INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 33
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 39
(without par value) (as of November 30, 1997)
<PAGE> 757
Class C Shares of Beneficial Interest 9
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30,1997)
FOR MFS RESEARCH GROWTH AND INCOME FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 2,981
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 4,390
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 557
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30, 1997)
FOR MFS CORE GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 41
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30,1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30, 1997)
<PAGE> 758
FOR MFS STRATEGIC GROWTH FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 3,830
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 4,060
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 37,927
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 6
(without par value) (as of November 30, 1997)
FOR MFS SPECIAL OPPORTUNITIES FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 28
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 3
(without par value) (as of November 30, 1997)
MFS(R) CONVERTIBLE SECURITIES FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 8
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
<PAGE> 759
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of November 30, 1997)
MFS(R) BLUE CHIP FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 23
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of November 30, 1997)
MFS(R) NEW DISCOVERY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 937
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 846
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 170
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of November 30, 1997)
<PAGE> 760
MFS(R) SCIENCE AND TECHNOLOGY FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 39
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of November 30, 1997)
MFS(R) RESEARCH INTERNATIONAL FUND
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Class A Shares of Beneficial Interest 45
(without par value) (as of November 30, 1997)
Class B Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class C Shares of Beneficial Interest 0
(without par value) (as of November 30, 1997)
Class I Shares of Beneficial Interest 4
(without par value) (as of November 30, 1997)
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> 761
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 thirteen 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, MFS Special
Opportunities Fund, MFS Convertible Securities Fund, MFS Blue Chip Fund, MFS New
Discovery Fund, MFS Science and Technology Fund and MFS Research International
Fund), MFS Series Trust II (which has three series: MFS Emerging Growth Fund,
MFS Large Cap Growth Fund and MFS Intermediate Income 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 Mid Cap Growth
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 MFS 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"). 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
<PAGE> 762
(the "MFS Closed-End Funds"). The principal business address of each of the MFS
Closed-End Funds is 500 Boylston Street, Boston, Massachusetts 02116.
Lastly, MFS serves as investment adviser to MFS/Sun Life Series
Trust ("MFS/SL"), 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 of the
aforementioned funds 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 Funds (which has six
portfolios: MFS American Funds-U.S. Equity Fund, MFS American Funds-U.S.
Emerging Growth Fund, MFS American Funds-U.S. High Yield Bond Fund, MFS American
Funds - U.S. Dollar Reserve Fund, MFS American Funds-Charter Income Fund and MFS
American Funds-U.S. Research 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, MFS
Meridian U.S. High Yield 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.
<PAGE> 763
MFS Institutional Advisors, Inc. ("MFSI"), 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.
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., Patricia A. Zlotin, John W. Ballen, Thomas J. Cashman, Jr., Joseph W.
Dello Russo and Kevin R. Parke are Executive Vice Presidents, Stephen E. Cavan
is a Senior Vice President, General Counsel and an Assistant Secretary, Robert
T. Burns is a Senior Vice President, Associate General Counsel and an Assistant
Secretary of MFS, and Thomas B. Hastings is a Vice President and 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, Ellen M.
Moynihan and Mark E. Bradley, Vice Presidents of MFS, are the Assistant
Treasurers, James R. Bordewick, Jr., Senior 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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, and James R. Bordewick, Jr.,
is the Assistant Secretary.
<PAGE> 764
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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers, 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, and Bernard Scozzafava, Vice President of MFS, are Vice
Presidents, Sheila Burns-Magnan, Assistant Vice President of MFS, and Daniel E.
McManus, Vice President of MFS, are Assistant Vice Presidents, Stephen E. Cavan
is the Secretary, W. Thomas London is the Treasurer, James O. Yost, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers, 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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M. Moynihan
and Mark E. Bradley are the Assistant Treasurers 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
<PAGE> 765
Presidents of MFS, are Vice Presidents, Daniel E. McManus, Vice President of
MFS, is an Assistant Vice President, Stephen E. Cavan is the Secretary, W.
Thomas London is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers 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, Ellen M.
Moynihan and Mark E. Bradley are the Assistant Treasurers 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, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
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, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers 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, James O. Yost, Ellen M. Moynihan and Mark E.
Bradley are the Assistant Treasurers and James R. Bordewick, Jr., is the
Assistant Secretary.
MFS/SUN LIFE SERIES TRUST
John D. McNeil, Chairman and Director of Sun Life Assurance Company
of Canada, is the Chairman, Stephen E. Cavan is the Secretary, W. Thomas London
is the Treasurer, James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
<PAGE> 766
MONEY MARKET VARIABLE ACCOUNT
HIGH YIELD VARIABLE ACCOUNT
CAPITAL APPRECIATION VARIABLE ACCOUNT
GOVERNMENT SECURITIES VARIABLE ACCOUNT
TOTAL RETURN VARIABLE ACCOUNT
WORLD GOVERNMENTS VARIABLE ACCOUNT
MANAGED SECTORS VARIABLE ACCOUNT
John D. McNeil is the Chairman, Stephen E. Cavan is the Secretary,
and James R. Bordewick, Jr., is the Assistant Secretary.
MIL
A. Keith Brodkin is a Director and the Chairman, Arnold D. Scott
and Jeffrey L. Shames are Directors, Thomas J. Cashman, Jr., an Executive 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, Executive Vice President and Chief Financial Officer of
MFS, 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, 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, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers and James R. Bordewick, Jr., is the Assistant Secretary.
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. Bordewick, Jr., is the Assistant
Secretary and James O. Yost, Ellen M. Moynihan and Mark E. Bradley are the
Assistant Treasurers.
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,
<PAGE> 767
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.
MFSI
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 (who is an Executive Vice President of MFS) 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
Director, Sun Life Insurance and Annuity
Company of New York, 67 Broad Street,
New York, New York
<PAGE> 768
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:
NAME ADDRESS
Massachusetts Financial Services 500 Boylston Street
Company (investment adviser) Boston, MA 02116
MFS Fund Distributors, Inc. 500 Boylston Street
(distributor) Boston, MA 02116
State Street Bank and Trust Company State Street South
(custodian) 5-West
North Quincy, MA 02171
Investors Bank & Trust Company 89 South Street
(custodian) Boston, MA 02111
<PAGE> 769
MFS Service Center, Inc. 500 Boylston Street
(transfer agent) Boston, MA 02116
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
Shareholders upon request and without a charge.
(d) Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the provisions set forth in Item 27 of
this Part C, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE> 770
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Boston and
The Commonwealth of Massachusetts on the 23rd day of December 1997.
MFS SERIES TRUST I
By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
Title:Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to its Registration Statement has been signed below by
the following persons in the capacities indicated on December 23, 1997.
SIGNATURE TITLE
--------- -----
/s/ A. KEITH BRODKIN* Chairman, President (Principal
- --------------------------- Executive Officer) and Trustee
A. Keith Brodkin
/s/ W. THOMAS LONDON* Treasurer (Principal Financial Officer
- --------------------------- and Principal Accounting Officer)
W. Thomas London
/s/ RICHARD B. BAILEY* Trustee
- ---------------------------
Richard B. Bailey
/s/ MARSHALL N. COHAN* Trustee
- ---------------------------
Marshall N. Cohan
/s/ LAWRENCE H. COHN, M.D.* Trustee
- ---------------------------
Lawrence H. Cohn, M.D.
<PAGE> 771
/s/ SIR J. DAVID GIBBONS* Trustee
- -----------------------------
Sir J. David Gibbons
/s/ ABBY M. O'NEILL* Trustee
- -----------------------------
Abby M. O'Neill
/s/ WALTER E. ROBB, III* Trustee
- -----------------------------
Walter E. Robb, III
/s/ ARNOLD D. SCOTT* Trustee
- -----------------------------
Arnold D. Scott
/s/ JEFFREY L. SHAMES* Trustee
- -----------------------------
Jeffrey L. Shames
/s/ J. DALE SHERRATT* Trustee
- ------------------------------
J. Dale Sherratt
/s/ WARD SMITH* Trustee
- -------------------------
Ward Smith
*By: JAMES R. BORDEWICK, JR.
Name: James R. Bordewick, Jr.
as Attorney-in-fact
Executed by James R. Bordewick, Jr.
on behalf of those indicated pursuant to
a Power of Attorney dated
August 11, 1994, incorporated by
reference to Registrant's Post-Effective
Amendment No. 21 filed with the SEC
via EDGAR on October 17, 1995.
<PAGE> 772
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE NO.
- ----------- ---------------------- --------
<S> <C> <C> <C>
5 (k) Investment Advisory Agreement for MFS(R) New
Discovery Fund, dated October 30, 1997.
10 Consent and Opinion of Counsel, dated
December 22, 1997.
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.
(c) Auditor's Consent Letter for Ernst & Young LLP regarding
MFS Core Growth Fund, MFS Equity Income Fund, MFS Special
Opportunities Fund, MFS Blue Chip Fund, MFS Convertible
Securities Fund, MFS New Discovery Fund, MFS Research
International Fund and MFS Science and Technology Fund.
(d) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Research Growth and Income Fund.
(e) Auditor's Consent Letter for Ernst & Young LLP
regarding MFS Strategic Growth Fund.
15 (b) Exhibits as revised December 10, 1997 to
Master Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940.
17 Financial Data Schedules.
</TABLE>
<PAGE> 1
EXHIBIT NO. 99.5(k)
INVESTMENT ADVISORY AGREEMENT
INVESTMENT ADVISORY AGREEMENT, dated this 30th day of October, 1997, 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 this Investment Advisory Agreement was approved by the Trust's
Board of Trustees on October 8, 1997, and by shareholders of the Fund on October
30, 1997; 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 December 14, 1994, 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
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
<PAGE> 2
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 0.90% 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
<PAGE> 3
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 October 30, 1999 on which date it will terminate unless its
continuance after October 30, 1999 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.
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.
<PAGE> 4
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.
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
----------------------
A. Keith Brodkin
Chairman and Trustee
MASSACHUSETTS FINANCIAL
SERVICES COMPANY
By: JEFFREY L. SHAMES
----------------------
Jeffrey L. Shames
President
<PAGE> 1
EXHIBIT 99.10
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02116-3741
617-954-5182/800-343-2829/FACSIMILE 617 954-6624
JAMES R. BORDEWICK, JR.
Senior Vice President and
Associate General Counsel
December 22, 1997
MFS Series Trust I
500 Boylston Street
Boston, MA 02116
Gentlemen:
I am a Senior Vice President and Associate General Counsel of
Massachusetts Financial Services Company, which serves as investment adviser to
MFS Series Trust I (the "Trust"), and the Assistant Secretary of the Trust. I am
admitted to practice law in The Commonwealth of Massachusetts. The Trust was
created under a written Declaration of Trust dated July 22, 1986, executed and
delivered in Boston, Massachusetts, as amended and restated thereto (the
"Declaration of Trust"). The beneficial interest thereunder is represented by
transferable shares without par value. The Trustees have the powers set forth in
the Declaration of Trust, subject to the terms, provisions and conditions
therein provided.
I am of the opinion that the legal requirements have been complied with in
the creation of the Trust, and that said Declaration of Trust is legal and
valid.
Under Article III, Section 3.4 and Article VI, Section 6.4 of the
Declaration of Trust, the Trustees are empowered, in their discretion, from time
to time to issue shares of the Trust for such amount and type of consideration,
at such time or times and on such terms as the Trustees may deem best. Under
Article VI, Section 6.1, it is provided that the number of shares of beneficial
interest authorized to be issued under the Declaration of Trust is unlimited.
By vote adopted on February 2, 1995, the Trustees of the Trust determined
to sell to the public the authorized but unissued shares of beneficial interest
of the Trust for cash at a price which will net the Trust (before taxes) not
less than the net asset value thereof, as
<PAGE> 2
MFS Series Trust I
Page 2
December 22, 1997
defined in the Trust's By-Laws, determined next after the sale is made or at
some later time after such sale.
The Trust has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933.
I am of the opinion that all necessary Trust action precedent to the issue
of all the authorized but unissued shares of beneficial interest of the Trust,
including the Shares, has been duly taken, and that all the Shares were legally
and validly issued, and are fully paid and non-assessable, assuming the receipt
by the Trust of the cash consideration therefor in accordance with the terms of
the February 2, 1995 vote of the Trustees described above, except as described
below. I express no opinion as to compliance with the Securities Act of 1933,
the Investment Company Act of 1940, or applicable state "Blue Sky" or securities
laws in connection with the sale of the Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Trust or the Trustees. The Declaration of Trust provides for indemnification
out of the Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
I consent to your filing this opinion with the Securities and Exchange
Commission.
Very truly yours,
JAMES R. BORDEWICK, JR.
James R. Bordewick, Jr.
JRB/bjn
<PAGE> 1
EXHIBIT 99.11(a)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 29 to Registration Statement No.33-7638 of MFS Series Trust I, of
our reports each dated October 3, 1997, appearing in the annual reports to
shareholders of MFS Managed Sectors Fund and MFS Cash Reserve Fund for the year
ended August 31, 1997, 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 22, 1997
<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. 29 to Registration Statement
No. 33-7638 on Form N-1A of our report dated October 9, 1997, on the financial
statements and financial highlights of MFS World Asset Allocation Fund, a series
of MFS Series Trust I, included in the 1997 Annual Report to Shareholders.
ERNST & YOUNG
Ernst & Young LLP
Boston, Massachusetts
December 22, 1997
<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. 29 to Registration Statement
No. 33-7638 on Form N-1A of our report dated October 9, 1997, on the financial
statements and financial highlights of MFS Core Growth Fund, MFS Equity Income
Fund, MFS Special Opportunities Fund, MFS Blue Chip Fund, MFS Convertible
Securities Fund, MFS New Discovery Fund, MFS Research International Fund and MFS
Science and Technology Fund, each a series of MFS Series Trust I, included in
the 1997 Annual Report to Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
December 22, 1997
<PAGE> 1
EXHIBIT 99.11(d)
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. 29 to Registration Statement
No. 33-7638 on Form N-1A of our report dated October 9, 1997, on the financial
statements and financial highlights of MFS Research Growth and Income Fund, a
series of MFS Series Trust I, included in the 1997 Annual Report to
Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
December 22, 1997
<PAGE> 1
EXHIBIT 99.11(e)
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. 29 to Registration Statement
No. 33-7638 on Form N-1A of our report dated October 9, 1997, on the financial
statements and financial highlights of MFS Strategic Growth Fund, a series of
MFS Series Trust I, included in the 1997 Annual Report to Shareholders.
ERNST & YOUNG LLP
Ernst & Young LLP
Boston, Massachusetts
December 22, 1997
<PAGE> 1
EXHIBIT NO. 99.15(b)
EXHIBIT A
DATED: DECEMBER 10, 1997
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12B-1
FUND PLAN PLAN ADOPTED
- --------------------------------------------------------------------------------
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 Strategic 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 Large Cap Growth Fund A,B January 1, 1997
- --------------------------------------------------------------------------------
MFS Intermediate Income 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
- --------------------------------------------------------------------------------
-1-
<PAGE> 2
EXHIBIT A
(Continued)
CLASSES OF
SHARES
COVERED BY
RULE 12B-1 DATE RULE 12B-1
FUND PLAN PLAN ADOPTED
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
-2-
<PAGE> 3
EXHIBIT B
DATED: DECEMBER 10, 1997
MFS Managed Sectors Fund
MFS Cash Reserve Fund
MFS Research Growth & Income Fund
MFS Emerging Growth Fund
MFS Large Cap Growth Fund
MFS Intermediate Income 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
MFS Strategic Growth Fund
MFS New Discovery Fund
MFS Equity Income Fund
MFS Research International Fund
-3-
<PAGE> 4
EXHIBIT C
DATED: DECEMBER 10, 1997
MFS World Asset Allocation Fund
MFS Core Growth Fund
MFS Special Opportunities Fund
MFS Convertible Securities Fund
MFS Blue Chip Fund
MFS Science and Technology Fund
-4-
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<NAME> MFS SERIES TRUST I
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<NAME> MFS STRATEGIC GROWTH FUND CLASS B
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<TABLE> <S> <C>
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<NAME> MFS STRATEGIC GROWTH FUND CLASS C
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<TABLE> <S> <C>
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
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<NAME> MFS STRATEGIC GROWTH FUND CLASS I
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<TABLE> <S> <C>
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 041
<NAME> MFS EQUITY INCOME FUND - CLASS A
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 042
<NAME> MFS EQUITY INCOME FUND - CLASS I
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<TABLE> <S> <C>
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
<SERIES>
<NUMBER> 111
<NAME> MFS NEW DISCOVERY FUND - CLASS A
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<NAME> MFS NEW DISCOVERY FUND - CLASS I
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<CIK> 0000798244
<NAME> MFS SERIES I
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<NAME> REASEARCH INTERNATIONAL FUND - CLASS A
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<NAME> MFS SERIES 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 CORE GROWTH FUND - CLASS I
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<NAME> MFS SPECIAL OPPORTUNITIES FUND - CLASS A
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<NAME> MFS SERIES TRUST
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<NAME> MFS SPECIAL OPPORTUNITIES FUND - CLASS I
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<NAME> MFS BLUE CHIP FUND - CLASS A
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<CIK> 0000798244
<NAME> MFS SERIES TRUST I
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<NAME> MFS BLUE CHIP FUND - CLASS I
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<NAME> MFS SERIES TRUST I
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<NAME> MFS CONVERTIBLE SECURITIES FUND - CLASS A
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<NAME> MFS SERIES TRUST I
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<NAME> MFS CONVERTIBLE SECURITIES FUND - CLASS I
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